An Analysis of Minnesota's Municipal Tax Legislation, Metro-Area Fiscal
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At Odds with Progress: An Analysis of Minnesota’s Municipal Tax Legislation, Metro-Area Fiscal Control, and the Taxpayer’s Income Conundrum, 2003-2012 A Dissertation SUBMITTED TO THE FACULTY OF UNIVERSITY OF MINNESOTA BY Benjamin Ronald McDaniel IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY Roderick Squires February 2017 © Benjamin Ronald McDaniel 2017 Acknowledgements The list of those I want to thank is voluminous, as each personal relationship I have formed in graduate school has shaped this project in some small way or another. In the interest of narrowing the list down, however, I should begin by thanking my adviser, Rod Squires, without whose support and patience I could not have succeeded with this project, my committee members, George Henderson, John S. Adams, and Peter Calow, who gave excellent feedback with a gentle hand, and to my wife, Shelby Bell, who was both my biggest supporter and critic. She gave me the drive to finish. I would like to thank the Department of Geography for providing me with the opportunity to learn in a challenging and high-stakes environment, and to my peers who influenced me more than I could adequately acknowledge. Finally, I should thank my family. They believed I had something important to share with the world long before I was convinced that I had anything to say at all. i Dedication I dedicate this dissertation to Bret Wallach, an exceptionally kind and honest friend, and to Rod Squires, a genial mentor who edifies with a hammer (Stimmhammer). ii Table of Contents List of Tables Pg. vi List of Figures Pg. vii Chapter One: Introduction: Pg. 1 1.1 – Research Questions Pg. 4 1.2 – City Taxation in the Twin Cities Pg. 6 1.2.1 – Other Revenue Sources Pg. 10 1.3 – The Minnesota Miracle Pg. 14 1.4 – Chapter Two Description Pg. 16 1.4.1 – Chapter Three Description Pg. 17 1.4.2 – Chapter Four Description Pg. 18 1.4.3 – Chapter Five Description Pg. 19 1.5 – Research Framework and Methods Pg. 20 1.6 – Conclusion Pg. 24 Chapter Two: City Finance in Theory and Practice Pg. 28 2.1 –Theoretical Overview of Tax Competition and Redistribution Pg. 31 2.2 – The Evolution of Early Tax Competition, 1850s-1920s Pg. 35 2.3 – The Evolution of Modern Tax Competition, 1930s-1970s Pg. 37 2.4 – The Benefits of Modern Tax Competition Pg. 42 2.5 – The Costs of Modern Tax Competition Pg. 43 2.6 – Negating the Cost of Modern Tax Competition Pg. 47 2.7 – Revenue Sharing Pg. 49 2.8 – Ambivalence Over Local Government Aid Pg. 53 iii 2.9 – Growth of Exemptions, Exclusions and Refunds Pg. 56 2.10 – Bleak Future? Pg. 58 2.11 – Conclusion Pg. 62 Chapter Three: The Plight of Cities During the Recession Pg. 73 3.1 – The Financial and Political Environment for Cities Pg. 76 3.2 – The Commercial/Industrial Stimulus Cycle Pg. 78 3.3 – The Great Recession Pg. 84 3.4 – An Economic Analysis of Sample Cities During the Recession Pg. 85 3.4.1 – Property Taxes Pg. 87 3.4.2 – State and County Aid Pg. 88 3.4.3 – Fees, Fines, and User Charges Pg. 89 3.4.4 – Sales Taxes Pg. 89 3.4.5 – Bonds Pg. 90 3.4.6 – Revenues vs. Expenditures Pg. 91 3.4.7 – Data for Largest/Smallest Property Tax Bases Pg. 92 3.4.8 – Revenues vs. Expenditures for Largest/Smallest Property Pg. 93 Tax Base 3.4.9 – Data for Largest/Smallest Property Tax Bases Per Capita Pg. 95 3.4.10 – Revenues vs. Expenditures for Largest/Smallest Property Tax Pg. 96 Bases Per Capita 3.5 – The State's Response to the Plight of Cities Pg. 98 3.5.1 – 2003 Legislative Session Pg. 99 3.5.2 – 2004 Legislative Session Pg. 101 3.5.3 – 2005 Legislative Session Pg. 102 iv 3.5.4 – 2006 Legislative Session Pg. 105 3.5.5 – 2007 Legislative Session Pg. 108 3.5.6 – 2008 Legislative Session Pg. 110 3.5.7 – 2009 Legislative Session Pg. 114 3.5.8 – 2010 Legislative Session Pg. 117 3.5.9 – 2011 Legislative Session Pg. 119 3.5.10 – 2012 Legislative Session Pg. 123 3.6 – Conclusion Pg. 126 Chapter Four: Regionalism, Demand, and the Twin Cities’ Income Pg. 141 Conundrum 4.1 – The Built Landscape and Regionalism Pg. 143 4.2 – The Fiscal Control Paradigm Pg. 149 4.3 – What is “Affordable” Housing? Pg. 150 4.4 – The Supply-Side Explanation Pg. 153 4.5 – The Income Conundrum Pg. 156 4.6 – The Demand-Side Explanation Pg. 160 4.7 – Conclusion Pg. 165 Chapter Five: Conclusion Pg. 176 5.1 – Re-Evaluating Wage Floors Pg. 177 5.2 – Graduated Rent Control Pg. 181 5.3 – Fiscal Control of Public-Private Partnerships Pg. 183 5.4 – Continuing Education for Property Owners Pg. 