Twin Cities metro sends money to rural counties

A common refrain from Minnesota Republicans goes something like this: Rural communities are overtaxed, underfunded and ignored by legislators. Greater Minnesota sends their tax dollars to the Twin Cities, where metro residents benefit from government programs.

At a Nov. 15 event in New Ulm, Republican State Sen. Gary Dahms repeated the sentiments that have fueled the kinds of outstate Republican campaigns that helped them win the Minnesota House a decade ago: 

“If you look at the money that’s collected in rural Minnesota, for gas tax and things like that, we do not get our fair share for transportation. If you look at health care, we do not get our fair share for health care,” Dahms said, according to the New Ulm Journal. “It really shows up in education, when you see what we get per student, versus what the seven-county metro area … there is a major, major difference there.”

It’s a sweeping argument that plays into the state’s often bitterly divided partisan and geographic politics, which have become deeply intertwined during the past decade, with Republicans dominating greater Minnesota while the Democratic-Farmer-Labor Party has locked down the metro. It also simplifies a complicated web of tax and revenue distributions — and it’s factually untrue. 

Department of Revenue data show that the Twin Cities metro is the state’s biggest driver of tax revenue, and rural counties benefit more than the metro area from government aid.

Twin Cities metro residents paid an average of $4,362 in taxes and received $3,252 in aid and credits per capita in 2019, according to analysis by the Minnesota House Research Department. In the non-metro area counties the same year, residents paid an average of $2,871 per person in taxes and received $3,423 in state aid and credits per capita.

That the 7-county metro would contribute more to Minnesota’s overall tax base isn’t surprising, nor complicated: The metro has more people, its jobs pay more, and the property values are higher. Because both income and property taxes are progressive — the more you make and the more your house is worth, the more you pay — the metro’s contribution is larger.

And when it comes to distributing that revenue, rural programs need more money per capita because programs are less efficient when people are spread out, said Kelly Asche, a researcher at the Center for Rural Policy & Development. 

“In a rural area, we are fighting against the economies of scale. It is the rural enemy to be efficiently run,” Asche said. 

Last year the House Research Department launched an online tool that allows users to explore and compare state taxes, aid and credits. The tool includes breakdowns between Twin Cities metro and greater Minnesota. 

Metro area disproportionately contributes to state revenue

In some areas, like the gas tax, non-metro Minnesotans pay more than Twin Cities residents.

Everyone pays the same rate — 28.5 cents per gallon, which will be adjusted for inflation in coming years — but rural residents use more gas. (Farmers are exempt from the gas tax.)

But for the tax categories that make up the bulk of state collections, however, metro residents disproportionately contribute to the revenue pool.

About 44% of the state’s collections come from income tax.

In tax year 2020, the most recent year available from the Department of Revenue, 2.2 million Minnesotans owed taxes. About 57% of those taxpayers lived in the seven-county metro area, but their tax liabilities made up 66% of the state’s collections.

The next-biggest chunk of the state’s tax revenue — 20% — comes from sales and use taxes. 

Like income taxes, the state sales tax rate of 6.875% applies evenly across the state. Municipalities can tack on their own local sales taxes, leading to different sales taxes across the state, but the state’s share is the same everywhere.

More sales tax revenue comes from the Twin Cities than from greater Minnesota, presumably because some rural Minnesotans travel to the cities to do their shopping. 

Property taxes are another important revenue source for the state and local governments, making up the majority of public school funding across the state. 

In the Twin Cities metro area, property values are much higher on average than in non-metro counties. 

A Department of Revenue analysis for the 2021 tax year showed that residents of the Twin Cities metro area carried a slightly higher tax burden. That year, metro homeowners paid an average of 2.8% of their household income on property taxes, compared to 2.4% in Greater Minnesota. 

Distributing the money 

In his comments at the event in New Ulm, Dahms called out three specific areas where he believed rural Minnesotans don’t get their fair share: transportation, health care and education. 

Dahms later clarified that by “health care,” he was referencing nursing home Medical Assistance reimbursement rates, which the Minnesota Department of Human Services sets based on a facility’s operating, facility and external costs.

“Nursing home reimbursement rates vary wildly across the state but I’ve heard from nursing home administrators they are frustrated when my district receives an average of about $640 in reimbursements and some facilities in the metro- and in other areas too- are receiving $700 to $800 reimbursements for the same base rate,” Dahms said in a statement. 

A Reformer analysis of Medical Assistance reimbursement rates showed that five of the seven metro area counties receive reimbursement rates below the state average of $410.

In Dahms’ district in southeast Minnesota, two of the five counties he represents received significantly more than the state average, at $515 and $467.

