To tax, or not to tax? The debate on local sales taxes

Last week I noted that, because of the “The ideological divide between the two main parties in the state legislature… we actually see some rather profound debates up at the state capitol these days.” Once again, Minn Post’s Peter Callaghan provides a good summary of one of these debates. It begins with local sales taxes but quickly moves on to deeper issues.

“Currently,” Callaghan notes:

…local governments put together proposals for projects that are supposed to have regional appeal or draw visitors to the area and then seek special legislation that authorizes them to ask voters for approval. If local voters say yes, sales taxes are increased to make payments on bonds of up to 30 years duration to pay for projects.

But if the Legislature doesn’t have a taxes bill, which sometimes happens in non-budget years, or if a taxes chair doesn’t allow projects to move forward, local governments have to wait until next year. In addition, lawmakers don’t like having to wade through dozens of projects, along with waivers of sales tax collections on construction materials and tax increment finance district approvals. 

To reform this cumbersome process, a task force led by the Department of Revenue:

…suggested having a list of the types of projects that could use local sales tax increases and a process for cities and counties to present their plans to the state auditor. That statewide elected official would check the projects against the state requirements and then certify them to go before local voters at a November general election.

Only projects that are outside the rules — perhaps because they are especially expensive or include projects not on the allowed list — could go to the Legislature.

A bill authored by Rep. Aisha Gomez, HF 5335, would enact a limited version of this:

…Gomez has a much more limited list of project types, excluding for example community centers, park projects not deemed regional by the Parks and Trails Legacy Plan, courts and jails, roads and water and sewer projects. She also requires approval of adjacent cities and envisions a system where cities that win voter approval would share some of the revenue raised with smaller, less-wealthy jurisdictions.

What are the pros and cons of this proposal? Lets start with the pros.

I considered the pros and cons of sales taxes generally back in November last year and concluded that “All in all, sales taxes are not the worst way for a government to raise revenue.” Added to this is the argument against preemption I have made recently:

Speaking from principles, if you believe that as much power as possible ought to be devolved from the federal to state governments, it follows that as much power as possible ought to be devolved to local governments. As a general rule, political power ought always to rest closest to those whom it will affect.

On these grounds, Rep. Gomez’ bill is a step in the right direction, albeit a smaller one than the Department of Revenue’s task force proposed. In the Senate, SF 5424 authored by Sen. Ann Rest (DFL) is “much closer to what the task force proposed.”

So what are the cons? Interestingly, for this we turn to Rep. Gomez:

Her concerns are twofold: The sales tax is regressive in that low-income people have to devote a much higher percentage of their incomes to pay it than wealthier people. Second, cities with more robust retail sales can buy more things than cities that don’t.

“Are we going to pick winners and losers based on whether a kid was born close to a robust sales tax base or are we going to stick with our Minnesota tradition of equalizing resources across the state,” Gomez told her committee.

The legislative process is also suspect, she said, because it rewards local governments with the most money to hire the most-skilled lobbyists “who can work all the different levers in the Legislature. That is another thing that affects equity.”

All of this is, I think, correct. The trade off here is between more local control over taxes and spending versus the points about regressivity and differing resources. Which of these weighs more heavily is a normative question for which there isn’t a “right” or “wrong” answer.

Some data, however, can inform the decision. Back in 2022, I asked “State or local government: Who taxes you in Minnesota?” Using Census Bureau data, I found that:

…in 2019*, Minnesota’s state sales, property, and individual income tax revenues amounted to 7.4% of Personal Income, the 3rd highest share in the United States.

By contrast:

…Minnesota’s local sales, property, and individual income tax revenues amounted to 2.8% of Personal Income, ranking it 41st among the United States.

The result, I noted, is that:

…Minnesota is one of the most fiscally centralized states in America. This is by design. Giving state government the responsibility of raising the majority of tax revenues in the state also gives it the opportunity to spend the majority. 

In this setting, there is ample scope for more localism in fiscal policy in Minnesota. As the House and Senate bills move into conference committee, let us hope that the SF 5424 comes out best.