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Fiscal Disparity Plan
The Minneapolis- St. Paul region provides a clear example of how a regional tax- base sharing program is successfully implemented. Because of the Fiscal Disparity Plan's success and inventiveness, other metropolitan regions have attempted to mimic plan, yet Minneapolis- St. Paul remains the only region with this type of model. This handbook entry outlines the advantages of tax base sharing, the Plan's legislative history, how the Plan works in practice, and, finally, the Plan's impact on the Minneapolis- St. Paul region during the last 30 years.
Advantages of Tax Base Sharing
Tax- base sharing has a number of advantages over state aid programs commonly used to redistribute funds and address tax capacity disparities. First, tax- base sharing does not remove local control over tax rates and collection. Instead, tax- base sharing equalizes tax capacity disparities by using existing taxing mechanisms that municipalities are already comfortable with and have experience using. Second, tax- base sharing reallocates money to jurisdictions from single, common pool. The existing system of state aid programs is complicated and fractured. Furthermore, tax- base sharing produces more efficient budget decision outcomes than current system of inter-jurisdictional competition for commercial and industrial development. Fourth, tax- base sharing is flexible. Tax base sharing avoids migration issues and when implemented regionally, tax base sharing does not involve complicated aid formulas to address urban and rural areas very different needs (Orfield 2002, 105-106).
Additionally, research results suggest that tax- base sharing can be more effective at reducing tax disparities than current state aid programs. Economic simulations indicate tax sharing reduces tax capacity disparities by 2 percentage points for each point of shared revenues. Existing aid programs only reduce tax base disparities by half a percentage point for every percentage point of aid (Ibid 106).
Tax- base sharing works just as the name suggests. Each municipality contributes a portion of their tax base to a regional pool. The contribution can be either a percentage of growth in tax base or as a percentage of the current tax base. The affected portion of the tax base can include all types of taxes or can be limited to particular ones. Once the contribution amount and type of tax base affected have been decided, each municipality within a region then receives money from that pool based upon a set of established criteria. The criteria can include: tax capacity, service costs, land- use decisions or other indicators (Ibid 106).
The Minnesota Fiscal Disparities Act of 1971 was an innovative attempt to
address growing concerns within the Minneapolis- St. Paul region. Increasing
property tax rates, tax- base and tax- rate disparities, and interjurisdictional competition
for development within the region had combined to place an inordinate strain
on many municipality's budgets (Orfield 2002,
107). After a long, bitter legislative and court fight, the Minnesota Fiscal
Disparity Act resulted in the Fiscal Disparity Plan. To date, the Minneapolis-
St. Paul is the only metropolitan area in the
Republican Charles R. Weaver, representative from
Critics were particularly aghast that their communities would have to share part of their commercial property base with communities that seemingly could not manage their own finances. One suburban mayor wondered, "How can metro government take 40% of what we have and give it to those who can't operate on 100 percent? (Ibid) Other legislature's criticisms compared the bill with communism. Some particularly ardent critics felt that the bill represented "community socialism or that it was "nothing more than creeping communism (Ackberg 1971, 14B cited in Orfield 1997, 143). One town board chairman went so far as to say that, "the fiscal disparities law will destroy the state (Carr 1971, E5 cited in Orfield 1997, 143).
Again the bill passed through the State House, though the vote was closer than during the previous attempt in 1969. In fact during the 1971 legislative session, the bill had 24 fewer supporting votes (Ibid). After a particular rancorous debate in the Senate, the bill narrowly passed. Almost immediately, suburban communities brought suit against the plan (Orfield 1997, 144). The trial court found the bill unconstitutional, though the law was upheld by the appeal court. Finally, in February 1975, the fiscal disparity law went into effect (Ibid).
How the Fiscal Disparity Plan works
First, the plan applies to all taxing jurisdictions within the seven county, Minneapolis- St. Paul area. This amounts to 186 cities, villages and townships, 48 school districts, and 60 other taxing authorities (Rusk 2002, 240). Each jurisdiction is required to contribute 40% of the increase in value from its commercial- industrial property since 1971 to a common, regional pool (Rusk 1993, 102-103; Orfield 2002, 107). Residential property tax increases are not included in the fiscal disparity plan. Each year, a jurisdiction receives a share of money from the pool. Essentially, communities that are experiencing rapid commercial or industrial growth are required to share the benefits with communities whose economies have stagnated.
There are a number of criteria used to determine the amount that each municipality receives. The various criteria include the population and the ratio of the total market value of property per capita in the jurisdiction and the average market value of property per capita in the region (Orfield 2002, 107). Money is then reallocated on the basis of inverse net commercial tax capacity (Orfield 1997, 87). Municipalities that have lower than average market value per capita receive a share of the pool that is greater than their share of the regional population (Orfield 2002, 107).
The Metropolitan Council, the regional government, believes that tax- base sharing with the Minneapolis- St. Paul makes sense because the region is just one large, interconnected economy. While commercial- industrial development provides needed tax revenue for particular governments, these developments are largely funded through regional and state financing. Without tax- base sharing, only municipality with the new development would benefit, not the other parts of the region that also contributed. The Metropolitan Council believes that, "the ideas underlying tax- base sharing is to allow all cities to share in the commercial- industrial development that is, to a large extent, the result of the regional market and public investments made at the regional and state levels (quoted in Rusk 1999, 239). Thus regional tax- base sharing prevents one municipality benefiting from growth at the expense of the rest of the region. Certainly specific municipalities do not gain the full benefit from the development that occurs within their borders, but proponents argue that region wide benefits more than outweigh any financial loss associated with the fiscal disparity plan.
Orfield (2002) finds that the plan has been largely successful at narrowing the regional business tax rate disparities. In 2000, 28% of the region's commercial- industrial tax base was shared between jurisdictions (Orfield 2002, 107). Gini- coefficient measurements indicate that the program reduced tax base disparities by close to 20%. Furthermore, the ratio between the ninety- fifth to fifth percentile tax base declined by 25% (Ibid). Finally, within the entire region, tax base disparity has been reduced from 50 to 1 to approximately 12 to 1, but for cities with populations over 9,000 people the ratio of tax base disparity dropped from 18 to 1 to 5 to 1, as measured by per capita commercial industrial value per capita (Rusk 1993, 102; Orfield 1997, 87).
The plan provides fiscal benefits for the majority of municipalities in
the region. Annually, the plan pool contains roughly 20% of the regional
tax base. In 1998, this money was distributed to 137 cities, villages, and
townships funding while only 49 were net contributors. Since its inception,
the major fund contributors include the area's wealthiest suburbs,
Orfield, Myron. 1997. Metropolitics: A Regional Agenda for Community
Orfield, Myron. 2002. American Metropolitics:
The New Suburban Reality.
Rusk, David. 1993. Cities without Suburbs.
Rusk, David. Inside Game/ Outside Game: Winning Strategies for Saving