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Looking for dollars, Minnesota cities turn to sales tax

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Bobbie Vickerman and Valerie Gilfillan
Lanesboro city administrator Bobbie Vickerman, right, speaks to Valerie Gilfillan at her clothing boutique, Bittersweet, in downtown Lanesboro. The city of Lanesboro is implementing a local sales tax in order to help pay for infrastructure projects, like repairs to the city's dam and hydroelectric plant, and to make improvements to its community center and library. The local sales tax will go into effect on Jan. 1.
Photo for MPR by Alex Kolyer

In the summertime, tourists descend upon the small, southeastern Minnesota city of Lanesboro and triple its official population of 754. Those visitors put wear and tear on the water and sewer systems and the roads.

So, city administrator Bobbie Jo Vickerman reasons, it hardly seems fair that local residents should foot the entire bill for repairs.

That's why, as of Jan. 1, businesses will begin to charge a half-cent local sales tax on goods they sell, a move overwhelmingly supported by residents in a recent referendum.

"Tourism is wonderful here," Vickerman said. "But we thought these people are using resources they may be able to assist paying for." Given the tough economy and budget constraints, she said the city has been cutting back where it can, recently laying off a full time parks worker and delaying some road projects. "The people who live here can't keep supporting all the capital improvements that need to be done."

The city's new tax will fund improvements to a hydroelectric dam among other projects, while taking some of the burden off local property tax bills. "It allows us to move forward with some infrastructure projects," she said. "This is a way to spread the cost around."

Historically, city sales taxes have been relatively rare in Minnesota. Before 1990, there were only three -- in Minneapolis, Duluth and Rochester.

Some legislators have viewed the local sales tax as unfair to smaller cities. Grand Rapids, for example, could raise more money than a town like Bertha in Todd County. Instead, lawmakers have favored the decades-old Local Government Aid (LGA) program, which spreads state money around and creates a semblance of equalization -- the so-called "Minnesota Miracle."

Downtown Lanesboro
Signs mark the locations for some of the businesses in downtown Lanesboro. The city of Lanesboro is implementing a local sales tax in order to help pay for infrastructure projects like repairs to the city's dam and hydroelectric plant, and to make improvements to its community center and library. The local sales tax will go into effect on Jan. 1.
Photo for MPR by Alex Kolyer

Efforts to institute local sales taxes often failed either during local votes or at the Legislature--both forms of approval are required.

That attitude appears to be changing. Given ever-tightening state and local budgets and limited options for raising money, more cities are asking for and winning the ability to lodge local sales taxes to fund infrastructure projects.

About two dozen cities have them currently and three more, including Lanesboro's, are set to start next month. Last session alone, lawmakers approved taxes for Hutchinson, Cloquet, Marshall, Fergus Falls, Medford and Lanesboro. They approved modifications to existing taxes in Rochester, Hermantown and Clearwater.

In Hutchinson, starting on Jan. 1, a half-cent sales tax will help pay for a new water plant and an expanded wastewater treatment plant.

"We had the debt that had to be paid for," said Mayor Steve Cook. "The sales tax came up." A referendum passed by 62 percent.

"The people who live here can't keep supporting all the capital improvements that need to be done."

Without it, Cook said, debt payments would have driven user fees even higher and perhaps deterred business growth in a city that's seen lots of layoffs. "As a way to spread out the impact, going through a sales tax seemed like a fair way to do it," he said. "All those jobs also benefit the whole region."

Cook said Hutchinson had sought permission from the Legislature before, only to be turned down. "With some of the changes in leadership, there seemed to be more openness to it, especially if there was a public vote."

Cloquet still has to pass a referendum before it can implement a sales tax to pay for roads, sewer improvements and parks. "Communities are looking for funding to sustain basic infrastructure needs," said city administrator Brian Fritsinger. "The state and federal money is not there for local governments, so what else can we do?"

Lanesboro residents Jerry and Rita Dalzell
Lanesboro residents Jerry and Rita Dalzell wait as Tara Johnson, library director, checks out their books. The city of Lanesboro is implementing a local sales tax in order to help pay for infrastructure projects like repairs to the city's dam and hydroelectric plant, and to make improvements to its community center and library. The local sales tax will go in effect on Jan. 1.
Photo for MPR by Alex Kolyer

Fritsinger was somewhat surprised when his city got the nod from the state. "Our local legislators have stood up over the years to get (the sales tax) as a funding tool. We tried to get it for about nine years in a row. I'm not sure how our number finally got drawn."

Some link this new legislative receptiveness to the declining Local Government Aid program. "My personal belief is that some of the opposition was seen as a way to maintain support for LGA," said the League of Minnesota Cities' Gary Carlson. "And I think the past three or four years have made it clear that LGA isn't going north. It's going more south and we do need to find some alternatives for cities. I think the sales tax is still going to have major equity issues as notably smaller cities don't have the ability to tap that as a viable source of revenue."

Indeed, there were two proposals last session that would have allowed cities to implement sales taxes without coming to the Legislature at all. One, authored by Rep. Greg Davids, R-Preston, would have maintained the current requirement that proceeds go toward capital projects. The other would have allowed the tax for any purpose but only if cities accepted a reduction in LGA.

Neither bill passed but Davids said he wants a hearing on his next session.

"It's going to give a huge weapon to legislators who want to do away with LGA to put the final nail in the coffin."

Rep. Paul Marquart, DFL-Dilworth, who serves on the House Taxes Committee, is trying to slow the trend toward allowing more sales taxes. "Ultimately my concern is we are going to create more disparity among rural cities," he said. He introduced a bill last session that would have imposed a moratorium until 2013. The bill didn't pass in its entirety, but a provision forbidding cities from spending money to advertise or promote sales taxes did.

Marquart suggested that the sales tax could become an excuse to eliminate Local Government Aid altogether. "If you allow (this), it's going to give a huge weapon to legislators who want to do away with LGA to put the final nail in the coffin." Still, he's sympathetic to the plights of cities. "I understand why cities want to do this. I understand the need to look for new revenue."

Davids, who chairs the House Taxes Committee, says he simply wants to give cities choices. "As long as they go to the voters and they don't' have a problem, they should be allowed to do it," he said. "This is a local control deal. Local units of government know what their needs are."

Killing state aid is not his goal, he said. "I have been a lone voice in the forest howling every day to try to protect LGA. The communities I represent are heavily dependent on it. Many members of the Legislature said, 'Get rid of it entirely.' I said 'No, I'm not doing that.'"

In fact, Davids is cognizant of issues of fairness (though he declined to use the word, saying it has been "abused"). In return for allowing Rochester to extend its existing sales tax next year, he required the city to establish a fund and distribute $5 million in tax revenue to surrounding communities for economic development. "Sixty percent of the money Rochester collects is from outside Rochester. Maybe some of it should come back to outside the city. I put a provision in there, a good neighbor policy, and we'll see how it works."

"I'm not a redistributionist," Davids said. "But when you're paying 60 percent and getting nothing, that's redistribution going the wrong way."