Impact of Governor’s Sales Tax Plan on Local Sales Taxes

Governor Dayton's budget recommendations would extend the state sales tax to more goods and services, which could affect the amount collected by cities in local sales tax.
(Published Jan 29, 2013)

Within the governor’s state budget recommendations is a proposal to extend the state sales tax to a variety of goods and services that are not currently subject to the sales tax. For the state sales tax, the base broadening is estimated to generate an increase in sales tax revenues of 62.5 percent. However, the governor is proposing a simultaneous reduction in the overall state sales tax rate from the current 6.875 percent rate to 5.5 percent, which will reduce the actual overall state revenue increase.

However, the governor’s budget makes no recommendations for adjustments in local sales tax rates. If the legislature adopts the governor’s recommended base broadening, local sales taxes would bring in more dollars that previously estimated. There are currently 24 local sales taxes in place (counting the St. Cloud area tax as one rate).

Most local sales taxes were established to fund specific capital projects and the sales taxes remain in place until a specified amount of revenues are generated to pay the cost of the capital project. Under these sales taxes, the city would simply receive the necessary revenues earlier than expected and the local sales tax would blink off. However, some local sales taxes only specify an end date or are permanent local taxes. If the governor’s base broadening proposal moves forward, it is possible that the legislature will consider adjustments to local sales tax rates.

The Minnesota House of Representatives Research Department has prepared a preliminary analysis of the impact of the base expansion under the governor’s proposal on local sales taxes. Under the analysis, the estimates of the increase in sales tax revenues for local sales taxes are +62.5 percent due to the base broadening(which is the assumed increase in state sales tax revenues due solely to the base broadening). However, the actual impact of the Governor’s based broadening proposal on individual local sales taxes will depend on the mix of newly taxed goods and services within the city.

You can find a copy of the House Research memo here.

Questions? Contact Gary Carlson at (651) 281-1255 or gcarlson@lmc.org

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