Impact of Dayton's tax plan worries local governments

State of the State
Minnesota Gov. Mark Dayton delivers his state of the state address Wednesday, Feb. 6, 2013 at the State Capitol in St. Paul. The governor's budget plan increases the level of state aid to cities and counties by $120 million a year.
MPR Photo/Jennifer Simonson

Gov. Mark Dayton's sales tax proposal is attracting plenty of attention for how it would lower the tax rate but expand it to more services.

The governor's budget plan increases the level of state aid to cities and counties by $120 million a year. The governor wants the money to go to property tax relief over the next two years.

The tax changes would apply to regular people and businesses, as well as cities and counties, which also have to pay the sales tax.

City and county officials cheer the increase, but also worry about the part of Dayton's budget that expands the sales tax to consumer and business services. Some city and county officials say Dayton's plan would put a dent in their budgets.

"Every single county has looked at the issues and believes they would see an increase in their sales tax liability under these reforms," said Beltrami County Commissioner Joe Vene, who is also the president of the Association of Minnesota Counties.

Vene said Beltrami County estimates its annual sales tax payments would more than double from $334,000 to $713,000. He said those figures are based on Dayton's proposal to lower the sales tax rate by 20 percent while expanding it to services. Vene said the increased expense would come from paying sales taxes on legal, accounting, architecture, business support and consulting services. He said the increase in sales taxes would offset nearly two-thirds of the county's expected aid increase from the governor's plan.

"We would now add another burden, another layer of sales tax, which does not bode well for the property taxpayer because that's where we go to get the money," Vene said.

Governor's budget
In this photo from Tuesday, Jan. 22, 2013, Gov. Mark Dayton presents his budget proposal to the media at the Department of Revenue in St. Paul. The governor's budget plan increases the level of state aid to cities and counties by $120 million a year. The governor wants the money to go to property tax relief over the next two years.
MPR Photo/Jennifer Simonson

Beltrami County isn't alone. Cities and counties across the state have been calculating the numbers to get a handle on the sales tax plan's effects on their bottom lines. Republican Rep. Nick Zerwas of Elk River is part of a bipartisan group of lawmakers who want to eliminate sales taxes on cities and counties altogether. He worries smaller cities and counties that hire outside contractors would be forced to pay more.

"Now they'll be paying 5.5 percent under the governor's plan on all of those services, raising the cost of just doing the main basic operation of running a county or running a city," Zerwas said.

Exempting cities and counties from paying the sales tax would add another $245 million to the state's $1.1 billion projected budget deficit. Cities and counties started paying the tax in 1991 when the state had to deal with a past budget deficit. They've been paying it ever since.

Revenue Commissioner Myron Frans says the Dayton administration looked at exempting cities and counties from paying the sales tax but decided it was too costly in light of the budget deficit. He also said he hasn't heard many complaints about big sales tax increases when discussing Dayton's budget plan with cities and counties. But he said he is willing to reconsider.

"If this is a major problem, we'll have to address it. The last thing we want to do is provide local government aid and then turn around and take away with the collection of the sales tax. We'll look at this, but we haven't seen quite the same problem," Frans said.

City and county officials are trying to dance delicately — lobbying to exempt themselves from the governor's sales tax expansion while trying to preserve the increase in state aid. DFL Rep. Ann Lenczewski of Bloomington said it's silly that a local unit of government has to pay a tax to the state. But the House Tax Chair said the Legislature needs to consider Dayton's entire budget plan, not just portions of it.

"The governor is a friend to cities and counties. If anyone has any doubt about how he feels about local units of government and trying to rebuild the partnership between the state and local units of government, they haven't been listening to him," Lenczewski said.

Lenczewski says she will consider ways to exempt cities and counties from paying the sales tax when she puts together the major tax bill of the session. She said that legislation won't be written until after state finance officials release the next revenue forecast at the end of the month.

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