Why is fiscal disparities reform important to Minnesota businesses?

Fiscal disparities legislation was enacted in 1971 and implemented in 1975. It operates in the seven county metropolitan area. Its goal is to allow communities to share in the region’s property tax growth, regardless of where the growth occurs. This is intended to partially equalize the per capita tax base among metro area communities. Fiscal disparities has “pooled” 40 percent of all commercial/industrial (C/I) tax base growth since 1971. This tax base pool is then taxed at a common tax rate and resulting revenue is distributed to taxing districts based on a formula that reflects a community’s population and market value. The program is self-financing, and all taxing districts participate in the program.

How certain districts fare depends on their C/I contributions to the pool and its distribution from the pool. If contributions exceed distributions, the district is a net loser of tax base. Therefore, “loser” districts’ tax rates are driven higher, while “winner” districts’ tax rates are bought down. Hennepin County is an overall loser, or tax exporter, as are most of the TwinWest area cities. The fiscal disparities pool incurs growth due to real development and inflation. About two-thirds of the pool comes from inflation on properties that have had no physical development since the program was enacted.

What guidelines does TwinWest support in approaching fiscal disparities reform?

We support further legislative study of the regional fiscal disparities program to review its purpose and function, including consideration of the overall necessity of the program and determine if it is meeting current goals.

We recommend that the following factors should be considered during the fiscal disparities study:

• Elimination of inflation growth as a factor in determining the amount of property taxes a district must contribute to the pool so that the tax paid relies on real development rather than inflation.

• Ensuring that the program recognizes the fact that differences exist among communities in the amount of tax effort needed to meet the city’s needs for service, public safety and infrastructure.

• Reducing the 40 percent contribution rate which determines the overall scale of the program and the size of the tax base gains and losses because it is arbitrary and excessive.

• Allocating dollars based on a city’s need, not just on local tax capacity.

• Cities that choose to restrict or ban commercial/industrial development should not be in the pool.