When it comes to education, some districts in both the Twin Cities metro and in greater Minnesota are underfunded, according to an analysis by Minneapolis Schools Voices. A lack of funding is correlated with the rate of poor students, students of color and English language learners, more so than the district’s rural or urban status. 

Minnesota public schools are funded through a combination of local property taxes and state money. For the state’s part, all schools start with the same baseline funding — around $7,100 per student.

The rest of the state funding comes from the education formula, a 14-component algorithm that is built to compensate schools for the cost of educating populations that need more support, like English learners and special needs students.

The formula has an “equalization” component that gives extra money to districts in areas with low property values, in order to bring funding closer to that of property-rich districts without increasing taxes on those lower-value properties. Rural and city schools alike benefit from the equalization component. 

Some formula components benefit rural schools, including increased compensation for small schools and sparsely populated districts, plus a transportation allowance for spread-out districts, according to the Center for Rural Policy and Development’s report on the education formula.

Other components tend to benefit urban schools, like compensation based on the number of English learners, which are more prevalent in cities than rural school districts. Some greater Minnesota Cities, like Worthington, St. Cloud and Willmar, also serve large populations of English learners.

Rural and metro schools alike receive additional funding based on how many students qualify for free or reduced-price lunch.

Belgrade-Brooten-Elrosa Public School District, a rural district in central Minnesota, received nearly $13,000 per adjusted pupil unit in fiscal year 2022, the highest in the state. (Adjusted pupil units are used to count students for formula purposes, and are weighted based on grade level.) 

A large part of that funding — about 37% — came from the “sparsity” components of the formula.

Minneapolis Public Schools received a total of $8,790 per adjusted pupil unit. About 16% of the funding came from the “compensatory” component of the formula, which is based on the percentage of students qualifying for free- and reduced-price lunch. 

Ada-Borup-West Public Schools, in rural western Minnesota, received less than Minneapolis Public Schools in 2022 with $8,474 per adjusted pupil unit; the district isn’t as sparse as Belgrade-Brooten-Elrosa and serves fewer low income students than Minneapolis Public Schools.

Suburban districts tend to receive the least amount of state funding because they generally feature high property values, are not sparse, and have a lower percentage of poor students. 

Transportation funding is largely the responsibility of cities, counties and townships in Minnesota, usually paid for with local property taxes. The state is responsible for maintaining the highway system —  interstates, U.S. highways and state highways — which accounts for around 8% of road miles; the federal government chips in funding for those roads.

State transportation funds mostly come from the gas tax, the motor vehicle sales tax and tab fees. 

When looking at federal, state and local funding combined, residents of the Twin Cities metro area and central Minnesota contribute more in transportation funding than they receive, according to a study of transportation funding from 2015 to 2020 by experts at the University of Minnesota’s Center for Transportation Studies. The opposite was true for some non-metro districts, including northern and southwest Minnesota, which receive more than they contribute in transportation funds.

If greater Minnesota residents feel short changed when it comes to transportation dollars, that could be because of the sheer size of the system they have to maintain: Minnesota has the fifth largest road network in the country, including 255,000 lane miles in greater Minnesota. Higher costs associated with maintenance and snow removal could be a reason the northern districts receive more funding, said Camila Fonseca Sarmiento, one of the authors of the study.

In the 2023 legislative session, lawmakers passed a $9 billion transportation bill funded by increased tab fees, motor vehicle sales taxes, gas taxes and a new delivery fee. More than $2 billion is dedicated to highway maintenance and expansion across the state.

Dahms said he took issue with the disparity in earmarked projects, like the nearly $200 million high speed passenger train between the Twin Cities and Duluth, which he said mostly serve the metro population. 

Lawmakers also approved a special sales tax for the Twin Cities that will fund local transportation.

Rural areas face some barriers to obtaining funding 

While rural areas do receive more state funds per capita, the numbers can obscure some of the real challenges rural municipalities face when applying for funding. 

In Bigfork, a city of 400 people in northern Minnesota, the mayor says the area is facing an affordable housing crisis. But the state’s formula for deciding which housing projects will get funding puts small towns at a disadvantage. 

Without a full-time staffer to handle grant applications, the city is struggling to find a way to build more housing. 

Asche said he’d seen the same dynamic play out in other state programs — rural applicants getting the short end of the stick because they couldn’t serve as many people as metro institutions. 

“More grant dollars per capita will probably go to rural areas because of inefficiencies and economies of scale,” Asche said. “You’re also going to have anything that’s competitive — grant programs or policy oriented funding programs — they likely will get inundated with so many more proposals from the seven-county metro because there’s such a larger nonprofit ecosystem.”