REGIONAL- Property owners across the North Country and St. Louis County could wind up with an unpleasant surprise when they receive their property tax statement this year, courtesy of a little known and less understood thing called the fiscal disparity program.
The Iron Range Fiscal Disparities (IRFD) Program was established in 1996 to share the commercial-industrial tax base in the “taconite assistance area” that covers portions of St. Louis, Itasca, Cook, Lake, Aitkin, and Crow Wing counties, with the overall intent of spreading the benefits of regional business development. Based on a similar program in the Twin Cities metro area, the intent was to equalize the distribution of fiscal resources in the region, and reduce the competition among communities.
Every year, each municipality in the covered counties that participates in the program starts with the commercial-industrial tax base it had in 1995 and calculates how much growth it has experienced up to the current year. Forty percent of that is then contributed to the fiscal disparity pool. Through a complex set of calculations done by St. Louis County, the program’s administrator, and the Minnesota Department of Revenue, the total pool is reallocated and redistributed to municipalities based on population and their relative property tax wealth.
It’s not a cash distribution. Rather, the distribution value calculated for a community becomes part of the tax base that towns and cities draw upon when they set their levies. As with any redistribution program, some communities get back less than their contribution to the pool and others get more. Traditionally, St. Louis County communities in the district have gotten back more than they put in, and that’s helped to reduce the property taxes that residents in those communities pay.
That will be the case again in 2023, but the distribution values are going to be less this year, in some cases dramatically less, a fact St. Louis County Tax Division Manager Brandon Larson relayed to program participants in a Sept. 1 email.
“Due to a variety of factors, most of St. Louis County is going to be receiving a lot less from the fiscal disparity pools to help offset levies.” Larson wrote. “This means that your general taxpayers will be having to pay a higher local tax rate than what they did last year in order to satisfy any levies that you certify. So even if you keep your levy at a zero percent levy increase, taxpayers in your cities will be paying more in taxes than they did in Pay 2022 as less of your certified levy is being offset from these monies.”
Ely has traditionally been a major beneficiary of the program. In 2022, the city of Ely received $453,339.56 in distribution value from the pool, which helped to hold down property taxes in the city. But next year, Ely will benefit to the tune of $268,266.38, a drop of over $185,000 from this year and that’s money that local taxpayers will have to make up.
Ely City Clerk Harold Langowski described his reaction when he received Larson’s email.
“You never know where it’s going to fall out, if it’s going to be up or down,” Langowski said. “But when Brandon sent me that information, I think I called him within 15 minutes. I sent an email back saying, ‘Whoa, wait a minute, what’s going on here? And how did this happen?’ It was extremely disappointing. It’s certainly going to have a detrimental effect on people’s tax bills, and it’s something we can’t control.”
Tower saw an increase of about $10,680 this year, but will see a $19,000 reduction for 2023. The city of Cook will see a $33,355 reduction for 2023. In Orr, the $24,000 they received for 2022 was nearly a $4,000 increase over the year before. But now Orr City Clerk Cheri Carter doesn’t know how they’re going to deal with their distribution being cut by $11,828, or nearly in half, for 2023.
Orr is taking a double hit this year, Carter said, because the state legislature failed to pass a budget bill that would have extended a two-year program to give cities with fewer than 5,000 residents Small Cities Assistance funds to use for street maintenance.
“First losing disparities aid, now we’re not getting Small Cities Assistance, and small cities are most affected because we don’t have the ability to generate more revenue. They’re going to have to come from a levy increase.”
Why the decrease?
It turns out that changes in the classification of short-term rental properties over the past few years may have played an oversized role in the drop in fiscal disparities distributions in St. Louis County and elsewhere scheduled for 2023. In early 2019, the Department of Revenue informed county officials that residential properties that were rented above a certain number of days would need to be classified as commercial property. That prompted a major increase in the commercial property tax base throughout the fiscal disparities district effective for the 2020 tax year. Because the fiscal disparities calculations affect the distributions two years in the future, that meant most communities in St. Louis County saw increases in their distribution from the pool in 2022.
Before the revenue department’s guidance, assessors in St. Louis County were kind of “doing their own thing,” said Mary Garness, public records and property valuation director for St. Louis County. “For St. Louis County, it was [classified as] non-homesteaded property.”
Then in December 2020, the revenue department issued new guidance based on a change in the law describing how short-term rentals were to be classified.
“They were given a classification which was a lower tax rate than the previous commercial classification rates,” Garness said.
As short-term rentals were taken out of the commercial-industrial tax base this time, it prompted a big drop in the overall valuation in the pool. And that decreased valuation for 2021 was used to calculate the fiscal disparities distributions for 2023. With less in the pool, most communities took a haircut.
Garness and Brandon Larson, with the county auditor’s office, both agreed that the shifting classification of short-term rentals doesn’t account for all of what cities are seeing in 2023, but they were in agreement that this was likely the largest contributor to the dramatic variations.
St. Louis County taxpayers won’t be alone with this, Larson said.
“Cook County went way down and Itasca County went way down because they had a lot of short-term rentals,” he said.
The program will remain “unpredictable,” but Larson sounded hopeful that the unique circumstances that drove the change for next year will give way to a bit more stability.
“It’s usually a yo-yo effect where it goes up one year and down the next,” he said. “I’m hoping there’s not any major value changes one way or the other. I don’t see it going down to the level that it was this year.”