The bill includes changes to local government aid, a new city performance measurement program, a temporary sales tax exemption simplification for certain construction materials, and more.
The House Taxes Committee on April 7 passed the omnibus tax bill (HF 3669, Rep. Paul Marquart, DFL-Dilworth), which contains many measures of interest to cities, including an increase in local government aid (LGA), aid for affordable housing, changes to homestead market value exclusion, and more.
The bill includes the provisions adopted by the Property Tax Division on March 30 in HF 4064 (Rep. Cheryl Youakim, DFL-Hopkins). It was approved on a bipartisan 13-8 vote and referred to the Ways and Means Committee. From there, it will be sent to the floor after legislators return from the recess on April 19.
Senate tax bill
In a somewhat unique process, the Senate finalized its initial omnibus tax bill, SF 3692, authored by Senate Taxes Committee Chair Carla Nelson (R-Rochester), which includes mostly federal conformity changes, reductions in the first-tier income tax rate, and an exclusion of social security income from taxation. The 26-page bill was approved on the Senate floor on Thursday on a vote of 42-24.
The Full Senate Taxes Committee and the Property Tax Subcommittee will continue to meet after the recess to compile recommendations, which will likely include local sales tax and tax increment requests as well as property tax and state aid provisions. At this time, it is unclear how the initial Senate tax bill and any future tax provisions will be combined and then negotiated in a conference committee process with the House.
House tax bill provisions
Below is a summary of the major provisions contained in the 2022 House omnibus tax bill that are of interest to city officials.
Historic structure tax credit extension
Article 2 of the bill makes some modifications to the Historic Structure Rehabilitation Tax Credit distribution to make the awarding of the credit more consistent with redevelopment timelines.
It also extends the sunset of the tax credit from the end of fiscal year 2022 to the end of fiscal year 2030.
Construction sales tax exemption
Article 3 includes a temporary sales tax exemption via a refund process. This is for purchases of construction materials for local government facilities and infrastructure made by a contractor on behalf of the local government.
The exemption is retroactive to July 1, 2021, but expires after Dec. 31, 2022.
Local government aid
Article 5 includes the local government aid (LGA) formula recommendations reflecting the research work conducted by the League of Minnesota Cities, Metro Cities, Coalition of Greater Minnesota Cities, and the Minnesota Association of Small Cities. The bill would increase the LGA appropriation by $34.2 million to $598.6 million, which is a 6% increase over the current law level.
The LGA formula was last updated in 2013 and has been reviewed roughly every 10 years. The research recommendations contained in the proposal update the factors used to statistically determine the “need” definition for each city to reflect newly available demographic and fiscal data.
Rep. Jerry Hertaus (R-Greenfield) offered an amendment to the LGA section that would have created a minimum distribution for all cities by setting aside 2%, or approximately $12 million of the overall LGA appropriation, and then allocating it on a modified per-capita basis with a cap of $250,000 for any individual city. The amendment was not adopted.
LGA payment acceleration
The bill also includes a provision that would modify the LGA payment structure by using future state budget surpluses to accelerate the payments of LGA.
During budget deficits in the early 1980s, the distribution schedule was shifted to the current backloaded structure, where payments are made to cities in July and December. This provision will use future surpluses to accelerate a portion of the July LGA payment to March 15.
Affordable housing aid
Article 5 includes a new local affordable housing aid. It establishes new flexible state aid of $8 million annually to cities to address locally identified housing needs. This will further strengthen the state-local partnership when it comes to affordable and workforce housing efforts, and bolster local innovation to address a myriad of housing issues.
The aid can be used by cities for a variety of housing efforts, including construction, acquisition, rehabilitation, demolition, or removal of existing structures. It could also be used for gap financing for housing intended for households that have incomes 115% of state or area median income for homeownership projects, and 80% of state or area median income for rental projects.
Cities unable to use funding for a specific development could also transfer funds to a housing trust fund.
