Deliberation over state and local government financing will dominate the 1983 legislature. If Minnesota is AAA credit rating is to be restored. If we're going to eliminate the need for massive short-term borrowing. If we are going to reverse the undesirable impact of the large revenue and payment ships that have been made. If we're going to establish an adequate budget reserve and if we are going to restore a relationship of trust between the state and its local units of government. Then some tough decisions must be made. Those of you who are veteran legislators know the painful choices that have confronted you the past two years. But you know to the decisions made over the past two years have occurred in a crisis atmosphere with little opportunity to examine carefully basic state priorities or the chart a new sound course for the state. Most of the spending cuts that have been made have been of the across-the-board variety or have involved the elimination of relatively small programs. That didn't have a broad constituency. Most of you would agree that it is now time to step back. Evaluate the entire taxing spending pattern and then make the difficult decisions that will serve the people of this state while into the future. Is a small step in that direction? Let's take a look at Minnesota state and local taxing and spending situation. Get a report issued last October the Citizens League said minnesotans pay more in taxes than citizens in most States, but not that much more and certainly not the most moreover. The prams is that taxation levels throughout the country seem to be drawing together meaning the difference between what minnesotans pay and what people pay elsewhere is growing smaller not larger. I agree with that assessment by the citizens league, but let's look specifically at how we rank among the 50 states and the District of Columbia in various types of taxes because state and local finances are so interrelated in Minnesota. It is important in comparing us with other states to examine taxes and spending on a combined state and local bases. 41981 on a per-capita basis Minnesota ranked 11th overall for state and local tax collections Brenda vigil income taxes we rank 7 The corporate income tax on a per-capita basis 6th. And I must say I agree with John Tomlinson little per capita basis is not a good measure for corporate income taxes, but I used it here to avoid getting too complicated at this point. For sales tax we ranked 37th and for property taxes 22nd. But I don't over all bases taking into account all state and local taxes paid per capita. We ranked 11th among the states. So well minnesotans are not the highest tax state. We are above the national average. Workouts for that. Where do we spend more in Minnesota? Then do people in most other states? Without getting into a lot of detail that time won't permit. Let's look at some of the major factors in Minnesota spending more than other states first. Let's look at per-capita expenditures of state and local government for highways. Minnesota spends more than the national average. The reasons are obvious. We are a large State. We have a thinly spread population. We have a high demand for roles and we have an agriculture-based economy. Because of these factors Minnesota has the fifth largest highway system per capita in the country. In addition our weather adds to construction cost Commissioner of Transportation dick. Braun has said that based on funding currently available are 12100 miles of trunk highways can be reconstructed on the basis of once every 372 years. It is clear that this legislature and those to come we'll have to make some hard choices and setting priorities for our state transportation system. Another area in which Minnesota spends more than the national average is nursing home care. We have a higher proportion of elderly the most States they live longer than just about anywhere else in the world. We rely more heavily on nursing home care. In Minnesota, we have 95 nursing home beds per 1000 persons age 65 or older in our population. In that regard we rank seventh in the nation are heavy Reliance on nursing home care for the elderly is expensive and is reflected in our growing medical assistance expenditures. When the growing dependence on community-based facilities for mentally retarded person's is added the legislature is faced with serious questions regarding the kind the level the cost of care into the future. 1/3 area where Minnesota spends more than the national average is an education. We have had a higher-than-average school-age population. They have stayed in school longer and they have had more options than in most other states. I have said facetiously that one way for us to reduce our taxing and spending to the national average would be to begin counseling junior high students to Dropout of school. Then we could reduce the need for high schools locational technical institutes in colleges. Of course, we shouldn't do that but it makes the point that are fostering of educational opportunity cost money and is a significant factor in Minnesota being an above-average Tech State. There's another way of differentiating state and local expenditures. Because government is a service-type operation the number of employees and state and local government and education is an important determinant in comparing costs among the various States each year. The United States Department of Commerce reports on the comparative number of public employees in the various States as a base full-time employees per 10000 population. It will surprise some of you to learn that since 1970. Minnesota has never ranked higher than 36 in the number of state employees per 10,000 population. That is to say that at least 35 states have had more state government employees per 10,000 population. Then Minnesota has had over the past 11 years. And if one combined state and local government employment leaving out employment in education. Minnesota has consistently since 1970 had fewer state and local employees than the national average. The area in which we consistently exceed. The national average is an education employment and the difference there has been reduced in the past few years. employment numbers me they mean that when compared with other states Minnesota has a rather modest number of state and local employees except in education where we exceed the national average and an education that reflects the longer time that Minnesota and spend in school and the additional options open to them. So let me summarize what I have said so far. Minnesota is a fairly high-tech State. Most of the reason for that is that we spend more on highways nursing home care and education. Those are