2010-03-23_PWETC_AgendaPacket - Laserfiche WebLink

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Key policy issues The primary advantage of centralized tax collection is that it gives the state the ability to equalize tax burdens and services across the state. This outcome has long been pursued in Minnesota. NCSL suggests that while centralization may improve horizontal equity-taxpayers with similar means paying taxes at similar levels-it can reduce local control, flexibility and accountability. Some argue that, within limits, local taxpayers and their elected officials should be allowed to determine their own service and tax levels and bear the burden of their own decisions. Expecting that states will continue to look for ways to hold down property taxes, including local revenue diversification, NCSL provides a list of issues that need to be considered in evaluating local option taxes. Those issues are discussed below. Local accountability and flexibility As noted above, local option revenue sources can improve accountability by bring- ing local spending and tax decisions closer to the people, and by forcing both spending and tax decisions to be made by the same set of policymakers who are accountable to the same taxpayers. Directly, or indirectly through elected represen- tatives, voters would be able to choose to increase their taxes to pay for services that state taxpayers or legislators might not be willing to fund. But these benefits will not be fully realized if the spending programs have significant "spillover" effects outside the local jurisdiction, or if, through tax exporting, local taxing jurisdictions succeed in shifting the cost of local government to nonresidents, as maybe the case with the local option sales tax. Limits on state revenue options A local option sales tax may lead to local competition for sales tax revenue. Enacting Once a local sales tax a state sales tax rate increase could be more difficult because taxpayers may resist is in place, removing or the change if the combined state and local rate becomes unacceptable. Knowing modifying it may be this, local governments will have an incentive to accelerate the adoption of local difficult due to local sales taxes, or to increase the tax rate when state rate increases are anticipated. The revenue implications. state might be similarly motivated to make preemptive state tax changes. This interdependence creates a potential "crowding-out" effect. Once a local sales taxis in place, removing or modifying it maybe difficult due to local revenue implications. Since current law requires that local sales taxes use the state tax base, local governments will likely oppose state sales tax reforms involving new exemptions, and become advocates for tax base expansion. While this dynamic would serve to stem the erosion of the sales tax base, it could preclude needed tax reforms, including those associated with the Streamlined Sales Tax Project. Administrative and compliance costs If not properly designed, local sales taxes can add significant complexity and cost to the tax system. However, in Minnesota, the uniformity provisions enacted in 1997 (limited authority over rates, required use of state tax base, required state tax administration) and others contained in the Streamlined Sales Tax Project (simpli- fiedaudit and administrative procedures, clear sourcing rules, application of use taxes) ensure that the additional administrative and compliance costs of local sales taxes in Minnesota will be minimized. Tax system balance and responsiveness to growth Conventional wisdom favors the balanced use of income, sales and property taxes (taxes on income, consumption, and wealth) in state and local revenue systems. This "three-legged stool" approach promotes stability and minimizes the tax rates 12