Levy Limits and Unintended Consequences
Last year, the governor and legislature passed levy limits on Minnesota cities. In simple terms, the law stated that cities could increase their tax levies by a maximum of 3.9% or the implicit price deflator (a measure of inflation for state and local governments), whichever is less. (There are other complications allowing a certain amount for population growth, exceptions for debt levies, etc.)
Last year the IPD was 6.1%, driven by factors like skyrocketing prices on petroleum, so cities were limited to 3.9% levy increases, less than the rate of inflation. But this year, the IPD has been calculated as only 0.76%, this time reflecting the falling prices of commodities and services in the global economic slowdown.
Cities could see this coming last year; inflation numbers come out every month, so it was obvious in the fall that the upcoming IPD calculation was going to be much lower than it was a year before. This set up a perverse incentive for cities -- knowing that they were not going to be allowed to keep up with inflation in their 2009 levies (to say nothing of how they knew state aid and credits would be cut as the state faced its own budgetary woes), and then that the decline in the IPD would mean even lower levy limits for the 2010 levy, the rational course of action for cities across Minnesota was to raise their levies right to the limit as a way to hedge against the future limits, especially if they didn't need to. Thus, in some cities the levy limit law may have delivered the exact opposite of its intended result -- it encouraged cities to focus on maximizing their levy increases, rather than minimizing them.
Last year the IPD was 6.1%, driven by factors like skyrocketing prices on petroleum, so cities were limited to 3.9% levy increases, less than the rate of inflation. But this year, the IPD has been calculated as only 0.76%, this time reflecting the falling prices of commodities and services in the global economic slowdown.
Cities could see this coming last year; inflation numbers come out every month, so it was obvious in the fall that the upcoming IPD calculation was going to be much lower than it was a year before. This set up a perverse incentive for cities -- knowing that they were not going to be allowed to keep up with inflation in their 2009 levies (to say nothing of how they knew state aid and credits would be cut as the state faced its own budgetary woes), and then that the decline in the IPD would mean even lower levy limits for the 2010 levy, the rational course of action for cities across Minnesota was to raise their levies right to the limit as a way to hedge against the future limits, especially if they didn't need to. Thus, in some cities the levy limit law may have delivered the exact opposite of its intended result -- it encouraged cities to focus on maximizing their levy increases, rather than minimizing them.
Labels: finance
So conservatives are right when they say everything should operate like a market -- levies will find the right level through the political market place! So conservatives are wrong when they cap levy limits!
But... but...
Posted by
Pogo |
5/15/2009 09:37:00 AM
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