A higher city sales tax to fund cops?

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January 24, 2005 // UPDATED 1:51 pm - April 26, 2007
By: Scott Russell
Scott Russell

Could make city less competitive, let legislators off the hook for cuts - but a Council leader says alternatives are few

City Council President Paul Ostrow has proposed asking the Legislature for a higher city sales tax - not as the city's first choice, but as a last resort to pay for police officers and fire fighters.

The Council's five-year financial plan projects unacceptable public safety cuts, Ostrow said. The city can't fill the gap with property taxes and can't count on dwindling state aid.

City Councilmember Scott Benson (11th Ward) calls a city sales tax increase "the worst option" that "should be put at the bottom of the list."

Benson called a new local sales tax a political "fantasyland" given a "no new taxes" governor and state House of Representatives. Further, he bristles at going cap-in-hand to the Capitol for permission to hike city sales taxes. The DFLer said that would let legislators off the hook for cutting aid to cities while forgetting Minneapolis is "the goose that laid the golden egg" generating sales and income tax for state coffers.

Ostrow introduced a resolution that the city should seek an unspecified sales-tax or parking-tax boost to pay for public safety, if the state doesn't increase city aid.

Members of the Council's Intergovernmental Relations Committee discussed a city sales tax request Jan. 11 to mixed reviews. The Committee will vote on the idea Tuesday, Jan. 25.

Whether or not the plan passes, it gives city leaders the chance to air their grievances that the state backtracks on a 34-year-old deal.

That arrangement is 1971's so-called "Minnesota Miracle." The state prohibited new local sales or income taxes, and lowered local property taxes by shifting their financial burden to the state income tax that funds state aid to local governments.

The state has approved local sales taxes in 12 cities and one county, according to a 2004 State Revenue Department report. The sales taxes generally support building projects such as hospitals, sewer improvements, convention centers and arenas.

The state has OKed several Minneapolis-only sales taxes. In 1969, before the Minnesota Miracle, the city instituted a 3 percent "entertainment tax" on admission fees, cover charges, amusement devices (such as jukeboxes and pinball machines), food and beverages sold during live performances, and short-term lodging.

The entertainment tax ($7.8 million in 2003) generally goes into the city's General Fund for police, fire and basic city services, said Pat Born, city finance director. The Target Center-generated entertainment tax goes to pay off Target Center bonds, about $1.1 million a year.

Other city sales taxes support the Convention Center. They are:

- 0.5 percent citywide sales tax ($25.3 million in 2003);

- 3 percent Downtown restaurant tax ($7.9 million in 2003);

- 3 percent Downtown liquor taxes ($2.9 million in 2003); and

- 3 percent lodging tax ($4.6 million in 2003)

Duluth has a 1 percent sales tax that goes into the General Fund to pay for police, fire and public works. It generated nearly $11 million in 2001. St. Paul has a 1 percent sales tax for the Civic Center, RiverCenter arena and neighborhood revitalization projects.

If Minneapolis boosted its sales tax by another quarter-percent, it would raise approximately $14 million, enough to hire at least 185 police and/or firefighters, city data said.

The state began collecting sales taxes in 1967. The rate started at 3 percent and increased to 4 percent in 1981, 6 percent in 1983 and 6.5 percent in 1991, according to a city memo.

As Benson sees it, the state keeps sales taxes collected in Minneapolis while cutting city aid. Benson said if the state wants to cut city aid, it should eliminate the aid and the state sales tax and let the city "eat what it kills."

The state receives $360 million in sales taxes from Minneapolis-based sales.

Ostrow's plan faces many potential potholes. For instance, Chief City Lobbyist Gene Ranieri said the Legislature could change the state-aid formula - cutting the city's aid if Minneapolis collects more from the new local sales tax.

The state's policy also said new local sales taxes should pay for infrastructure, not ongoing operations, he said. Also, hiking Minneapolis sales taxes a quarter-percent to 7.25 percent makes the city less competitive, if the tax in surrounding suburbs remains 6.5 percent.

Councilmember Barret Lane (13th Ward) said the city needed to sort out what it would do if it got new sources of money. For instance, should the new city sales tax pay for police and fire services or reduce property taxes?

The Council's five-year budget projections cap total annual property-tax growth at 8 percent, but many homeowners see bigger increases because state changes shifted the burden away from commercial property.

Lane said he liked the idea of a city sales tax because it diversified revenue.