Opinion | Minnesota’s fiscal system is under serious pressure. Might now be the time to redesign?

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A panel on state/local fiscal uncertainty at Minnesota Center for Fiscal Excellence’s recent policy forum discussed uncertainty over how bad the situation will be given federal government policy changes.

Intense fiscal pressure is certain. This is bad news for Minnesota, one of few states that make counties conduct and pay for human services delivery. It is exacerbated by our counties’ heavy reliance on the property tax and increasing pressure on home property taxes from a combination of falling commercial property values from pandemic-caused and technology-enabled reduced office space need and Minnesota taxing business property at higher rates than homes. (My home property tax is up 32% from 2023-25.)

Much of the discussion was unsurprising. But I was flabbergasted by comments by the Association of Minnesota Counties panelist. First, the counties favor unloading some human services responsibility onto the state. Second, the information technology system(s) supporting that work are hopelessly inefficient and outdated. The first suggests potential political support for systems redesign to provide better services at lower cost. The second illustrates the reality that practically nobody knows the details of governmental service administration, which consigns systems redesign to low political priority. At some point, apparently reached in this instance, continuing with outdated systems becomes downright stupid.

The stupidity question applies more broadly. Minnesota has 87 counties, but I believe “only” 84 human services delivery systems, due to some counties wisely collaborating. What has changed since Minnesota’s 1858 statehood? Cars. Trucks. Paved roads, highways and freeways. Airplanes. Telephones. Radio. TV. Big computers. Personal computers. Ever more powerful computers. The internet. Cellphones. And now AI. In sum, productivity explosions in transportation, communications and information management. The question for Gov. Tim Walz and legislators: Have we arrived at stupidity with our human services delivery system? Even if we’re not there yet, might now be the time for redesign since the existing system is going to be ever more painful for homeowners, property tax levying local officials, legislators and governors?

At least two varieties of redesign proposals recently appeared. The Public Strategies Group (PSG) focused on service delivery systems and the state/local government relationship, and I combined those with state/local fiscal system redesign.

1) Replace county human services responsibility with about 10 regional boards to govern human services delivery and contract with providers. Some functions might be at the state level; e.g., eligibility application and determination. Counties could be providers, but the state would pay for human services delivery, reducing property tax pressure. PSG estimated annual savings of hundreds of millions of dollars.

2) PSG’s “A New Minnesota State-Local Government Relationship” said the keys to enabling local governments to provide better results for fewer dollars are to change the state-local relationship from controlling inputs to focusing on producing outcomes and increasing local government accountability to citizens for results. Their strategies were managing for results; regional integrated human services delivery; a shared services investment fund, and reduced state funding linked with local flexibility.

3) Vastly broaden the sales tax base, including most services but exempting business inputs and sales of, e.g., medical services to nonresidents, and cut the rate from 6.875% to 5%, creating substantial revenue that facilitates property tax reduction. Minimize regressivity with an income-adjusted household credit. Repeal local sales taxes.

4) Redesign the property tax to a market value system. Repeal property tax credits and property tax-related aids, including LGA, to cities and counties, but deploy a transition aid program to smooth transition. Enact the Urban Development Encourager to tax developed rural property at the same or higher rate than an appropriate city comparison, with revenue to the state. Repeal the state property tax on cabins. Enact credits or exemptions for farm, timber and rural open land and a credit for seasonal recreational property to reward environmentally sound land management and switch the emphasis on farm taxation from the property tax to a business activities tax on gross margin. Use the property tax refund program both to hold increases to a reasonable level and to ensure that no homeowner’s or renter’s property taxes reach an unacceptable level relative to their income.

5) Substantially increase state funding of E-12 education and perhaps switch from the property tax to an equalized local income tax for voluntary local education funding, further reducing property tax pressure.

7) Set the gas tax at the same rate as the sales tax, a major reduction sure to be widely appreciated, and fund roads more from general state revenues. The appeal of the gas tax, enacted when the property tax was the only other substantial tax, comes mainly from the reality that “an old tax is a good tax” in the sense that people are used to paying it and the feds also tax gas heavily. But as a user fee it is a joke, again raising the stupidity question. How dumb are we? Local property taxes could also contribute more to transportation funding and Minnesota Department of Transportation desires might require local approvals. If desired in the fight to protect the environment, additional transportation funding could come from higher motor vehicle sales tax and annual registration fees for gas guzzlers and taxes on carbon emissions.

8) Finally, reduce reliance on the individual income tax. But broaden the base as well as widening the brackets and cutting some rates. As a former revenue commissioner, I appreciate the fact that nobody likes to pay taxes and that legislators and governors like to do what they can to make people happy. But we are all in this together and Minnesota is in big fiscal trouble that can, with considerable accuracy, be blamed on the federal government. So please stop exempting types of income from tax and at least don’t provide more exemptions. Among the stupidest of all provisions is exemption of Social Security income from tax. Well-off seniors can afford to pay. Those who are not can be protected by low rates and an income-adjusted household credit.

To minimize the damage to Minnesotans from federal changes, from continuing to use outdated systems, and from reluctance to use the sales tax and redesign systems, the leadership challenge belongs to Walz. I think experts more knowledgeable than me will also help if he asks.