Governor’s Tax Bill Introduced: LGA Reform Included

The governor's tax bill was introduced in the House and Senate on Monday; the bill includes LGA reform measures that would impact cities.
(Published Feb 20, 2013)

On Monday, the Governor’s tax recommendations were introduced in the House and the Senate. The bills, SF 552 and HF 677 were introduced by Senate Tax Committee chair Rod Skoe (DFL-Clearbrook) and House Tax Chair Ann Lenczewski (DFL-Bloomington), respectively.

The legislation includes a new fourth tier income tax bracket, changes in the corporate franchise tax, a sales tax rate reduction and base expansion to services, higher-value clothing, digital goods and Internet commerce, a new LGA formula and a host of miscellaneous tax changes including an increase in cigarette and tobacco taxes. This article will focus on the governor’s LGA recommendations.

LGA Reform
Article 2 of the bill is the property tax article and it includes the governor’s recommendations for LGA reform. If enacted, the changes would start affecting city aid payments in 2014. The governor is not proposing changes for the LGA distribution scheduled for July and December of 2013.

Impact on Your City
The Department of Revenue (DOR) has released city-by-city estimates for LGA payment amounts in 2014 as compared to current law.

View the DOR spreadsheet of LGA payment estimates (pdf)

Much of the current LGA formula would be discarded under the governor's proposal. One element of the current distribution system that does remain is the comparison between a city's “capacity” and its “need.” The governor does not propose changing how “capacity” is calculated. It would still be the city's adjusted net tax capacity (tax base) multiplied by the statewide average city tax rate.

New Factors in Formula
Each city’s “need” would be computed using an entirely new formula that includes three need factors. These need factors are:

1) Public safety/streets need based on population: The formula would begin by awarding each city with a foundation need of $200 per capita. Each city would receive additional need from this factor above the $200 base need based on its population size. This factor is based on a simple statistical analysis of the average city spending per capita on public safety and streets.

2) Percentage of housing built before 1970: The second need factor is the percentage of housing built before 1970 in each city. For each percentage point of pre-1970 housing, a city receives an increase in need of $1.30 per capita up to a maximum of $130 per capita.

3) Percentage of parcels that are tax-exempt: The third factor is the percentage of parcels in each city that are tax-exempt. The governor’s proposed formula defines a parcel as tax-exempt if it is not city owned and it contains at least one structure valued at $5,000 or more. For each percentage point, a city gets $65 per capita of need up to a maximum of $130 per capita.

The per capita dollars of need for each of the three factors are added together to arrive at the city’s total per capita need. The formula then compares total per capita need multiplied by the city’s population to the city’s capacity just like it does in current law. If there is a gap between need and capacity, the city receives LGA. If capacity exceeds need, the city will not receive LGA.

One of the governor’s main stated goals in constructing this new formula is year-to-year stability. The population factor is the only need factor that is adjusted annually. This will minimize the year-to-year volatility in aid amounts.

Another main goal of the proposal, according to the budget documents, is to simplify the LGA system. With only three need factors and no adjustments based on special aid bases, the budget document suggests that calculations are easier to understand. In addition, several of the complexities of the current formula, including the current aid bases (e.g., small cities aid base, jobs aid base, regional center aid base) are eliminated under the proposed system.

Increase in Total LGA Appropriation
The governor is also recommending an increase in the LGA appropriation of $80 million beginning with the 2014 distribution but there is no additional increase for future years. This increase would bring the total LGA appropriation to roughly $506 million per year.

In the first year of this new system, which would be the 2014 calendar year distribution, the $80 million appropriation increase would initially be distributed by providing each city that received LGA in 2013 with a $30 per capita increase. This initial distribution would provide 729 cities with an initial increase in LGA.

Beginning with the calendar year 2015 distribution, the formula would be used to distribute the LGA appropriation, however there are several caps to annual increases and decreases that would limit the annual change to individual cities. Year-to-year changes--either positive or negative--in each city’s annual LGA distribution would be limited to no more than $10 per capita. Decreases in each city’s LGA are also limited to $300,000 for all cities. These caps are similar to what is in place under current law. As a result of these caps, the majority of the LGA appropriation would not be distributed through the new formula until the fourth year.

Next Steps
The governor’s tax bills will likely be heard in the Tax Committees later this week or early next week. The League Board of Directors will be considering and possibly taking a position on the governor’s proposal at their meeting on February 21.

Questions? Contact Gary N. Carlson at (651)281-1255 or gcarlson@lmc.org

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