Diverse Revenues: An Update of 2010's "Vulnerable Cities" Analysis

In 2010, we conducted analysis of municipal finance trends, and asked you to consider with us the following question: If state and federal aids disappeared tomorrow, and citizens wished to maintain the same level of services, how large a property tax increase would be required? How vulnerable are communities to federal and state revenue reductions?

Minnesota cities remain the focus of the “Vulnerable Cities” analysis, to extend the 2010 work, and because in the state, the law largely limits cities to collecting property tax as their primary funding source. Broader local discretion leading up to the 1960s empowered cities to tailor revenue structures more to their circumstances. As cities work to match revenues to the expectations of constituents for public services, they are increasingly pressed to diversify sources - but remain unable to do so in Minnesota due to limitations of state law. The result is increasing reliance, particularly among our small towns, on state and federal sources at a time when these are growing less stable.

The updated report produces key findings in line with those of the 2010 Vulnerable Cities report:

• Today, all but one of the 50 Minnesota cities most reliant on state and federal aids and grants are cities with population under 5,000: International Falls, population 6,424, is the exception. In 2010, the top 50 Minnesota cities on the list recorded population less than 5,000.
• If cities experienced total loss of Local Government Aid (LGA) and Federal grants and aids, and elected to maintain public services through the property tax levy, owners of a home valued at $100,000 would experience property tax increases of $1,000 or more in 125 Minnesota cities. These are cities with fewer than 8,000 residents in every case, and in 122 cases population is 5,000 or fewer.
• Minnesota’s two largest cities – Minneapolis and St. Paul – are each less reliant on state and federal revenues than the state median. Of the 50 most populous cities in the state, 46 are less reliant on such sources than the median.

In the 2010 report, we accurately predicted that some of our colleagues would respond that city reliance on state and federal sources is a spending problem, while others would argue that local governments are forced to rely on state and federal sources because property taxes are insufficient to provide the services their citizens demand. Our view at Strong Towns remains that each of these perspectives are accurate:

• It’s a revenue problem because property taxes are clumsy, regressive mechanisms that create a direct disincentive to more efficient land use. It’s a spending problem because we as citizens are accustomed to consuming local police protection, clean water and well-maintained streets which we do not fully fund through local property taxation.
• It’s also a productivity problem. The most vulnerable Minnesota places produce local tax revenues that are less than what voters there demand. Using state and federal subsidy to meet core public needs is a way of addressing inequities, perceived or real. It also undermines discussion of how communities need to redesign their physical layout, infrastructure, or human capital to fund a higher percentage of total public services consumed.

Tables listing state and federal reliance data by Minnesota city are available in alphabetical order or by rank of degree of reliance.

We're glad you've joined the Strong Towns dialogue and invite you to support the work happening here.

Comments

[Property Tax Calculator]

To calculate property tax is very confusing process. You provide information about property tax in north Dakota this is really very useful for every person. Thanks for sharing such a nice post.

[Derek]

Property taxes encourage cities to make land-use decisions that bolster property values, and they encourage people to buy smaller properties.

So no, property taxes don't "create a direct disincentive to more efficient land use." Quite the opposite.

[Jeffrey Jakucyk]

Derek, of course CITIES want to bolster property values, but the incentive for property OWNERS is to devalue their property as much as possible so that it reduces their tax burden. This is why so much urban development has been demolished for parking lots, small one-story buildings, or just empty space, because less building means less value means less tax. If the tax was levied on the LAND value rather than the IMPROVED value (of which buildings make up the vast majority), then there would be more incentive to break up plots and develop more densely. As it is currently though, that isn't happening.

[Derek]

Jeffrey, I agree with you, when the property tax on unimproved land is too low, it disincentivizes efficient land use.