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Cities see lots to like in Dayton budget, but effect of sales tax change unclear

St. Paul Mayor Chris Coleman
MinnPost photo by Terry Gydesen
St. Paul Mayor Chris Coleman: "Gov. Dayton made it clear that one-time budget fixes balanced on the backs of taxpayers can no longer be tolerated."

The mayors of St. Paul and Minneapolis are praising Gov. Mark Dayton's proposed state budget because of the increases in Local Government Aid that would flow their way, starting in 2014.

For the past 10 years — when the GOP held the governor's office and then controlled the Legislature — cities have complained that their needs were overlooked and that state budgets were often fixed at the expense of property tax payers.

But now cities around the state, and counties, too, see lots to like in the governor's plan, although there's still some questions about how proposed changes in the state sales tax will affect them.

This all depends, of course, on Dayton's plan, or parts of it, being passed by the Legislature.

The best news for cities in the governor's budget: a proposed $80 million increase in LGA, which the state sends to cities that have "spending needs greater than their revenue raising capacity."

The spread sheets for the governor's proposal show that Minneapolis would get $75.8 million in 2014, instead of $63.8 million under the current law.

St. Paul's LGA share would increase from $50 million to nearly $59 million in 2014. There's also a $500 property tax rebate for homeowners built into the governor's proposal.

 The Twin Cities mayors were quick to praise the plan:

St. Paul Mayor Chris Coleman:

"Gov. Dayton made it clear that one-time budget fixes balanced on the backs of taxpayers can no longer be tolerated. By stabilizing local government aid, Governor Dayton is sending a clear message that the State will responsibly deal with its budget challenges rather than asking cities to bear the burden alone. Property taxpayers have seen an 86 percent increase in their property tax bills since 2002. This is an unacceptable burden on middle-class families in Saint Paul and throughout the state.

"We in Saint Paul know first-hand that budgeting games and gimmicks are unsustainable and that achieving structurally balanced budgets means making tough decisions. This budget includes reasonable changes to the state’s tax system that stabilizes property taxes, recognizes the importance of local government aid to Minnesota cities and includes the largest sales tax reduction in Minnesota history. These common-sense changes will allow the City of Saint Paul to continue to provide quality services to our residents."

Minneapolis Mayor R.T. Rybak:

"For too many years, mayors from both parties and every community tried to make our voices heard at the Capitol about the need to rein in property taxes, stabilize Local Government Aid and stop lurching from deficit to deficit — but  frankly, we had little success and business went on as usual.

"But Governor Dayton changed course: he and Commissioner Myron Frans formed the Mayors Tax Reform Advisory Group, which I was proud to co-chair with St. Cloud Mayor Dave Kleis, and brought mayors to the table to listen to our ideas about how to reform our tax system while keeping our communities safe, strong and vibrant."

Gary Carlson, director of intergovernmental relations for the League of Minnesota Cities, said recent state budget policies have created "great tumult" for city and county finances.

Uncertainty about the amount of aid made it difficult for local governments to plan, he said.

"I told the commissioner of revenue that cities report that LGA has been so unreliable," Carlson said. "They've come to assume that they might get 80 percent of the amount certified this year, and that if the other 20 percent does come through, they'll spend it on a one-time project. They don't want to risk recurring more costs as they build their budgets, by adding salaries with money that might not actually be there."

The $80 million increase in LGA is a 19 percent increase; there's also $40 million more in the governor's budget for County Program Aid. They note, though, that neither is indexed for inflation.

The governor also proposed a new 1/4 percent metro-wide sales tax to be used for transit, a boon for Twin Cities area officials who feel that new light-rail projects and more bus service will lead to further development.

The tax would "cover capital and operating expenses for the growing transit system, and eliminate the current use of state bonding and state general fund expenditures for metro area transit services," said the Progressive Railroading newsletter.

The effect on cities of another piece of the governor's plan — a rejiggering of the sales tax — isn't clear, yet, Carlson said.

