Word games local politicians play to avoid responsibility for raising taxes

We’re entering budget season for counties and cities.  In the next three weeks, these local governmental entities will be setting their preliminary property tax levies for 2013.  The preliminary levy is the highest amount of taxes that the city or county can collect for 2013 — they do have the option of collecting less than that amount when they approve the final levy in early December.

Local units of government take great pride in announcing that they aren’t raising your taxes — they pretty much seem to make that announcement every year, in fact.  How is this possible?  Can it be true?  As you might suspect, the answer here is “not exactly”.  Let’s take a step back and see how this works.

The basic tax calculation for an individual property is pretty simple:  the value of the property multiplied by the tax rate (also called a mill rate). Since the local unit of government has to levy a specific dollar amount for their entire community, though, there’s two ways they can go about the process of determining that final number — they can either go based on the total levy amount and work back into the mill rate or they can start with the mill rate and work up to the number they need.  In reality, local governments combine the two methods to get to a final answer.

Let’s take a look at what happens here.  Here’s a community of 10 houses.  We’ll call this community “Sampleville”.  The 10 homes in Sampleville have a collective value of $3 million, and pay a combined $6,000 in property taxes based on a mill rate of 0.2%. (For wonks out there:  this is going to be a really simplified example.)

What happens in Year 2?  Let’s look at an example of what many cities and counties are experiencing today — declines in property values.  Let’s assume a 10% reduction in property values, and let’s also say that an 11th home is built in the community.  Since times are hard, this home has a less than average value of $150,000.  If the mill rate stays the same, Sampleville generates $300 fewer property tax dollars, even with the addition of the new house.

The Sampleville City Council has some decisions to make at this point.  They can choose to keep the mill rate the same and cut their budget by 5%.  Or they can do what many local government units have done — keep their overall levy amount the same.  After all, Sampleville largely has to provide the same services in Year 2 as they did in Year 1.  They may even have to provide more of some services as there are now more people living in the community.  Under this scenario, Sampleville has to raise the mill rate to make up the difference.  They only have to raise the rate by 5.26%, because of the new house being added to tax base, though.

Even though the mill rate has increased, the Sampleville City Council goes back to its residents and says:  “No tax increase!”  Why? They will say it is because they left the overall tax levy the same — and all residents who were here in Year 1 will pay less in property taxes in Year 2 than they did in Year 1.  (Never mind that they are taking a larger percentage of your property value in Year 2 than they did in Year 1.)

But what if Year 2 is a good economic year?  If property values grow by 10% instead of shrink by 10%, we see a different story.

If no changes are made to the mill rate, tax collections go up by $900.  What does the Sampleville City Council (and most units of local government) do under these situations?  Go back to their residents and say:  “No tax increase!” (and  start planning things to do with the additional $900).  Why?  Because they left your mill rate alone.  The Council will tell you that the reason your taxes went up is a result of your property value increasing, not an active decision by government.

You may have realized at this point that the Sampleville City Council is changing the rules of the game midstream here.  You may also be realizing that many local units of government in Carver County (and across the state) operate the same way.  If you change the standard by which you declare a “tax increase”, it’s pretty easy to make it look like you’re not increasing taxes.

This isn’t meant as some sort of anti-tax screed.  In times like we are in today, decisions to keep local levies flat by raising the mill rate can frequently be justified.  But we have to be fair and call a spade a spade.  If keeping the mill rate flat during good times and collecting the additional revenue from increase property values isn’t a tax increase, then raising the mill rate during bad times to make up for declining property values is a tax increase.  Period.  We should expect our local government officials to not try to muddy the waters on this point.

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2 Responses to “Word games local politicians play to avoid responsibility for raising taxes”

  1. In Minnesota, unlike other states, cities don’t set mill rates. The mill rates are a number that simply falls out at the back end of the process and they are irrelevant to the process. What is important is the levy, which is the portion of the city’s budget that has to be covered from the property tax after all other sources of revenue have been considered. As long as a city is holding its levy down, it’s doing a good job of managing its fiscal affairs. Most cities in Minnesota express changes in their property taxation burden in terms of the change in the amount to be levied against a typically valued home.

    Under Minnesota’s levy system, if a city’s spending is flat and everyone’s property increases in value by 10%, everyone’s property taxes remain unchanged. Same thing if everyone’s property values decline by 10% — each property’s share of the flat levy amount remains unchanged.

    The advantage of this approach, as opposed to the mill rate approach used in many other states, is that, under the mill rate approach, your property taxes increase whenever your home appreciates in value, even though your city’s costs may not have increased. Conversely, in states with mill rate systems, many cities are now on the verge of bankruptcy because their revenues shrank when the real-estate market tanked, even though city expenses remained unchanged.

    The property taxes paid on any given home, as well as the revenues recieved by cities, are much more stable under the levy system used in Minnesota. Ignore your the mill rate. In Minnesota, it’s irrelevant!

    • Hi Steve, thanks for commenting. My experience is that your comments surrounding mill rates aren’t always true (although that’s ideally how it should work). I know of cities that have looked at the impact on the budget of keeping mill rates steady as one of many possible budgeting scenarios. And, in good times, some cities have chose to keep the mill rate the same and just ride the increase in property values.

      That’s why I don’t think the mill rate is irrelevant. It is one piece of the puzzle, just as the total levy amount is and the value on the typical home is.

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