For decades Minnesota has supported a wide network of cities outside the metro area where quality of life has for just as long lured families looking for a place to raise a family with low crime and high quality schools.
From regional cities like Mankato, Duluth, St. Cloud and Rochester to small towns like St. Peter, New Ulm and Austin, these outstate cities have thrived as places to live and do business.
But a projected $7 billion state budget deficit over the next two to three years will put severe pressure on small town life more so than life in larger cities. The state’s system of spreading revenue around to smaller cities to create a consistent system of basic services is under fire. Local government aid has been depleted. Cities will receive on average this year 27 percent less than they did in 2002.
The cuts in state aid have resulted in property tax increases in the double digits as well. Total city property tax levies have more than doubled from 2000 to 2010, from $850 million to $1.8 billion.
What many may not realize is that local government aid cuts don’t just hurt taxpayers by shutting down libraries on weekends, or cutting police and firefighters: The loss of local government aid raises property taxes not only on homeowners, but more importantly on small business owners who pay higher property tax rates.
This trend is making it more expensive to do business in outstate Minnesota. Property tax rates in outstate Minnesota have become much higher than in the metro area. Albert Lea, for example, has a 45 percent property tax rate while Bloomington has a 27 percent tax rate. There is little incentive for a new business to consider Albert Lea when taxes are almost half in Bloomington.
Local government aid was designed to mitigate this disparity. Bloomington is a property rich town. It can tax the property of the Mall of America. Albert Lea, and Mankato or St. Peter for that matter, have fewer options.
The result of this trend will be higher taxes and fewer services in small-town Minnesota. Indeed, the livability of small towns will diminish.
Not only will business taxes be higher, but the tax capacity of the citizens will at some point reach its maximum. And just as schools are getting cut (the state has borrowed $2 billion from them and the government says it may take 12 years to pay it back), they will likely ask taxpayers for more money through local operating referendums. But facing higher property taxes already, these taxpayers are not likely to be willing or able to pay more school taxes.
At the same time, suburban metro areas with their high property tax bases, and relatively low level of property taxes, will likely be able to pour more money into their schools.
These trends will create two Minnesotas, the haves and the havenots. Unfortunately, outstate cities are likely to fall in the latter category.