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Many of the bills will be heard next week.
(Published Apr 5, 2013)
On Tuesday, April 9, the Senate Tax Reform Division will be considering a number of bills impacting cities including three bills that would exempt purchases made by all cities from the state sales tax, a bill that would exempt purchases made by cities that do not receive LGA and the Senate companion to the LGA reform bill that has now been included in the House Property and Local Tax Division report.
The bills that would exempt cities from the sales tax include SF 1523, authored by Senator Ann Rest (DFL-New Hope), SF 329 authored by Senator Dave Senjem (R-Rochester) and SF 104, authored by Senator Chuck Wiger (DFL-Maplewood). According to the Minnesota Department of Revenue, these three bills would result in a savings to cities and counties in the first full year of implementation of roughly $130 million. Although these bills exempts the majority of city purchases, they do not exempt purchases made by cities that are inputs to goods and services that are generally provided by a private business and the purchases would be taxable if made by a private business engaged in the same activity.
Senator Roger Chamberlain (R-Lino Lakes) has a separate bill that would exempt purchases made by cities not receiving LGA from the state sales tax. Currently, there are approximately 120 cities that do not receive LGA. The savings to these cities has not yet been estimated by the Department of Revenue.
Senator Roger Reinert (DFL-Duluth) is the chief author of SF 1491, the LGA reform bill that is the companion to the House LGA reform bill (HF 1608) introduced by Representative Ben Lien (DFL-Moorhead) and now included in the House Property and Local Tax division report.
Under SF 1491/HF 1608, the LGA formula would be updated by using a three-tier LGA need factor calculation depending on the population of the city with separate “need” calculations for cities under 2,500 population, cities between 2,500 and 10,000 population and a third calculation for cities over 10,000 population. Statistical analysis showed that different factors explained variations in city revenue base for different size cities. All three formulas were derived using revenue base (levy plus aid) as a proxy for city need. The small city need calculation is based on a graphical analysis, the medium and large city need calculations are based on regression analysis similar to the techniques used in previous LGA formulas.
The bill stabilizes the LGA system by modifying the method used to allocate the annual appropriation increase. Cities whose current LGA distribution is furthest from their unmet need will receive proportionally larger increases. The bill would also cap the maximum annual loss for any city which would allow cities to accurately plan for formula changes.
The bill also significantly simplifies the LGA system. The bill repeals seven pages of LGA statutes that are obsolete under this LGA proposal and eliminates several of the formula side pots.
Under the bill, 92 cities would experience a reduction in their LGA distribution. However, in the first year (calendar year 2014), the bill would prevent any reductions to cities. In the future, the bill would limit reductions to a yet-to-be-defined percentage of their previous year’s levy.
As introduced, the bill does not specify an appropriation level but the bill includes an annual inflation and population adjustment to the LGA appropriation that would be limited to between 2.5 percent and 5 percent per year.
We will report on the outcome of the hearing next week.
Questions? Contact Gary N. Carlson at email@example.com or at (651) 281-1255.
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