Though they know that sales tax is regressive, the House tax chairs are proposing it anyway as a way for counties to raise revenue.
With property taxes expected to surpass the income tax as the No. 1 revenue source in the state in fiscal year 2010 and massive cuts to various county aids proposed to help with the state’s multi-billion dollar budget deficit, Rep. Paul Marquart (DFL-Dilworth) said he had to get a little creative.
HF2020, sponsored by Marquart, the House Property and Local Sales Tax Division chairman, would give counties the option to impose a half-cent local option sales tax to offset cuts to county aid.
“This is a serious and bold proposal and an important option for counties,” he said.
Rep. Ann Lenczewski (DFL-Bloomington), House Taxes Committee chairwoman, said this proposal, along with HF1782, which eliminates corporate tax credits, would be a foundation for the House omnibus tax bill.
Marquart unsuccessfully tried to pass legislation in 2007 that would base property tax payments on a person’s ability to pay, a measure that would have made the system more progressive.
Marquart said his current bill would raise more than $100 million in the upcoming biennium and $200 million in the 2012-2013 biennium. This would mitigate some state cuts anticipated to local government aid, which is often used to pay for essential services, like police.
The half-cent option could be adopted by a majority vote of a county’s commissioners. The tax could be overturned in a countywide referendum that would take place if 5 percent of the county’s registered voters or 300 people, whichever is greater, called for one.
Currently there are 23 cities with a local option sales tax. Any cities in counties that passed the half-cent increase would lose their local option sales tax, Marquart said. Counties would then be obligated to fund projects that had been funded through the city tax. Only three cities could be exempt from the elimination: Minneapolis, St. Paul and Duluth.
But counties would have a stable and growing revenue source, with more than half the money going to property tax relief, Marquart said.
According to the nonpartisan House Research Department, the bill would also repeal levy limits for cities, because the cities would not benefit from the local option sales tax. Counties that chose to impose the tax would not be able to levy back cuts to county aid through property taxes. Counties that do not impose a sales tax increase could levy that money back onto property taxes to make up for the cuts.
Marquart, along with Lenczewski, said they crafted a bill that would be similar to what Gov. Tim Pawlenty has signed in the past. Lenczewski said this bill is like one that allowed Hennepin County to raise its sales tax for construction of a Minnesota Twins’ ballpark.
“This is more conservative because we give the option of a reverse referendum,” Marquart said.
“I agree that we need a diversified revenue stream,” said Joe Mathews, general government policy analyst with the Association of Minnesota Counties. “There are concerns that a reverse referendum would result in a loss of county program aid with nothing to replace it.”
Marquart said 26 other states allow this authority for counties and 20 states have a higher sales tax than Minnesota.
Still, some members aren’t so sure about the idea.
“You and I have both opposed local option sales tax and you come forward with this. We’ve been talking about our regressive tax system and sales tax is a regressive tax,” said Rep. Morrie Lanning (R-Moorhead), the Republican lead on the House Property and Local Sales Tax Division.
He added that one aspect of the current local option sales tax is that receipts are used to fund projects of regional significance.
Marquart said the money from the half-cent sales tax could be used for that, if the county so chooses.
“Increasing the sales tax, in my view is no option at all,” Lanning said.
He said the majority of state voters already approved a three-eighths of 1 percent sales tax increase for the arts and the outdoors, which takes effect this summer. “This half-cent would be on top of that.”
Marquart said the big concern was the great inequities local option sales taxes cause. “If everyone has them, this minimizes the inequities.”
Keith Carlson, executive director of the Metropolitan Inter-County Association, said this is a “been there and done that” scenario. He said a trust fund was opened in the 1980s and a sales tax was put into it for counties to use. Two years later, “the rug was pulled and the trust fund was eliminated. There’s a lot of concern that we’re going to find ourselves in the same place again.”