The Minnesota Legislature, like that in several other states with budget surpluses and looming elections, is grappling with changes in the taxes over which the state has authority.
Minnesota, like many other states, levies a tax on sales and use of selected goods and services as well as taxes on personal and corporate income. Equally important is its supervision of the real estate taxes levied by counties, cities, school districts and minor local government entities.
The real estate tax is troublesome. Based on the worth of certain assets a household owns, it often is unrelated to ability to pay.
Households that have low cash incomes, such as those of many retirees, but which own a house in a locality with rising property values, frequently face stiff and rising tax bills. Family-owned businesses using real estate as an integral part of their operations, such as farms and small-town stores, also pay high levels of real estate tax relative to their net incomes.
Moreover, homeowners have more political weight than renters, and apartments and other rental property are taxed much more stiffly than owner-occupied homes. Such taxes are largely passed on to renters, who tend to be poorer than homeowners are. And, in Minnesota, commercial and industrial property also pays higher rates than housing, skewing the business climate in favor of neighboring states.
Real estate taxes also pose problems as a source of education funding. The amount of taxable real estate relative to students varies widely between school districts. This leads the Legislature to develop increasingly complex formulas to distribute state education aid in a way that compensates for underlying variations in the total value of taxable land and buildings.
Many state and local tax specialists would like to see the real estate tax abolished completely. But to do that is to risk losing something important, a local tax that is tied to local control of education and services.
My sensitivity to this issue is tied to my experience living in Latin America. In Brazil and Peru, education, roads, sewers and water supply depend on the state or national governments. Local leaders have virtually no control over taxes. Success for elected officials is defined by their ability to go to the state or national capital and bring home funds.
Much is spent on building new roads or buildings that can be inaugurated with pomp and ceremony; little is spent on repair or maintenance of existing infrastructure funded by the efforts of a predecessor or political rival.
Contrast that with the local school districts and townships established in Minnesota 100 to 150 years ago. My mother and her siblings attended Murray County District 94, northwest of Chandler. The District 94 schoolhouse was modest, and the district’s early teachers were lucky if they had two years of “normal school” or “teacher’s college” after high school.
But the schoolhouse was built and maintained by taxes on farm in Moulton and Chanarambie townships. A board of local farmers hired and fired the teachers, bought coal and decided when upkeep was needed.
Their prerogatives and duties were specified by state law, but there was genuine local control and local financing.
Similarly, the townships built roads and conducted local elections. There was a clear sense that local residents had the right and the duty to take care of themselves as far as local infrastructure goes.
If a farmer had trouble raising cash to pay his taxes, he could “work it out on the road crew,” with his own sweat and that of his horses. Spending priorities were defined by direct interaction between the citizens and the town board.
It is easy to over-romanticize local government in the mid-20th century. The level of public services was uneven. Some schools were excellent; others barely met minimum standards. Roads and bridges were narrow and dangerous.
But the contrast with centralized government in virtually all of Asia, Africa and Latin America, along with southern and eastern Europe, is striking. Local control and local financing of local government is an institutional miracle that had much to do with making the United States what it is today.
If we simply do away with the real estate tax and replace it with a share of state income tax revenues, we will move in the direction of Latin America, where lobbying in the capitol will mean more than local willingness to pay.
Cynics or realists may respond that we have already passed that point, that state aid to small school districts and state funds for social services and infrastructure already outweigh local revenues in many cases.
And yet my mind still returns to the Andean villages where I worked in the early 1980s, with their atmosphere of passive acceptance of the status quo, their total reliance on what someone from some ministry in Lima might bring in the way of local improvement.
I contrast that to hard-fought fights over bonds for a new school in my hometown, or to seeing five township board members and two local earthmoving contractors out on a spring evening looking at the township roads, deciding how the $4,000 or $6,000 available that year might best be spent.
Times change, necessary institutions change, but the principles of some level of local control, local responsibility and local financing are important ones. In considering tax reform, we need to keep those principles in mind.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.