Local Option and Regional Sales Tax

Issue

Should Minnesota expand or curtail the use of local option or regional sales taxes?

Policy

The Minnesota Chamber opposes general local option sales tax authority and the expansion of local or regional sales taxes. States usually fall in two distinct groups – those that give local governments authority for local taxes but little state aid and those that provide significant state aid but not general authority for local taxes. As long as Minnesota continues to maintain significant aid to local governments, it is appropriate to place limits on the use of local or regional sales taxes. In addition, the Legislature should recognize that local sales taxes are not a tool for every community or the appropriate financing source for every project. The Chamber also opposes local or regional sales taxes that are used to finance projects that will directly compete with existing area businesses. In the future, if the Legislature considers individual grants of local or regional sales tax authority, we urge it to:

• Modify the capital improvement, sunset, voter approval and waiting period requirements of Minnesota Statutes § 297A.99, subdivision 3 as follows:
  • Require the proceeds to be used for capital improvement projects of regional significance.
  • Limit the duration of local sales taxes to 10 years or the time required to pay off the projects, whichever is less.
  • Require voter approval at a general election for the initial grant of authority and any modification or extension of the authority.
  • Prohibit a local government or region from seeking authority to renew its local sales tax for at least one year after the tax expires.
• Limit communities or regions seeking local sales tax authority to a rate of one-half cent.
• Require communities or regions seeking local sales tax authority to raise one-half of the project cost from other local sources – i.e. private contributions, property taxes, spending cuts, state or federal grants.
• Require communities that use local sales tax revenue to pay off bonds to include – in the bondholder risk section of the bond prospectus – that the Legislature could change the sales tax base in a way that would reduce the yield of the local sales tax.
• Sunset perpetual local sales tax authority December 31, 2012, unless a referendum is passed at a general election that reauthorizes the local sales tax for a specific project and for a specific period of time. (Duluth has perpetual sales tax authority.)

Business Impact

The Department of Revenue estimates that businesses pay approximately 45 percent of Minnesota's general sales and use tax. One of the Minnesota Chamber's long-term goals is to eliminate the sales tax on intermediate purchases and equipment. As local sales taxes become more prevalent, this will be more difficult to do because local government will want to expand – not contract – the sales tax base. Furthermore, local sales taxes have the potential to divide the business community. Some businesses directly benefit from the projects that local taxes finance. Others don't directly benefit and face higher costs on their purchases and greater administrative burdens. Requiring communities or regions seeking local sales tax authority to raise one-half of the project cost from other local sources guarantees that citizens within the city or region want the project enough to arrange financing for a substantial portion of its cost.