Taking Another Look at Tax-Base Sharing.

• Author: Gilje, Paul
• Position: TAKING ANOTHER LOOK AT TAX-BASE SHARING

July 2021 will mark the 50th anniversary of pioneering legislation in Minnesota to address fiscal implications of metropolitanism. The law--which adjusts for differences among municipalities in the commercial/industrial (C/l) property tax base without sacrificing local control, increasing taxes, or moving functions to higher levels of government--continues to attract interest across the nation. Similar actions are rare, however, and none is as far-reaching as Minnesota's.

The law pools 40 percent of net growth since 1971 in the C/I property tax base among some 190 municipalities in the Minneapolis-St. Paul metro area. The pooled valuations are immediately redistributed back to the 190 municipalities, according to population modified inversely by tax wealth. Among municipalities with populations of more than 9,000, the wealthiest municipality without the law in 2020 would have 13 times the per capita C/I base as the poorest, or 13 to 1. With the law, the ratio is 6 to 1.

Everyone contributes and everyone receives. Higher-valuation municipalities still end up with the highest per capita C/I valuation, but less than they would have had without the law. Lower valuation municipalities still end up with less, but more than they otherwise would have had.

EFFECT ON REVENUE

Tax-base sharing affects the capacity of a municipality to raise revenue, but it raises no revenue by itself. What happens is that property tax burdens shift somewhat from slower-growing, moderately priced bedroom communities to wealthier, more rapidly growing municipalities with more commercial-industrial tax base.

Without tax-base sharing, among metro-area cities with populations of more than 10,000 in 2018, the six largest recipient cities would have seen their homestead taxes go up between 11 percent and 22 percent, according to the Minnesota House of Representatives Research Department. (1) Among the six largest contributor-cities, homestead taxes would have decreased between 2.6 percent and 4.4 percent.

There is less to the impact of the law than meets the eye. Some municipalities receive about as much as they put in. The total C/I value shared in 2020 is $477 million, which is not insubstantial. But every municipality or township receives back some of what it contributed. Only a fraction actually gets taken from the "losers" and ends up in the hands of the "winners." About 29 percent of the $477 million gets transferred to the winners; about 71 percent is returned to the municipalities and townships from which it was contributed.

Tax-base sharing eases the strain on municipalities that, because of their location--not near major transportation facilities such as airports, freeways and freeway interchanges, and transit and transit stations--are unable to attract major shopping centers, office parks, or industrial buildings. The law also keeps municipalities from being unduly penalized by refraining to develop land that should remain as open space.

Before tax-base sharing was enacted, municipalities openly embraced "fiscal zoning," by which they discouraged new development that didn't "pay its own way in property taxes." Municipalities still encourage more expensive homes, but they now recognize--or should recognize--that all new residents, whether renters or owners, in apartments or single-family residences, in lower-priced or higher-priced residences, bring a share of C/I tax base with them. This is because the pool is apportioned based on population, modified somewhat by whether a city is above-or below-average in tax-base wealth. It seems that municipalities are more open to accepting lower-priced housing today than before tax-base sharing was enacted.

In December 2020, the Center for Policy Design (CPD) published a free online book on the half-century history of tax-base sharing, How Could You Do This? (2) (See sidebar for more information.) Walter McClure, founder and chair of the board of directors of CPD, says in a foreword: "Systems and organizations tend to...