Stronger Community Aid Program
Article 5 also contains language repealing the existing Local Performance Aid program and creating a new program called Stronger Community Aid.
The goal of the program would continue to be to encourage cities and counties to voluntarily develop performance measurement programs for municipal services. Local governments that choose to participate would be required to identify 10 performance measures as prescribed by the Office of the State Auditor. The bill does not identify specific performance measures.
Participating jurisdictions would be required to hold an initial citizen performance measure and budget workshop between June 15 and August 15 each year to review and report on performance measures. They would also be required to discuss the performance measures, strategies, and related outcomes when setting the preliminary budget and when adopting the final budget.
The state would provide aid to each participating entity, using a calculation of 14 cents multiplied by the population, not to exceed $25,000. The program would be effective in 2023.
Tax Increment Financing
Article 6 includes individual tax increment financing (TIF) provisions for projects in the cities of Plymouth, Hopkins, Savage, Woodbury, and Fridley.
The report also contains the recommendations of a working group formed by the Office of the State Auditor, and they include several technical clarifications and corrections to the statutes governing the use of the TIF tool.
Provisions include a clarification of the definition of administrative expense and the limitation on those expenses, a new definition of “pay-as-you-go” contracts, and notes and clarifications to the existing pooling authorization and restrictions.
To learn more about the background of this provision, read a previous article.
Local Sales Taxes
Article 4 includes several clarifying amendments to the existing local sales tax process. Also included are local option sales tax authorizations to fund various capital projects with regional significance for the following cities and counties:
- Brooklyn Center
- East Grand Forks
- Golden Valley
- Grand Rapids
- Rice County
- Winona County
The bill also includes local lodging tax provisions for Plymouth, Woodbury, and Cook County.
Rep. Greg Davids (R-Preston) offered an amendment to add a regional road project originally requested by the City of Waite Park during the 2021 session. Last year, the final tax bill approved 16 city sales tax requests but did not include any road funding proposals. In offering the amendment for Waite Park, Rep. Davids mentioned that the request from Rochester this year that was included in the division report does include a road funding component. The amendment was not adopted.
State-paid refunds to homeowners and renters
The bill includes modifications to three programs that provide direct relief to homeowners and renters. The homestead credit refund program, which provides a state refund to homeowners whose property taxes exceed a defined percentage of their household income, would have the maximum state refund increased to $3,290 for households with incomes up to $46,719 beginning with 2022 refunds.
The maximum refund for all households increased, with the maximum refund phased out for households with incomes greater than $126,290. The bill includes other changes that increase the refund for household incomes between roughly $21,000 and $78,000. The changes included in the bill would increase the program’s current cost of $640 million by an additional $35 million in fiscal year (FY) 2024.
The renters’ refund program would change from the current refund structure to an income tax credit for refunds in 2022 and beyond. The credit would essentially be calculated in the same manner as in current law, with a simplified definition of “household income” used for the credit calculation. It would be based on the income tax definition of adjusted gross income reduced for exemptions for dependents, seniors over 65, and persons with disabilities. The changes in the program would increase the net state cost by $146.6 million in the first year of implementation.
The bill also includes an expansion to the state’s property tax “targeting” refund program. Under current law, if a homeowner experiences an increase in property taxes of more than 12% and it is also more than $100, the homeowner is eligible to receive a refund equal to 60% of the increase.
The refund is currently capped at $1,000. Under the division report, the qualifying tax increase threshold would be reduced to 10%, and the maximum refund would be increased to $2,000. The changes are estimated to increase the program’s current cost estimate of $5.3 million in FY 2024 by roughly $2 million per year.
Homestead market value exclusion
The bill would modify and expand the current homestead market value exclusion. Under current law, the exclusion is equal to 40% of the home’s market value up to $76,000 in value. The report would increase the eligible threshold to $80,300. The exclusion would phase down by $90 per $1,000 of market value in excess of $80,300 until the exclusion is fully phased out for homes that are valued at more than $437,100. The current phase-out occurs for homes valued at $413,800.