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February 17, 2005
Minnesota's budget problems have created big challenges for communities. Cities have seen significant cuts in the amount of local government aid they get from the state. As a result, many cities have cut services or raised local property taxes to make up the difference. This year, a record number of cities are looking for another way to raise revenue. They're seeking legislative approval to impose local sales taxes. Observers say it's a trend that's likely to continue.
Bemidji, Minn. — A few years ago, the city of Bemidji decided its parks and trails system needed a facelift. Officials estimated the project would cost close to $10 million. That figure would have been a huge burden on local property taxpayers. Instead, the city decided to pursue a half-cent local sales tax.
David Minke, Bemidji's city manager, says it's hard finding the money for things like park improvements, especially since the state cut local government aid three years ago. Minke says Bemidji now gets about a half million dollars less each year than it used to.
"As local government aid is decreased, and as there's more reliance on the property tax, cities are going to have to find ways to diversify their revenue streams to avoid undesirable impacts of extraordinarily high property taxes," said Minke.
Minke says the local sales tax option is a legitimate way to pay for things that aren't just used by city residents alone.
"As Bemidji grows as a regional center, more people come either as tourists, either to do their shopping, attend BSU for some events," said Minke. "They also use the park and trail system. And so the city believes that's a fair way to fund amenities that not only city residents use, but also those who live adjacent to but outside the city, as well as people who might come through Bemidji as tourists."
Bemidji is among about a dozen cities seeking legislative approval for local sales taxes. Projects range from new community centers in Beaver Bay and Park Rapids, to regional airport improvements in Wilmar.
Gary Carlson is director of intergovernmental relations for the League of Minnesota Cities.
"Clearly there is a trend," said Carlson. "There is something different in play today than there was 10 or 15 years ago. And more and more we see cities asking for this sales tax authority."
Carlson says back in the days when the state was flush with cash, cities went after state bonding dollars to fund local projects. He says that's happening less frequently.
"I think we've seen a trend at the state Legislature for less state involvement in local capital projects," Carlson said. "And we've seen less interest at the state level in funding projects that may be deemed to be more local in nature. And therefore, cities are looking for sources of revenue to help finance those local improvements."
Some see that as a good thing. David Strom, president of the Taxpayers League of Minnesota, says as long as the state continues to require cities to pass local referendums before implementing a sales tax, the process is fair.
"Overall, I mean within a city, if you raise the sales tax, it is going to fall primarily on the residents of that city," said Strom. "And they have to decide, do they want what it is that they're being requested to pay for. And as long as they say 'yes,' that's democracy in action."
Today, only about 10 of Minnesota's 853 cities have local sales taxes. Observers expect that number will grow.
Minnesota is one of the few states that require cities to come to the Legislature for authorization for local sales taxes. There's a bill in the Senate that would eliminate that requirement. Opponents say more local sales taxes would create accountability problems. They also worry it would complicate the administration of Minnesota's tax system.
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