The plan would lower the overall sales tax from 6.875 percent to 5.5 percent, but would broaden the tax to include business-to-business services and clothing over $100.

"Cities and counties have to pay sales tax on their purchases, so the rate reduction is going to be a benefit." Carlson said. "But more and more cities and counties are contracting for more services, like accounting, and legal help and actuarial services, which would then be subject to the tax."

He said more study is needed to determine if the sales tax change "is a net good, or a costly thing." And it may vary from city to city.

The governor's proposal is so complicated that the League of Cities is hosting a webinar Feb. 1 to help local officials analyze its impact.

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Comments (3)

sales tax on clothing

I doubt the sales tax on clothing wil bring in near the revenue expected if there is a $100 limit. I'm expecting to see a lot of items priced $99 each so customers will be able to avoid paying it .Retailers will lose money, and so will the state.

Threshholds

No matter where they set the threshhold, that's what would tend to happen at prices "nearby". But the strategy is less useful the farther the real price is from the thresshold, so the effect is limited.

Still, that's one of the reasons I was more in favor of a "graduated" tax - structured in somewhat the same way as income taxes are. A basic rate, starting at some lower price, and additional "marginal rates" added to that as various price threshholds are reached. That would keep it a progressive structure while still minimizing its effect on those who can only afford to buy less expensive clothing.

The only system that's likely to make "everybody" happy is no clothing tax at all. But I have a feeling those days are on their way out.

Minneapolis & St. Paul: What is the effect?

"...recognizes the importance of local government aid to Minnesota cities and includes the largest sales tax reduction in Minnesota history. These common-sense changes will allow the City of Saint Paul to continue to provide quality services to our residents."

~St. Paul Mayor Chris Coleman.

To the best of my knowledge about the budget plan, the local sales and special taxes, several dozen, would not be changed, so in spite of the LGA to Minneapolis and St. Paul, the twin cities would also receive a huge increase in Sales & Use Tax revenues with their 0.5% rate would but the rate +6.0% (that and the current 0.25 percent transit tax (5-county) and the proposed 0.25 percent transit tax (7-county), in my understanding, of these proposals would but your rate at 6.5% in St. Paul and 6.65% in Minneapolis with the added Hennepin County tax (0.15%).

If I recall algebra as I should, if A X B = 1, then (A X 0.80) X (B X 1.25) = 1.

To me, that means that to balance the loss in revenues due to a 20 percent reduction of rate, A, with the increase in base, B, you'd have to increase the base 25%. That is for a neutral change. This reform proposal ends up generating $2B of new revenue collectively. Nothing inherently wrong with that. For the twin cities that means, they collect an additional (0.5% X 25%), or a comparable to a 0.125% rate increase to 0.625% in St. Paul. That is only to break even! The 25% is likely a low conservative placeholder for the actual sales tax base increase measured as percent increase in sales taxable. (Hennepin & Ramsey counties combined had a total of $23.3 billion taxable sales in 2010 out of gross sales out of $102.4 billion gross sales. The maximum increase in base could be over 300%, in this anectodal case.)

Though it is unclear, I'd be curious to know Mr. Carlson's' take on the sales tax component I described and the effect on cities and whether it is accurate and indeed a boon.

Excerpt: "The effect on cities of another piece of the governor's plan — a rejiggering of the sales tax — isn't clear, yet, Carlson said"

That is a considerable gift on top of the other gifts (1) the LGA, (2) the homeowner rebate which economically-speaking says that cities can tax homeowners an additional $499 provided the homeowner gets an additional $500 homeowner rebate (they are $1 better off and should be happy?), (3) an effective sales tax rate increase of +0.125%,for total purchases and corresponding increase in revenues of +25% (more likely closer to 50% in my unqualified opinion.).

Disclaimer: These are my personal opinions and I claim no expertise in regard to this budget plan or the contents of this comment. Read at your own risk.

~Bob