all high expenditure areas and the 1983 legislature will have to carefully consider new ways to meet needs in those areas with limited resources. So far we have been focusing on combined state and local Taxation and combined state and local expenditures now to a more direct discussion lb state budget. The 1983 legislature faces a tax expenditure Gap that ranges up to a billion dollars or more. How can I get Gap be closed without destroying services that have made Minnesota a good place to live or without resorting to unfair or uncompetitive taxes that will hurt our state. I don't have to tell you that there are no easy answers. Those were used up several budget crises ago. And the magnitude of the problem is such. That it probably won't work or at least it won't work successfully to try to minimize the depth of the Pain by sharing it on an across-the-board basis. It is time for a fundamental sorting out of responsibilities. It is a time to recognize that we cannot continue to expand all of the program's now on the books. It is a time to recognize that state and local government in Minnesota must establish priorities based on sound principles. It is a time to take courageous action. Let me give you a major example to make the point. A year ago the legislative audit commission charts the office of the legislative auditor with responsibility for conducting an evaluation of our direct property tax relief programs. These include the homestead credit program the agriculture credit the renter's credit and so on. Some of our staff members have been working on that study over the past 12 months and we are now completing it. We will be releasing the report within the next two weeks. And at that time we will be prepared to spend a good deal of time going over it in detail, but let me share with you today a few of our findings. You remember I said earlier than on a per-capita basis, Minnesota ranks 22nd among the 50 states and property taxes that's on all property including business and industry. Even though property taxes turned up sharply in 1982 in direct property tax relief programs such as school and local government AIDS and direct property tax relief programs chiefly the homestead and agricultural credit. Have caused Neptune axis in constant dollars. To decline about 24% between 1971 and 1982. In constant dollars net property taxes in Minnesota where lower in 1982 than they were in 1965. And then if we look only at property taxes paid by homeowners minnesotans do even better. In 1980 only eight states have lower taxes on homes and Minnesota have the lowest property taxes on homes in this region of the country. For example, if we examine property taxes on homes as a percentage of the market value of those homes, we find within Michigan homeowners were paying 2.54% of the value of their homes in South Dakota. It was 1.70% Some of you will note that sets out the CO2 is not 50th. In Wisconsin 1.67% in Iowa 1.48% with its ability to generate revenues from coal and oil was at 1% Minnesota at .93% was the lowest in the entire region and well below the national average of 1.28% Just a few days ago. We received information from The Advisory Commission on intergovernmental relations that shows that Minnesota rank even better for 1981 the property tax on homes as a percentage of the market value of those homes decline for Minnesota homeowners from .93% in 1980 to .79% in 1981. Now property taxes are probably the least appealing of our major state and local taxes. And from the very low level of 1981 property taxes have increased for many homeowners in the past year. There are projections that indicate that they may increase even more over the next few years. Interview of that the danger is that we will adopt a blanket policy that property taxes Camp increase for that. They will be permitted increased by only a certain percent small percentage each year. The problem with that kind of policy is it assumes that the property tax levels for homeowners that now exist or that existed last year are fair and appropriate? Our study indicates that may not be the case. Well, there are instances of burdensome tax rates for particular homeowners in some areas of the state. We found the overall. Property taxes were not high in Minnesota when compared to the past when compared to other states or when compared to the market value of the property. But we also found tremendous disparities in property taxes paid by homeowners in different areas of the state. Average property taxes in some locations were as much as five times as high as we found in the lowest tax areas. Taking into account the financial problems of the state. We don't think that the existing to Spirit pattern of property taxes paid by homeowners across the state of Minnesota can or should be locked in as a base level for the future. That would be unfair and the cost would be prohibitive. So is an example of the need to establish clear priorities and to make difficult decisions. Let's look at the homestead credit program. The homestead credit program was first enacted in 1967 at the same time that the legislature approved a 3% general sales tax. It provided that the state of Minnesota would pay 35% of a homeowner's property tax bill up to a maximum of $250. The percentage in the maximum were increased over the years so that today the state pays 58% of a homeowners tax bill up to a maximum of $650. These changes have resulted in huge increases in the cost of the homestead credit program and have been a significant factor in the state's continuing budget crisis of the past few years. the cost of the homestead credit program Tripper Between 1968 and 1979 from 79 million dollars in 1968 to 242 million dollars in 1979. And then in just three years Between 1979 and 1982. The cost nearly doubled to an annual cost of 479 million dollars now 479 million dollars is a lot of money. It is equivalent to 1/4 of the total 1982 receipts from the state income tax. It represents 12% of annual general fund expenditures by the state. Or put another way it amounts to about $116 a year for every man woman and child in this state. So what is obviously a program of great magnitude that directly impacts most of us? Because of that it will be tough to change. But I am convinced as a result of our study that you will have great difficulty solving the state budget problems now and into the future if you declare off-limits hard examination of the homestead credit and other direct property tax relief programs. There is no question that the homestead credit program was a significant factor in helping to hold on property taxes for homeowners during the 1970s. What the price has been high and it probably won't work into the future. What