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Sales tax plan would be boon to some Minnesota cities; Bemidji could be affected

By BRIAN BAKST, Associated Press

ST. PAUL, Minn. (AP) — About two dozen Minnesota cities — including Bemidji — and counties whose sales taxes piggyback on the state’s would see a gusher of new money if Gov. Mark Dayton’s proposed sales tax expansion prevails.

Most of the local taxes are temporary and dedicated to specific purposes, which could mean quicker repayment of public debt on civic centers, airports, stadiums and sewer projects, such as the half-cent local sales and use tax for Bemidji that is currently earmarked to pay construction bonds for the Sanford Center. That would mean the local sales taxes would end sooner. Other cities have more flexibility on how they could spend a windfall from taxes that either never expire or won’t for decades.

Several Twin Cities-area counties impose a quarter-cent sales tax to pay for regional mass transit projects, and the amount raised from that would shoot up.

The trickle-down effect of Dayton’s sales tax proposal has garnered little attention since the Democratic governor released his budget plan last week. Dayton’s budget would subject a range of consumer and business services — haircuts, tattoos, legal bills and accountant fees among them — to the tax while lowering the state’s overall rate from 6.875 percent to 5.5 percent.

As it is now structured, the local sales taxes would remain at their current rates but apply to everything the state considers taxable.

Early estimates by the Minnesota Department of Revenue provided to The Associated Press show that cities and counties with their own sales tax could expect to take in 60 percent more than they take in now. Counties would be in line for $79 million more in 2014; cities with extra sales taxes would gain a combined $60 million. The actual amount each city or county could expect would vary because consumption of the newly taxed goods or services isn’t the same from place to place.

Duluth’s 1 percent sales tax could generate an extra $8 million per year, according to a separate House Research estimate. Mayor Don Ness said it would come at a critical time, given a recent court loss that deprives the city of $6 million in annual payments from an American Indian band that operates a downtown casino.

“We’ve been on the razor’s edge with our budget for over a decade in the city of Duluth, and while we’re getting close to finding stability, we still have a long way to go,” Ness said Monday. Ness envisions using the revenue uptick to plug the hole from the casino decision and pay off other debt, but he’s well aware that the expansion is no sure thing.

St. Paul, which levies a half-cent sales tax, is also taking a wait-and-see mentality. Sixty percent of those proceeds go for neighborhood or cultural development, with the rest used to repay debt from the city’s convention center. City economic development projects could benefit, but city officials said it’s too soon to say precisely how.

“We’re moving at the speed of the Legislature,” said Joe Campbell, communications director for Mayor Chris Coleman.

One of Minnesota’s most lucrative local sales taxes is the 0.15 percent imposed in Hennepin County to pay construction bonds for the new Twins ballpark.

In 2011, the tax brought in $31 million, a slice of which the county was allowed to use on libraries and youth recreation fields. If the expanded base was in place that year, House researchers estimate it would have meant almost $20 million more. The tax is due to expire once the Target Field borrowing is paid off.

Hennepin County Board Chairman Mike Opat said the faster repayment would mean less interest costs on bonds that had a 30-year lifespan when they were sold in 2007.

“We would turn off that tax. There are very narrow uses for that tax, and it’s not the desire of the county board to leave that on,” he said.

In 1971, the Legislature prohibited new or increased local sales taxes as a way to centralize collections and reduce disparities that reward cities with the most political clout. But it wasn’t long before cities started pressing legislators for exemptions, with some success. Most were enacted only after local voters approved them. Three new sales taxes kicked in last year — in Fergus Falls, Hutchinson and Lanesboro.

While most of the taxes were initially connected to a specific capital project, the Legislature conceivably could stretch their purpose and longevity. Dayton’s administration was leaving that up to lawmakers, said Janelle Tummel, a Revenue Department spokeswoman.

One wrinkle involves the constitutional amendment voters passed in 2008 to raise the state sales tax for specific programs. That amendment permits lawmakers to shave the tax rate if the sales tax base is expanded — so the revenues match the projected income under the prior arrangement.

The added 0.375 percent tax produces hundreds of millions of dollars per year dedicated to programs protecting drinking water, enhancing wetlands and habitat, boosting the arts and otherwise preserving Minnesota’s environmental and cultural legacy. Dayton has recommended slicing the rate connected with the Legacy Amendment to 0.234 percent.

A look at local sales taxes in Minnesota

Many Minnesota cities and counties have local sales taxes imposed on top of the state’s sales tax. If Gov. Mark Dayton’s proposal to make more goods and services subject to sales taxes prevails, the local governments would see more money come in, too. Most, but not all, dedicate the proceeds to a specific project and the tax has a scheduled expiration. Here’s a look at current local sales taxes:

ALBERT LEA, 0.5 percent, authorized 2005

AUSTIN, 0.5 percent, authorized 2006

BAXTER, 0.5 percent, authorized 2006

BEMIDJI, 0.5 percent, authorized 2005

BRAINERD, 0.5 percent, authorized 2006

ST. CLOUD AREA, 0.5 percent, authorized 2002

CLEARWATER, 0.5 percent, authorized 2008

COOK COUNTY, 1 percent, authorized 2008

DULUTH, 1 percent, authorized 1973

FERGUS FALLS, 0.5 percent, authorized 2011

HENNEPIN COUNTY, 0.15 percent, authorized 2006

HERMANTOWN, 0.5 percent, authorized 1996

HUTCHINSON, 0.5 percent, authorized 2011

LANESBORO, 0.5 percent, authorized 2011

MANKATO, 0.5 percent, authorized 1991

MINNEAPOLIS, 0.5 percent, authorized 1986

NEW ULM, 0.5 percent, authorized 1999

NORTH MANKATO, 0.5 percent, authorized 2008

OWATONNA, 0.5 percent, authorized 2006

PROCTOR, 0.5 percent, authorized 1999

ROCHESTER, 0.5 percent, authorized 1983

ST. PAUL, 0.5 percent, authorized 1993

TWO HARBORS, 0.5 percent, authorized 1998

WILLMAR, 0.5 percent, authorized 2005

WORTHINGTON, 0.5 percent, authorized 2006

Source: Minnesota Department of Revenue.