187 5.5 – En Final Pg. 187 Figures Pg. 190 v Bibliography Pg. 234 Appendix A: Municipal Budgets by Year Pg. 258 Appendix B: Total Value of Property Tax Bases for Largest/Smallest Tax Pg. 269 Bases by Year Appendix C: Revenue vs. Expenditures for Largest/Smallest Tax Base Pg. 274 Appendix D: Total Value of Property Tax Bases for Largest/Smallest Pg. 275 Tax Bases Per Capita by Year Appendix E: Revenue vs. Expenditures for Largest/Smallest Tax Base Pg. 280 Per Capita vi List of Figures Chapter One: Introduction Figure 1.1 – Twin Cities Metro Area, 2015 Pg. 193 Figure 1.2 – Total Property Tax Base by Property Type Pg. 194 Figure 1.3 – Total Value of Taxable Real and Personal Property Pg. 195 Figure 1.4 – State Government- Legislature and Its Various Agencies Pg. 196 Chapter Two: City Finance in Theory and Practice Figure 2.1 – Twin Cities Metro Area, 1930 Pg. 197 Figure 2.2 – Metro-Area Gross Inflow of Earnings, 1990-2012 Pg. 198 Figure 2.3 – Metro-Area Gross Outflow of Earnings, 1990-2012 Pg. 199 Figure 2.4 – Twin Cities Metro Area, 1975 Pg. 200 Figure 2.5 – Tax-base Sharing in Twin Cities Metro Area Pg. 201 Figure 2.6 – Twin Cities Metro Area 2012 Revenue Sharing Pg. 202 Figure 2.7 – Total Metro-Area LGA for Cities with Populations Pg. 203 Over 2,500 Figure 2.8 – Growth of Metro-Area Gross Real Wages and Salaries Pg. 204 Personal Income and Taxable Real and Personal Property Chapter Three: The Plight of Cities During the Recession Figure 3.1 - Twin Cities Metro Area Cross-Section Sample Pg. 205 Figure 3.2 – Twin Cities Cross-Section Sample Pg. 206 Figure 3.3 – Composition of Budgets, 2003-2012 Pg. 207 Figure 3.4 – Composition of Budgets, 2003 Pg. 208 Figure 3.5 – Composition of Budgets, 2012 Pg. 209 Figure 3.6 – Property Taxes Pg. 210 Figure 3.7 – State Aid and County Grants Pg. 211 vii Figure 3.8 – Fees, Fines, and User Charges Pg. 212 Figure 3.9 – Sales and Other Consumption Taxes Pg. 213 Figure 3.10 – Bond Debt Added Pg. 214 Figure 3.11 – Minimum Expenditures vs. Total Expenditures, 2003-2012 Pg. 215 Figure 3.12 – Total Expenditures vs. Total Revenues Pg. 216 Figure 3.13 – Percentage Change in Value for Largest/Smallest Tax Pg. 217 Bases, 2003-2012 Figure 3.14 – Expenditures vs. Revenues for Largest/Smallest Tax Bases Pg. 218 Figure 3.15 – Composition of Budgets for Largest/Smallest Tax Bases, Pg. 219 2003-2012 Figure 3.16 – Percentage Change in Revenue/Expenditures for Pg. 220 Largest/Smallest Tax Bases, 2003-2012 Figure 3.17 – Minimum Expenditures vs. Total Expenditures for Pg. 221 Largest/Smallest Tax Bases, 2003-2012 Figure 3.18 – Expenditures vs. Revenues for Largest/Smallest Tax Bases Pg. 222 Per Capita, 2003-2012 Figure 3.19 – Percentage Change in Value for Largest/Smallest Tax Pg. 223 Bases Per Capita, 2003-2012 Figure 3.20 – Composition of Budgets for Largest/Smallest Tax Bases Pg. 224 Per Capita, 2003-2012 Figure 3.21 – Percentage Change in Revenue/Expenditures for Pg. 225 Largest/Smallest Tax Bases Per Capita, 2003-2012 Figure 3.22 – Minimum Expenditures vs. Total Expenditures for Pg. 226 Largest/Smallest Tax Bases Per Capita, 2003-2012 Chapter Four: Regionalism, Demand, and the Twin Cities’ Income Conundrum Figure 4.1 – Total Taxable Homestead Property Pg. 227 Figure 4.2 – Median Household Income Pg. 228 Figure 4.3 – Median Per Capita Income Pg. 229 viii Figure 4.4 – Growth of Metro-Area Homestead Property vs. Pg. 230 Total Gross Real Wages and Salaries Figure 4.5 – 30% of Total Gross Real Wages and Salaries as a Pg. 231 Percentage of the Total Value of Homestead Property Figure 4.6 – Median, Average and Minimum Wage for 2nd and 4th Pg. 232 Quarter Job Vacancies Figure 4.7 – Percentile of Earnings at Full-Time for 2nd and 4th Quarter Pg. 233 Job Vacancies ix Chapter One Introduction In the 1960s-1970s, the Minnesota Legislature passed a series of local government tax reform legislation that became known as the “Minnesota Miracle.”1 This legislation shifted the focus of the state’s tax legislation paradigm away from promoting competition for revenues between local units of government, which had been the priority since statehood, towards regulating urban development and city finances.* This legislation lessened the tax burdens of homestead owners,† and gave the state government greater fiscal control over city finances. This study focuses on the effect of this tax legislation for the Twin Cities metro area. It examines the income-generating difficulties of cities and taxpayer burdens over the past half-century from a different and perhaps needed perspective for the state’s most important economic region.