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ATTACHMENT6 Overview Memo re: Local Sales and Use Tax The Department's iindings show that relative to the typical city, cities with local sales taxes tend to be ]U�s dependent on local property taxes and other local funding sources. But this does not suggest that property taxes are lower in cities that have local sales tax. Generally speaking, cities that have a local sales tax also have higher property tax rates when compared to cities with similar population. The likely reason is that cities with a local sales tax also have greater demands for services that extend beyond their borders — the byproduct of being a regional service center. Summarv of the Policv Issues The report outlines various policy issues related to the enactment of local option sales taxes. In summary, the report drew upon previous writings submitted by the National Conference of State Legislatures, whom in their 1997 report 'C�itical Issues in State-Local Fiscal Policy, a�'ruide to Local Options Tcrres' offered the following: Local option taxes allow local people to have mo�e cont�ol ove� tax decisions and imp�ove localjlexibility to meet �egional service needs. Howeve�; they may c�eate local accountability p�oblems, hampe� state f�'exibility and impose additional administ�ative and compliance costs on businesses and individuals. They may also affect the balance and fai�ness of the state-local system and c�eate hccYmful competition between local governments. Reviewing Public Comments As part of their study, the Department of Revenue conducted public meetings in 2003 to solicit comments on local sales taxes. Meetings were held in Brainerd, Rochester, and St. Paul. Attendees included; city and county officials, legislators, individual citizens, business organizations, and associations representing cities and counties. As is noted in the report, the comments were generally centered on criticism of the current process, appropriateness of a local sales tax as a component of state and local revenues, and issues raised by the prospect of wider local authority for sales taxes. Criticism and discontent were observed with respect to the process of authorizing local sales taxes. The lack of consistent and objective criteria, meant some cities were granted approval whereas others were not, and not always for consistent reasons. Concern was also raised that the approval process was driven by politics rather than by merit. Although no unanimity was reached on the appropriate role of a local sales tax as a revenue tool, it was acknowledged by many that larger communities with a relatively strong economic base are better able to raise local monies than their smaller counterparts. And that this basic fact should be a consideration in granting approval for a local option sales tax. Public comment was also received with respect to requiring wider local authority before granting approval of local sales taxes. It was suggested that for local taxes that would be paid primarily by those who live outside the taxing jurisdiction, the referendum ought to be a regional one rather than confined to the taxing jurisdiction. ATTACHMENT6 3 Overview Memo re: Local Sales and Use Tax