2010-03-23_PWETC_AgendaPacket - Laserfiche WebLink

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reducing aid to some communities so as to maintain equalization. It is important, therefore, that local sales tax authority be limited to capital projects. The next question is whether there should be limits on the kinds of projects. Local revenue dollars are fungible. If sales tax revenue can be used for any capital project, it is impossible to prevent the shifting of general fund revenue. General funds, raised by property taxes, can be shifted away from normal capital projects to non- capital spending. The resulting gap in capital spending would then be made up through local sales tax revenue. This, then, is a backdoor method of general funding through sales tax. To avoid such shifting, the uses to which local sales tax can be put should be limited Recommendations to large projects that would otherwise not be able to be funded by other means. The uses to which local These projects should have broad benefit and encourage multi-jurisdictional sales tax can be put cooperation. Projects that cross boundaries or will be utilized by surrounding should be limited to communities are examples of proposals that meet this criteria. While this may large projects that sound like another name for "regional benefit," the focus here should be on the would otherwise not be scope of the project and the inability to fund it from other sources. able to be funded by other means. A suggestion made by many in the public hearings was to have an "approved list" of projects that would qualify for sales tax authorization. Such a safe harbor list would provide some guidance to communities that are considering a local option sales tax. Any such list however, should not be regarded as comprehensive. A comprehensive list would limit creativity and not be responsive to the need for flexibility. C. Ability to Raise Revenue We recommend that there be a criterion relating to strength of an applicant's tax base. A community that has a sufficiently robust property tax base should look to that as its initial source of revenue. Only if the property tax base is insufficient to handle the demands of the capital project, should the sales tax be authorized. In order to limit the effects of fungibility of dollars and the temptation to shift resources, we recommend that there be a criterion relating to strength of an applicant's tax base. A community that has a sufficiently robust property tax base should look to that as its initial source of revenue. Only if the property tax base is insufficient to handle the demands of the capital project should the sales tax be authorized. Using property tax capacity plus local government aid (plus taconite aid where appropriate) as a measure of the capacity to fund capital projects gives the approving authority a relatively stable and comparable basis for relating one proposal to another. To encourage creativity and preserve flexibility, the criteria suggested above should be viewed together in the context of the whole proposal rather than as a purely mechanical checklist. For example, a proposal that funds a large capital project benefiting multiple jurisdictions and that has the support of those communities as evidenced by a successful referendum which includes those communities identified in a study of the incidence of the tax would be a strong proposal. The proposal would be further strengthened if the property tax capacity plus aid indicated an inability to fund the project through other means. Conversely, a single city whose proposal supports a primarily local project with little benefit for other jurisdictions would be a weaker proposal It would be further weakened if the required referendum was passed only in that city, although the tax was exported to a significant degree to surrounding communities. If that city also 21