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The bill is scheduled for a hearing on Feb. 27 in the House Taxes Committee.
(Published Feb 25, 2013)
Bills containing Gov. Dayton’s tax recommendations were brought forward on Feb. 18 in the House and the Senate. SF 552 and HF 677 were introduced by Senate Taxes Committee Chair Rod Skoe (DFL-Clearbrook) and House Taxes Committee Chair Ann Lenczewski (DFL-Bloomington), respectively.
The legislation would make many changes, including:
Article 2 of the bill contains the governor’s recommendations for local government aid (LGA) reform. If enacted, the changes would be implemented beginning with city aid payments in 2014. The governor’s bill does not impact the 2013 LGA distribution, which is scheduled for July and December of this year.
Most 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 a new formula that includes three need factor components:
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.
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.
Next legislative steps
The House version of the governor’s tax bill is currently scheduled to be heard on Feb. 27 at 7 p.m. in the House Taxes Committee. The hearing will include public testimony on the bill. It is expected the Senate bill will be heard in the Senate Taxes Committee in the near future.
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Contact Gary Carlson
(651) 281-1255 or (800) 925-1122
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