Minnesota cities get a sales-tax break — unless they’re too efficient

When the 2013 legislative session came to a close, the Democrats who control Minnesota state government counted sales tax relief for local governments as one of the year’s top achievements.  

DFL leaders said money saved by exempting local governments from the state’s sales tax on purchases could be used to lower property taxes in cities and counties across the state, which have been pinched for years by cuts or stagnant funding. The Department or Revenue estimates the sales tax exemption will save local governments more than $130 million in the first full year. An estimate from two local government groups puts the savings a bit lower at about $54 million a year.

But local governments operating in most “joint powers” agreements – a way of consolidating tasks and responsibilities in order to cut back on costs – have found out that they don’t qualify for the exemption under the way the bill was drafted last session.

“The Legislature has spent years telling us to be efficient at the local level and that is one way we did that,” said League of Minnesota Cities lobbyist Gary Carlson, who is working with legislators to try and fix the issue during the 2014 session. “Now we have cities scratching their heads and saying, ‘We are now being penalized because we are doing this together?’”

A ‘chilling effect’  

The technicality has irked South Lake Minnetonka Police Department Chief Bryan Litsey, whose department has offered shared police services to the communities of Excelsior, Greenwood, Shorewood and Tonka Bay for the last 40 years.

He learned last year that because his department covers four communities instead of one and operates as a “special district,” which reports finances directly to the state auditor, they would not qualify for the sales tax break. That could have saved them costs on everything from maintenance and operation of their police and fire stations to uniform purchases, Litsey said.  

“This push has been from the state to promote cooperative ventures to pool resources and not duplicate efforts in the process,” Litsey said. “We’ve been a good example of that for 40 years, and it’s a testament to what can be accomplished by cities pooling their resources while also providing quality services at a reduced cost that no one city could provide on their own. You feel like you are being penalized for doing what you are asked during the downturn of the economy.”

Litsey said internal politics hasn’t always made it easy to operate as a joint force and local governments should be given incentives for working together and cutting costs. “This has a chilling effect on people who want to do that,” he said. “  

The joint powers technicality also hits LOGIS, a government entity formed in 1972 to provide software and IT services to local governments across the state at a lower cost. LOGIS executive director Mike Garris said the sales tax exemption would have helped their members – local governments – save big on bulk purchases on anything from computers to printers. But because LOGIS is a joint powers arrangement, cities have been scrambling to purchase their own IT systems and computers in order to get the exemption. With several million dollars worth of equipment ordered each year in bulk purchases, the sales tax could save local governments hundreds of thousands of dollars through LOGIS, Garris said.

“It’s a real mess,” Garris said. “This is not to support things like golf courses, it’s IT systems. This is something cities need.”

Lawmakers will consider a fix

For his part, Revenue Commissioner Myron Frans said the sales tax exemption has been a major success across the state. It’s been more than 20 years since local governments enjoyed a break from the state’s 6.875 percent sales tax, after it was reinstated during a 1992 budget crisis.

“It’s going to save cities and counties and townships a lot of money. We were very successful in a major, major change in an inefficient tax policy,” Frans said. “Overall, from our perspective, this is a major achievement.”

Frans said lawmakers simply reverted back to the law that was in place before the 1992 change. He said that law was written to give cities and counties the exemption. It also included some joint powers arrangements if they filed their financial paperwork through a single local-government entity. Joint powers that operate in special districts and report directly to the state auditor – like the South Lake Minnetonka Police Department – were not included in the original law.

Senate Taxes Chairman Rod Skoe, DFL-Clearbrook, said he will give local governments dealing with this issue a hearing in the Legislature next year, but he won’t commit to making changes until after he sees the February budget forecast. The November budget forecast projected a $1 billion budget surplus in 2014, with about $825 million to spare after the school shift is repaid. The Department of Revenue estimates it will cost about $25 million to give all joint powers agreements the sales tax break.

“We are trying to encourage cities and counties to work together in the joint powers agreement because we think there are efficiencies there, and we don’t want to penalize that,” Skoe said. “But there’s a cost to that and we have to make sure there’s resources to pay those costs. We are not going to do anything that puts our strong balanced budget at risk.”

For her part, House Taxes Chairwoman Ann Lenczewski, DFL-Bloomington, says she’s open to fixing in the change. “From my perspective, I always intended that everyone would qualify,” she said.