2010-03-23_PWETC_AgendaPacket - Laserfiche WebLink

Home

Recent reform of the property tax system reaffirmed the principle of property tax as the cornerstone of local government fmancing. Local sales tax should not be looked to as a replacement for, nor as a significant offset of, property taxes. Local sales taxes can, under certain circumstances, however, be a useful tool for generating revenue for purposes that exceed the community's ability to raise property taxes. These purposes have traditionallybeen major capital projects that are of critical impor- tance and affect the vitality of a region greater than just the community imposing the tax. An example is the flood control project for which the original local sales tax in Rochester was authorized. This model seems to have worked well in providing a regional benefit by raising capital for an important project that would not otherwise have been funded. The use of local sales tax for nonessential projects or for general fund revenue, however, introduces a "creep" effect which is difficult to control and may lead inexorably to a broad, general use of sales tax as a replacement for all or part of the property tax system. The public comments to the department recognized this concern, which was also evident in repeated requests for establishment of a list of approved projects. This kind of a safe harbor list would reduce the creep effect and provide guidance to communities that are considering a proposal for a sales tax. Another vehicle for restraining the "creep" toward general expense funding through sales tax is to have criteria for sales tax authority based on the ability of the commu- nity to fund the project from existing resources. In other words, the legislature could consider imposing criteria on the granting of new sales tax authority that would measure the existing tax base of an applicant and limit new authority only to a community that cannot otherwise afford the proposed project. Such criteria would need to be limited to new proposals and not retroactive to existing authority so as not to cause defaults or other unanticipated fmancing problems well after a project has begun. The legislature might also wish to consider exceptions from the criteria for extraordinary expenses or circumstances. A third concern with regard to the appropriate role of local sales tax is the incidence of the tax. To the extent that a significant portion of the local sales tax falls on consumers who do not reside in the locality imposing the tax, the tax is being paid by taxpayers who have no voice in its imposition and possibly no benefit received for its payment. The dimension of this problem will differ from project to project and locale to locale. It raises however, an issue for legislative consideration. To what extent does the exporting of a local sales tax reflect allocation efficiency, i.e., spillover costs to pay for spillover benefits? What amount of exporting in what situations is fair and acceptable? Should a sales tax imposed by a city, for example, need approval by referendum of the surrounding county? Recommendations The legislature could consider imposing criteria that would measure the existing tax base and limit new authority only to a community that cannot otherwise afford the proposed project. 19