Local City Sales Taxes a Complex Issue

In 1971, the Minnesota legislature created the “Minnesota Miracle,” a package of tax increases that funded local government aid, state aid to schools and other state aids.  At the same time, new or increased local sales taxes were prohibited unless specifically authorized by the state legislature.  As state aid to cities has decreased, the pressure to allow cities to use local sales taxes as an alternative to property taxes has increased sharply.

The CGMC analyzed 2009 sales tax data from the Department of Revenue for 137 cities to estimate how much these cities would generate if each city imposed a half cent local sales tax.  The department’s data has some collection issues, so the data included in this article should be considered estimates.

According to our analysis, Waite Park, Baxter, Alexandria, Roseville, Wayzata and Fergus Falls (several cities fall within the margin of error for being the sixth best sales tax base) have the six strongest sales tax bases on a per person basis.  These six cities and their neighbors help illustrate the complex nature of the local sales tax debate and some of the questions the legislature should consider as it discusses these issues.

Who should benefit from local sales taxes?

Consider the City of Roseville, home to Rosedale Mall, Harmar Mall and numerous smaller shopping complexes.  Not surprisingly, it has the strongest sales tax base per person in the metropolitan area.  The chart below illustrates Roseville’s and its direct neighbors’ sales tax revenue capabilities:

City

.5% sale tax /pop

Roseville

$201

Falcon Heights

$65

Little Canada

$68

Mounds View

$46

New Brighton

$48

Shoreview

$55

St. Anthony

$58

It is likely that residents from all over the metro and the state contribute to Roseville’s strong sales tax base.  If the city imposed a local sales tax, should there be limitations on how it spends the sales tax revenue? Should the city use it primarily to benefit its own residents or should the sales tax benefit all those who pay into it?

The cities of Waite Park and Baxter, which have the strongest and second strongest sales tax base per person in the state, are similarly situated to Roseville.  Their per person sale tax bases greatly exceed that of their neighboring cities:

City

.5% sale tax /pop

City

.5% sale tax /pop

Waite Park

$277

Baxter

$231

Sartell

$34

Brainerd

$63

Sauk Rapids

$45

St. Cloud

$80

St. Joseph

$32

Both Waite Parke and Baxter participate in regional sales taxes, which is one method for addressing the unevenness in city sales tax bases.   Waite Park imposes a local city sales tax that is part of a larger regional sales tax for the St. Cloud area.  The sales tax funds the regional airport, library, and other capital projects in each city, so both the tax and projects are regional.   Baxter sits directly west of Brainerd, an older town with a much smaller sales tax base.  Currently, Baxter and Brainerd have a joint local sales tax that funds their water and wastewater facilities.

Should local sales taxes offset LGA?

When Minnesota implemented the LGA program, the trade-off was the prohibition imposed on local sales and income taxes.  As a result, one may ask if LGA should be offset or eliminated for cities that are allowed to have a sales tax.   To answer that question one should consider whether LGA’s goal of addressing unequal property tax bases would still be achieved.

The answer may depend, in part, on the purposes for which the sales tax is dedicated.  LGA is designed to allow cities across Minnesota to offer equitable levels of city services regardless of their relative property wealth.  If the city sales tax revenues will pay for a regional project that would not or could not be done with local property taxes, an offset to LGA would not make sense because the need to equalize property taxes to pay for services would still exist.

If instead the local sales tax is dedicated to cities’ general fund purposes, the answer is even more complex.  The chart above illustrates how much each city could raise per person with a half cent sales tax and with the same property tax rate, along with their LGA per person.

Fergus Falls receives $163 more in LGA per person than Alexandria, primarily due to its weaker property tax base.  Wayzata receives no LGA due to its very strong property tax base.  If cities lost all their LGA or were offset their LGA by their ability to raise sales tax revenue, Alexandria would see a small increase in revenue, Fergus Falls would see no gain in revenue or a loss, while Wayzata would see the full benefit.  This would create a situation where cities with both strong sales and property tax bases would benefit while cities, including most of the 700 cities outside this analysis, with poorer property tax bases would suffer.  This leads many legislators and local elected officials to believe that expanding the use of local option sales taxes will only increase the disparities between the cities that have and the cities that have not.

Chart 1: Strongest Sales Tax Base Cities

Legislation introduced to alleviate local burden, protect water quality

Municipal wastewater treatment facilities (WWTFs) are required to regularly test their discharge at an environmental laboratory certified by the Minnesota Department of Health (MDH).  Ideally, the labs are located on site so that the WWTF can quickly make adjustments based on test results.

Sen. Pederson and Rep. Banaian introduced companion bills, H.F. 367 and S.F. 162, to alleviate some of this burden.  The legislators, WWTF operators, and the CGMC have worked with the MDH on the bill to ensure that the proposed changes comply with federal and state clean water requirements.   The amended language is contained in the House omnibus Health and Human Services Bill, H.F. 927, Art. 2, Secs 15 and 16.

The bill as amended would create a two tier system for certification and lower the costs for municipal laboratories without harming water quality.   Although this language does not accomplish everything the municipal labs had hoped for, it is an important first step.  The CGMC urges legislators to keep this language in the bill as it moves forward.