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We believe it is important for all city officials to understand that the Legislature intended for cities to levy back any loss in state aids they might experience. In their budget discussions with community members, cities should point out their spending goals, not just the tax rate changes or levy increases. Finally, it's important to consider the changes in the education levy, most notably, how the average property taxpayer's bill may be lower overall.

The 2001 omnibus tax bill enacted several sweeping reforms to the Minnesota state/local finance system, including continuation of compression of tax classification, the state takeover of the general education property taxes for school districts, and state takeover of transit levies. The combined impact of these changes will mean that school property taxes will drop markedly while city property taxes will generally increase—in some cases dramatically.

In addition to decreasing the school reliance on the property tax, the Legislature eliminated the Homestead and Agricultural Credit Aid program (HACA) — a reduction of $200 million per year in state aid to cities. The elimination of HACA translates into an immediate increase in the city reliance on the property tax.

The overall impact of the elimination of HACA on cities is partially offset by an increase in local government aid by $140 million. However, because of how the LGA formula works, cities with less property wealth will generally receive more state assistance through LGA. Although the final LGA formula compromise has drawn criticism from some legislators and some city officials, the general LGA system served as an important policy tool to geographically balance the relief being provided through the elimination of the general education levy.

Most property owners will see a tax reduction in 2002; however, the city share of the typical property tax bill will likely increase. Although this outcome will be painful for city officials, it was intentional. The Legislature expects most cities to levy back the amount of taxes lost in state aids.

Do not overlook the substantial reduction in property taxes most property owners will realize because of the state takeover of the general education and transit levies. The Legislature injected significant funds into the tax system, so most Minnesotans will see a decrease in their property tax bills.

One way to describe the tax outcomes is that the Governor and the many legislators wanted the property tax to be more of a locally determined tax. Given that school property taxes have largely been set by the state, a state takeover of general education levies became a cornerstone of the governor's plan, the House tax bill and the final tax package. On the other hand, given that city services are primarily determined by city councils, the governor and legislature found that these services should be more fully supported by the property tax. In other words, by removing a large share of school funding from the property tax, cities and counties would be more able to tap the property tax to fund their services.

A: Yes, the fact that levy limits were included in the final tax package means that cities will not be able to fully exercise their discretion about service levels and property taxes. In addition, although the new state property tax is only paid by commercial, industrial and cabin property owners, it is certainly not a local tax.

A: Simplicity may have been an initial goal of tax reform but the final tax bill arguably does little to simplify the system.

A: The estimates assume that cities will replace, dollar-for-dollar, lost state aid with increased property taxes. In other words, even with these increases in the city share of the property tax bill, taxpayers are expected to see a tax reduction in 2002.

A: Yes, cities covered by levy limits (those over 2,500 population) will be allowed to replace lost state aids with property taxes. In a sense, the term levy limits are somewhat of a misnomer. A more accurate term might be revenue limits. Levy limits are essentially based on the total of the city's property tax and state aids from the previous year. To the degree that state aids are reduced or eliminated, the allowable property tax levy authority increases. Conversely, if state aids increase, levy authority is reduced.

A: This could happen, particularly if city officials are not prepared to explain the legislative changes enacted this year. However, due to the magnitude of the changes to the tax system, the parcel-specific notices sent to taxpayers this fall will not itemize the 2001 city taxes and the 2002 proposed city taxes. The only direct comparison on the form will be the total 2001 taxes to the proposed 2002 total taxes. This structure will hopefully avoid any unnecessary taxpayer concerns about increases in city levies due to lost state aids. Despite this one-year change in the parcel-specific notice, you will still want to be prepared to explain these changes to taxpayers.

A: The answer is not simple but the overall cost of the tax bill, including the state takeover of the total general education costs for schools, required the state to reprioritize its appropriations. HACA was viewed by many legislators as an undefined state aid that had little purpose largely due to the fact that there is no active formula to determine HACA distributions. The $200 million in HACA that had been distributed to cities was used to pay for the costs associated with the overall tax reform package.

A: Yes, school districts will still levy some property taxes including levies for community service, health and safety, integration and building leases. Many school districts also impose additional voter approved levies for operation and debt service for capital projects. In fact, due to school district concerns about the level of available school revenue under the 2001 omnibus education funding bill, there are preliminary indications that many school districts may seek new or expanded voter approval for operating levies.

A: Yes, the state will levy a new property tax that will be applied only to commercial, industrial and seasonal recreational (cabin) properties. The state tax will be administered just like any other local government's property tax levy and will be included as a line item on the property tax statement. The state property taxes will generally be deposited in the state's general fund and will therefore be available for general state spending.

A: The class rate applied to the first $76,000 of homestead value will remain at 1 percent. This is the only major property class that did not receive a class rate reduction. However, at least in the short term, taxes on even these properties will likely be reduced due to two factors. First, lower value homes will receive a new market value homestead credit that effectively translates into the state paying a portion of each qualifying homeowner's tax bill. In addition, all property owners including low value homes will pay significantly lower taxes to schools due to the state takeover of general education costs. According to legislative estimates, the combined effect of these changes will reduce taxes for most low valued homes.

A: The credit is equal to 0.4 percent of the market value of the home up to a maximum value of $76,000. For homes valued in excess of $76,000, the credit is gradually reduced by $9 for every $10,000 of the home's market value in excess of $76,000. Therefore, the credit is entirely eliminated for homes valued in excess of $414,000.

A: Under state statute, limited market value was due to sunset after taxes payable in 2002. The tax bill actually delays the elimination of the statute by phasing it out over a six-year period. This will increase the taxable value of homes and cabins that currently benefit from limited market value and ultimately shift property taxes to homeowners. Future legislatures will likely have to address any taxpayer fallout due to the impacts of the phase-out of limited market value.