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Memo To: Mayor and Council, Neal Beets, City Manager From: Chris Miller, Finance Director Date: February 20, 2004 Re: Overview of the Department of Revenue's Report on Local Sales and Use Taxes Background As an outcome of the 2003 Legislative Session, the Minnesota Department of Revenue was directed to prepare a report that examined the history of the local option sales tax, and its underlying principles and policy issues. The Report was completed and delivered to the Legislature on January 30, 2004. Copies of the report can be found on the Department of Revenue's website at www.taxes.state.mn.us. A brief overview of the report is provided below. Overview History of the Local Option Sales Tax The report notes that Minnesota is a relative newcomer to state and local taxes especially the local sales tax. Minnesota enacted a statewide sales tax in 1967, becoming the second -to -last state to do so. In 1971, the legislature enacted some sweeping tax reforms which became widely known as the `Minnesota Miracle'. The reforms were designed to generate more monies at the State level that could then be distributed to local governments in the form of `State aid', based on certain criteria including local "need". Because the reforms were designed to better equalize wealth across a broad region, State Leaders realized that it had to restrict local government's ability to levy sales tax independently. As a result, as part of the 1971 reform package, the Legislature enacted a prohibition against new or increased local taxes on sales or income. At the time of the 1971 prohibition, five Minnesota cities had already adopted Iocal sales taxes, they included: Minneapolis, St. Paul, Duluth, Rochester, and Bloomington. Enabling legislation is now required to implement a local sales tax. Beginning in the early 1990's and in response to continued pressure for alternatives to local property taxes, the number of requests for special legislation to enact local sales taxes increased dramatically. Today, 11 local jurisdictions have a local sales tax. They include: Cook County Minneapolis St. Cloud Duluth New Ulm. St. Paul Hermantown Proctor Two Harbors Mankato Rochester