Cities to the Legislature: Give us the sales tax option

A bill just introduced in the Minnesota Senate would give Grand Rapids the ability to levy a general fund sales tax.

This might sound like a wonky matter of fiscal management, but it represents the leading edge of a larger debate regarding how cities generate money in order to maintain budgets and pay for services in the face of a tough economy and repeated cuts to Local Government Aid.

"I came on board at the city 3 1/2 years ago," says Shawn Gillen, Grand Rapids' city administrator. "Within months, we had the first LGA reduction. The city said, 'We don't want to raise property taxes, nor do we want to reduce services.''' It was a tall order. But, says Gillen, "I like a challenge."

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Grand Rapids city hall

Gillen says he's delivered, forcing city departments to operate more leanly. He implemented an early retirement program, invested in technology, found a cheaper way to provide health care to public employees and even streamlined the way streets are plowed and salted. He doesn't call this "cutting." He calls it "re-innovating."

Now, Gillen is looking to supplant LGA funding altogether. "We aren't asking for more money," he says. "We're just saying, if you're going to take LGA away from us, give us more options."

Rather than raise property taxes, Gillen would like to tap the shoppers and diners who use Grand Rapids, a city of about 8,000, as a regional hub, but don't necessarily live in the city. "A local sales tax of 0.5 percent would generate a million dollars per year," he says. "It would replace all the LGA we are budgeted to receive and could reduce property taxes."

So he pushed for the Senate bill, sponsored by Tom Saxhaug, (DFL) District 3.

Historically, the state Legislature - which must approve city sales tax requests - has been reluctant to sign off on proposals that feed a general fund, favoring instead those that target a specific capital project. While local sales taxes exist in about 20 cities across the state, only Duluth's comes with no strings attached: It can be used for whatever the city wishes and has no expiration date.

The reasoning behind the legislative reticence is that LGA has been a preferred funding method, viewed as more fair than local sales taxes since it spreads money from wealthier communities to poorer ones. Bloomington, for example, could raise bucketsful of money from a sales tax, while a small town like Bertha could raise very little. Moving from an LGA- to a sales tax-based system, some have argued, would mean creating a state of haves and have nots.

Now, after years of cuts to LGA, this logic is losing its impact and cities are crying foul.

"If indeed LGA is done away with or drastically reduced, there will be more than one regional center that will look to this as one of the alternatives," says Saxhaug. "LGA started with the Minnesota Miracle. Now we're talking about dismantling the Minnesota Miracle completely."

Saxhaug acknowledges that his bill, as currently written, has a slim chance of passing. "For me it's about getting a discussion going," he says. "I want to start the discussion of how we replace the services in the Grand Rapids area when we don't have LGA."

Gillen, on the other hand, is optimistic that his city will wind up with a sales tax. He expects the language of the bill to be altered somewhat through the legislative process. "Rather than targeting the tax money for the general fund, it would go to 'capital improvements,'" he says, noting that this is still a usefully non-specific destination. "I'm a pragmatist. If that's what will help it pass, we can make it work."

The League of Minnesota Cities, where Gillen serves as a board member, is expected to introduce its own bill making it easier for cities across the state to impose sales taxes. According to Gary Carlson, the League's intergovernmental relations director, the bill should be drafted in the next week to 10 days. "Our city officials in our policy committee wanted us to secure a general authorization for sales taxes," he says.

While the language is still being hashed over, Carlson says the bill would allow a tax for "improvements in the community," a funding destination that could, for example, include road maintenance. Also, the bill would relieve cities of the burden of seeking legislative approval. They would only need a council resolution and a winning vote on a local referendum.

"Even if cities are anticipating aid cuts," says Carlson, "they don't know if these are the end of the cuts to city funding. We might see more cities doing what Grand Rapids is doing, saying, 'Maybe we're better off going alone on this issue.'"

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