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A Minnesota Judge Throws the Book at Immoral Tax Assessments

May 12, 2022 by admin
Policy/Legislative

A recent ruling on direct assessments of routine maintenance. (Click to view.)

In my time working as an engineer for cities across Minnesota, there were few practices I found as corrupting or immoral as the direct assessment of routine maintenance. In a recent ruling, a Minnesota District Court Judge agreed this common municipal practice is illegal. He chose different categories of questions to analyze in making his decision, but I’ll take it.

A direct assessment is a charge that a municipality levies against a property owner for something that disproportionately benefits that property owner. For example, when a city takes a dirt street and spends the money to pave it, that investment in pavement provides a direct benefit to the property owners on the street. The value of their property increases.

The city is allowed to charge the property owner (through the assessment process) the cost of paving the street, so long as the cost doesn’t exceed the benefit accrued to the property owner (how much the property went up in value). If the city spends $10,000 to put a new street next to your property, and your property increases in value by $10,000, the city can legally charge you the entire cost of the project.

This process is generally fair and, while it can be abused spectacularly, that abuse tends to be of the subsidizing-the-rich-and-well-connected variety rather than the predation-on-the-poor-and-disadvantaged type. Predation on the poor—as well as others more broadly—is what frequently happens when cities assess maintenance.

Go back to the new street example. Your new street was built and you paid an assessment for that. Then you pay taxes to the city for, among other things, maintenance of the street. In states like Minnesota, where local governments are funded predominantly through the property tax, taxes will actually go up after the project because the property is now worth more with the new street. What happens when the street needs to be maintained? What happens when the city needs to spend money to seal cracks, replace the pavement surface, fill potholes, or even sweep the streets?

None of those maintenance services provide what in legal terms is called a “special benefit” or a “direct benefit” to the property owner. In other words, none of those maintenance services make the value of a person’s property go up. Without that direct benefit, the money spent must be collected through a tax, not an assessment. As the judge writes in this ruling, “Taxes which are not uniform to all property owners in a municipality are only legal where there is a showing of special benefit to the property owners charged.”

St. Paul, in this instance, was charging their residents an assessment to pay for basic street maintenance. They lost a similar case in 2016 and, in response, narrowed the parameters of the maintenance program and changed some of the language in their charter, but to the same effect. The exact wording of the judge is important here:

Whether it categorizes the charges as fees or taxes, the primary purpose of charging individual property owners in these cases for four of the same services remains to raise revenue to pay for regularly scheduled maintenance. Whatever a city’s charter may say, the municipality may not violate the state constitution. The City cannot merely recharacterize the same charges for services using different words to achieve a different result.

I’ve had this discussion with more local officials than I can estimate. They all insist to me, in one way or another, that they have the right to charge an assessment for routine maintenance. Courts have been very clear on this. As this judge reiterates, “…the Court finds that the phrase [“property benefitted”] indicates that a benefit must be shown to a specific property in order for a special assessment to be legally justified.”

They can’t legally charge assessments for maintenance, but they still do. That is problematic enough, but it’s the next part that makes it corrupting and immoral.

(Source: Flickr.)

I understand how public officials suffer from motivated reasoning when it comes to assessments. They feel an obligation to maintain streets and other infrastructure. They don’t have the money to do that. Not maintaining infrastructure will cause harm to their community and pain to their constituents. It’s easy to see how well-intentioned people want to believe that assessing for maintenance is legal, despite it clearly not being legal.

The truly corrupting part is when that motivated reasoning translates into the indiscriminate assumption of new liabilities. Internal bureaucracies of elected officials and technical advisors have absorbed the notion that maintenance can be assessed, and so they don’t do their due diligence on whether or not a new piece of infrastructure is a good investment for the community.

Go ahead and take over that street that doesn’t generate enough tax base to pay for itself; after all, we’ll just assess them for their own maintenance.

Cities should be doing that due diligence. They should be doing a benefit-cost analysis to determine whether the shareholders of their municipal corporation (residents) are getting a good deal when they accept that new infrastructure as part of a new development. Direct assessments of maintenance are part of a soft corruption that permeates city halls.

The immorality comes from the way direct assessments for maintenance are carried out. The mostly unspoken reality that public officials and those advising them know is that, if the assessment amount is kept low enough, it will almost certainly go uncontested. That’s because the appeal on a direct assessment must be made in district court and district court is time consuming and expensive.

If it costs $10,000 to go to district court and fight a direct assessment, so long as your assessment is around that amount, the benefit–cost analysis of the aggrieved property owner doesn’t justify the fight.

A corrupt system turns immoral when insiders convince themselves that direct assessments for maintenance are legal and yet, by their actions, reduce direct assessment amounts enough to raise revenue while avoiding lawsuits. When you realize that this dissonant tactic is mostly used in poor and middle-class neighborhoods (not in places where savvy property owners, who know lawyers and judges and have a sense of the legal process, might come together for a class action lawsuit) the stench of this corrupting practice becomes sickening.

Without some type of legislative clarification prohibiting specific practices, cities will continue to use direct assessments to pay for maintenance. Their plight is too desperate, the changes needed too difficult, and the downside risk of a lawsuit too small by comparison.

What Can Be Done?

For cities that want to escape this trap, there are a few things that can be done. First, come clean, with yourself and your residents. Know the ongoing maintenance costs that your community has assumed—they are knowable to a competent staff—and understand your shortfalls. You can’t wish this deficit away, so stop pretending you can.

STOP MAKING YOUR CITY’S PROBLEMS WORSE.

Learn a better way to maintain your infrastructure through our course, “Go or No-Go? Doing the Math on New Projects.”

Next, stop making the problem worse. We’ve put together a worksheet and a Local-Motive course to help you understand whether or not you should take on a new liability. If you have a hole, stop digging. Stop the practices that got you to this point. If you know your long-term liability deficit, communicate the connection between what created that, and the practices you need to change. Thoughtful residents will get that.

Finally, start making a plan on what to do with your infrastructure deficit, a plan that doesn’t include illegal assessments for maintenance. A key part of that strategy has to be growth that adds revenue (tax revenue) without adding liabilities (more infrastructure). In other words, thicken up neighborhoods with more homes and businesses.

Executing on a strategy that makes the community financially stronger while also making it a better place to live is the project we’re working on at Strong Towns. If you’re new to this conversation, you can dig in with our content stream, any of our books, or on the social media platform of your choice.

And to all the public officials out there: Please, stop direct assessing for maintenance. Go build a Strong Town. It’s not the easiest path, but it’s the only one that is going to truly get you the results you seek in the way you aspire to do it.

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