started as a program to pay 35% of a homeowner's property tax bill to a maximum of $250 was adjusted upward several times over the years to insulate homeowners from property tax increases, but now the state faces a dilemma. with limited Financial Resources and the soaring cost of the existing program. It is unlikely that the state can afford to further enrich the homestead formula. But if the formula remains unchanged homeowners were at the $650 maximum will bear the brunt of any tax increase. At the same time the state will continue to pay 58% of the tax bill for many homeowners who already regard their property taxes as well put another way. If we continued Reliance on the present Foreman, there will be a tendency to protect homeowners in low property tax areas from increases while Lowe's in high-tax areas will not be further continued Reliance on the existing homestead credit formula will exacerbate the considerable disparities that already exist in property taxes paid by homeowners across the state. Assessing a possible reform of the homestead credit program. We need to stop and consider the array of tax breaks that are currently provided to homeowners in Minnesota. A Minnesota home owner is eligible for reduced property taxes because of the various age provided by the state to school districts and local units of government reduce taxes because of the classification of the property. Homestead credit that pays 58% of the tax on the home up to a maximum of $650. Additional State help in paying the home tax for the state circuit breaker if the owner qualifies on the basis of income and property tax level. Deductions on the federal income tax for property tax paid as well as interest payments on a home loan. Deductions on the state income tax for property tax paid as well as interest payments on a home loan and in some cases additional property tax relief based on geographic location for the special category of the homeowner. Now that brief listing only begins to describe the complexity and the uncoordinated nature of our various programs to limit the property taxes paid by homeowners. But it does illustrate that loss of the homestead credit would foremost homeowners be crushed principally because of the ability to deduct property tax payments on federal and state tax returns just on the basis of existing programs. If the homestead credit were dropped the net dollar impact on many homeowners would be cut in half or even more and much of the cost would be picked up by the federal government. another aspect of the problem of coordinating the various property tax relief programs relates to school AIDS Foundation Aid is paid to school districts based in good part on the property wealth of the district. Now that includes of course the valuable property not just home, but there is a clear tendency for school districts with a high proportion of expensive homes to get less Kool-Aid while those with a high proportion of modest homes tend to get more Now compare that to what happens with the homestead credit. It should be clear. Of course. The homestead credit program is designed to help individual homeowners not school districts or other local units. What an examination of where the homestead credit dollars gold will show that it tends to be a reversal of the school aid pattern. Generally speaking, the more expensive the homes in the district the more homestead credit receive per capita in that District the homestead credit program results in the distribution of money in a pattern that tends to be counter to the school aid formula. In addition to the problems of cost complexity and coordination that I have just briefly discussed. It should also be pointed out that our study also found serious problems with the administration of the homestead credit program. We will document the specific administrative problems in our report. But let me just say now that those administrative problems are not readily solvable on a cost-effective basis. Let me summarize. If you do not change the existing homestead credit formula the cost of the state of that program over the next biennium will be over 1 billion dollars. And even the expenditure of that 1 billion dollars will not protect homeowners who are at the $650 maximum from increases in their property taxes. It is time for a Fresh Approach. If we continue to patch up the homestead credit program. It will be exceedingly costly and we will prepare chu8 and increase the inequities and the disparities the currently exist throughout the state. So repeat it, it will cost over 1 billion dollars just to fund the existing homestead credit formula over the next biennium. We think that it is advisable to use that 1 billion dollars or some portion of it for a redesigned program that will more directly Target property tax relief to those who really need it in this time of Crisis. We questioned whether state government can afford to provide homestead credit payments to those who are wealthy enough that they don't need it or to those whose property taxes are inordinately low. Rather those firms those phones that are available. Should be targeted to those that you determine need protection. I believe that most legislators favored policies that will result in relatively low property taxes on homes that will provide a stable system that will help to ensure that property taxes are fair and Equitable across the state and that will protect adequately senior citizens the handicap the unemployed those with low incomes and those who are subject to unfairly High property taxes. Considering the financial condition of the state and the property tax information developed in our study. I am convinced that that would be better accomplished by a major redesign of the existing homestead credit program. the state of Minnesota faces the most serious financial crisis in memory It will not be solved by simply concentrating on adjusting or abolishing small programs. With over 70% of the state's budget going for Aid to schools and local government or the property tax relief in one form or another. It is clear that some major reordering must be accomplished in those areas. That will not be easy. It will require a careful analysis of where we have been where we are now and where we are headed. It will require that you avoid taking hard positions prematurely before needed information is developed and review. And it will require a strong measure of bipartisan cooperation for the long-term best interest of the state. Your work in the 1983 session may be the most difficult in history. But if you do it, well you look real will have earned the Gratitude of minnesotans for a long time to come. Thank you for the opportunity to speak today.