LOCAL GOVERNMENT: Property
taxes may rise as the state shifts costs

The state government won't force counties to raise property taxes, but local governments may choose that route in reaction to state measures to eliminate the budget deficit, Minnesota's budget director said Tuesday.

"There's going to have to be a major restructuring of state programs," as state officials grapple with a $4.56 billion shortfall during the next 30 months, Budget Director Peggy Ingison told the Association of Minnesota Counties on Tuesday.

Addressing the organization's annual meeting in Duluth, she said, "I think people need to understand this won't be nibbling around the edges."

Gov.-elect Tim Pawlenty and his choice for state finance director, Dan McElroy, have said they don't want the state to force local property taxes higher, she said, prompting a buzz among county officials.

But she quickly added, "I don't take that as a statement that there won't be a property tax increase."

Local officials fear the state will resolve its budget crisis by pushing more fiscal responsibility to city, town and county governments, forcing them to raise property taxes. By law, levy limits end in 2004 and may only be renewed by legislative action. That could leave open the possibility that property taxes could rise substantially.

Last year, the state made a policy decision to reduce local property taxes. Property tax increases would run counter to the intent of that law, which gave the state -- rather than local school boards -- responsibility for paying for schools. The law also significantly expanded the Local Government Aid program.

Pawlenty's budget plan is unlikely to be completed before February. His staff has just begun to tackle the problem after last week's announcement of the higher-than-expected shortfall.

The $356 million deficit for the current biennium, or two-year budget cycle, is 2.5 percent of spending. The $4.2 billion shortfall projected for the 2004-05 biennium is 13.6 percent of spending. The state must balance its budget by the end of each biennium.

When looking at the price of government, the Minnesota Finance Department takes into account both state and local governments because they work closely together to deliver services, she said after the meeting.

The incoming administration is aware that local property taxes could be raised as a result of state actions, Ingison said. However, if local governments want to replace programs formerly paid for by the state, they are free to do so, she said.

Asked how the state could reverse the shortfall, Ingison was at a loss for an easy explanation.

The budget director also painted a bleak picture of future state budgets -- from a $1.75 billion projected deficit in 2005 to a $960 million shortfall in 2007. Ingison said projected spending doesn't include an inflation adjustment, although projected revenue does. That makes it likely that the deficits will be larger than currently projected.

In addition, "revenue volatility is only going to get worse," she said. More taxpayers are retiring, and the proportion of their taxable income declines during the process. That means less money for the state.

Every state that collects an income tax has similar problems, she noted. The biggest loss of revenue -- and biggest surprise in the state's budget picture -- was the huge falloff of anticipated capital gains taxes in individual income taxes due to the stock market, she said.

In tax year 2000, the state projected $9 billion in revenue from capital gains but received just $4 billion. The Finance Department projects a 16 percent decline in capital gains tax revenue in tax year 2002.

The Association of Minnesota Counties annual conference continues through this morning at the Duluth Entertainment Convention Center.