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Among other things, the bill includes $80 million in additional funding for the local government aid program.
(Published Apr 15, 2013)
Sen. Ann Rest (DFL-New Hope), chair of the Senate Tax Reform Division, unveiled her initial draft of the tax reform articles of the Senate omnibus tax bill on April 11. The bill draft includes eight sections that cover individual income tax, corporate income tax, sales and use tax, tobacco taxes, estate tax, city aids, aviation taxes, and miscellaneous taxes.
For cities, the bill includes $80 million in additional funding for the local government aid (LGA) program; the revised LGA formula bill introduced by Sen. Roger Reinert (DFL-Duluth); and a sales tax exemption for cities and counties, as proposed in separate bills by Sens. Rest, Dave Senjem (R-Rochester), and Chuck Wiger (DFL-Maplewood). The sales tax exemption for cities is estimated to reduce city costs by $77.5 million in the first full year of implementation.
The bill includes a property tax savings reporting requirement tied to the sales tax exemption. All cities and counties would be required to report on the savings realized to their budgets, along with the property tax levy reduction associated with the sales tax exemption. If the statewide results of the report indicate that cities and counties have not reduced property taxes by at least 75 percent of the savings, the commissioner of Revenue would recommend in the report to the Legislature that levy limits be imposed on cities and counties.
Beyond being another state-mandated report, the reporting provision has several problems and challenges. The report is for the state fiscal year and not the city and county calendar year budget year. In addition, not all of the savings realized by cities and counties will be to services supported by property taxes. Although cities under 2,500 have traditionally not been covered by levy limits, the levy limit trigger (not realizing a property tax savings of at least 75 percent of the sales tax exemption benefit) would be based on the actions of cities under 2,500 in population.
More generally, the bill extends the state sales tax to clothing, digital goods, and a variety of services consumed by individuals such as haircuts, automobile repair, tattoos, piercings, over-the-counter medicines (unless prescribed by a doctor), and cosmetic surgery. This base expansion allows the Senate to reduce the state sales tax rate from 6.875 percent to 6 percent. The repeal of the clothing sales tax exemption is coupled with a clothing sales tax credit that could be claimed when filing the individual’s income taxes. The credit would only be available to low-income individuals based on the number of dependents, and the credit would be phased out for incomes in excess of 200 percent of the federal poverty guidelines.
The bill includes an adjustment to the Duluth local sales tax rate to account for the sales tax base expansion. Under the plan, the current 1 percent Duluth sales tax rate would be reduced to 0.87 percent, which presumably would result in a generally similar level of sales tax revenue for the city. Other local city sales tax rates are not similarly adjusted because the taxes are generally authorized for a specific purpose with a sunset when sufficient revenues have been raised. The sales tax base expansion will generally mean that these other city local taxes will expire sooner under the base expansion.
The bill also includes a clarification for local lodging taxes that would impose these local taxes on the full price or compensation paid by the consumer for access to short-term lodging. This clarification is necessary because some online travel and lodging resellers have only been collecting taxes on the wholesale price of a room paid by the online travel company rather than the retail rate actually charged to customers. This clarification was applied to state taxes in 2011.
The Tax Reform Division bill does not yet reflect the entire Senate omnibus tax bill. We expect additional articles to be added by the full Senate Taxes Committee as early as this week.
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