MINOT — As the implementation of a new 3% cap on local spending growth looms, you can tell which local governments have most abused their spending powers by the volume of the groaning about the cap emanating from their offices.
In Minot, where spend-happy Alderman Mike Blessum testified against the cap during the legislative session even as he's promised to rein in spending at home, the city is now threatening citizens with diminished fire protection that, in turn, will drive up insurance prices. According to Minot City Manager Harold Stewart, "without money to match a grant to hire more firefighters to meet national standards, Minot will see its fire rating downgraded next year, raising insurance costs for property owners," reports the Minot Daily News' Jill Schramm.
The 3% cap still amounts to roughly $1.6 million in increased spending per two-year legislative budget cycle in Minot. We're to believe that the city must increase spending by $800,000 every year or else calamity will strike? Keep in mind that, per the law, local communities like Minot can bank unused portions of the annual cap, and even exceed the cap with voter approval.
Some profligate local governments, who have been the architects of North Dakota's enduring property tax problem, seem committed to making the implementation of this property tax policy as painful for voters as possible. It's notable that many local governments, including the city of Grand Forks and even Minot's own Park District, have said they have no problem holding spending growth below the capped levels.
And there are things local governments can do to help stay below the cap without cutting services for citizens.
They could stop some of the property tax giveaway programs, for instance.
The city of Fargo is among the local governments working hard to make the property tax caps unpopular. In recent weeks, the city has been operating a parade of horribles from its constituent departments that are to take place because of the cap. But even as this happens, an easy way to address a big chunk of the city's shortfall sits in front of them.
The only problem? Using it would be unpopular with developers and real estate agents, who wield a great deal of political clout.
Fargo, like other communities around the state, offers a $150,000 valuation exemption for newly constructed single-family homes that are a taxpayer's primary residence. This exemption lasts for two years. Defenders of this sort of policy say it benefits homeowners and helps keep housing costs down, but that's a canard. The exemption only lasts for two years. That may be helpful for up-front interests, like developers and real estate agents who have an interest in moving their products, but someone who buys a home presumably plans to own it for a long time. For them, the exemption may create some sticker shock once their property tax bills jump after the first couple of years of ownership.
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And how much of a giveaway is this exemption? Let's do some math.
Based on Fargo's 2024 property tax rates and policies, the assessment ratio for residential property is 4.5%, and the levy for the city is 298.18 mills. Given that assessment ratio, a $150,000 exemption works out to about $6,750 in exempted taxable value, or about $2,012 in tax revenues.
From 2022 to 2023, there were 605 building permits issued for single-family homes in Fargo. If every one of those got the two-year exemption, and there's no reason to think they didn't, that's about $1.217 million in property tax revenues lost to the exemption per year.
Fargo's city leaders say they need to find $6.8 million in savings to balance their budget. This single property tax exemption (by my admittedly rough math) represents nearly 18% of that shortfall. The city of Fargo could address a big chunk of its budget shortfall simply by ignoring the howls of the developers and real estate agents, and their lobbyists, and ending this exemption.
And remember, this is hardly the only property tax exemption that taxing entities like the city of Fargo implement; its impact on the property tax bill extends beyond the revenues lost to exempted value. This exemption, because it only lasts for two years, benefits developers and real estate agents a lot more than it does homeowners. It makes it a lot easier for real estate agents and developers to move their inventory. It also incentivizes them to pursue the sort of low-density residential sprawl that drives up property taxes.
Every new housing development must be served by the police, firefighters and ambulance crews. It means more streetlights and water and sewer lines, not to mention lane miles of road that must be built, maintained and plowed in the winter.
The developers and real estate agents benefit from the two-year exemption up front. Once they've sold these developments, it's not their problem anymore. But the homeowners? And the larger municipal tax base? They're on the hook for them practically forever.
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One of the great drivers of the property tax problem in North Dakota is our failure to price property development appropriately. Through sundry tax abatement and exemption policies, we've succeeded in greatly expanding the basic government services that property taxes must support while simultaneously narrowing the tax base.
As I've argued before, the new 3% property tax cap is an impetus for local governments to fix that problem. And one would like to see them get busy doing that, instead of whining about having to comply with the cap.
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