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Commentary - New local government exemption could end two decades of sales tax shell game in Minnesota

By Joe Vene, Beltrami County Commissioner, 2013 president, Association of Minnesota Counties, Bemidji, MN

As a county commissioner in Minnesota, I often find myself trying to help my fellow citizens understand how their county property tax dollars are spent. Counties remain the biggest and most important piece of the property tax puzzle, yet counties are also arguably the least understood level of government. Understanding the wide array of state and federal mandates, funding streams and service arrangements that intersect with local county boards can be nearly impossible for even the most knowledgeable taxpayers.

To drive home this complexity and show how these relationships can impact a taxpayer's property tax statement, I will often share one of my favorite absurdities in Minnesota's tax code with those who ask me about these issues:

Counties and cities are currently required to funnel locally-raised property tax dollars to pay state sales tax when purchasing equipment, office supplies, construction materials, and many other products. This government-taxing-government arrangement is estimated by the state's Department of Revenue to cost local property tax payers over $100 million a year. That tremendous amount of money is levied by local elected officials but spent by state legislators, reducing the overall transparency in government spending while driving property taxes artificially higher.

This sales tax shell game has been going on in Minnesota since 1992, when lawmakers, while facing a serious budget shortfall, decided to impose the sales tax on local governments rather than reduce state aid to those same bodies. Since then, local governments have funneled hundreds of millions of dollars to the state in the form of sales tax payments and incurred substantial administrative costs to comply with these taxes, only to see the state return that money (and more) in the form of state aid and other payments. This is despite the fact that local government leaders have come to the Capitol year after year arguing that government-taxing-government is wildly inefficient and distorts the true cost of government.

Well, finally someone listened. A lot of people listened, actually. This past legislative session, a bipartisan collection of lawmakers came forward with proposals to finally exempt counties and cities from the state sales tax. Thanks to some dedicated legislators and a chorus of local government officials from across the state voicing their support for this provision, this tremendously important, but little known, tax reform measure was enacted.

This type of bipartisan problem-solving deserves credit, and on behalf of local government officials across Minnesota, I want to thank the Legislature for finally taking action on an issue that has lingered for far too long, and thank Gov. Dayton for signing this measure into law.

This tax reform will have a real impact on Minnesotans. Exempting local government from sales tax will reduce costs for cities and counties, and should also reduce the administrative burden of complying with the current sales tax requirement. This includes daily and monthly compliance monitoring, as well as periodic reviews and audit preparation. In some larger counties, this compliance effort alone can require the equivalent of one or more full-time employees.

While it's impossible to predict year-to-year how much individual cities and counties will save from this tax reform (as irregular purchases of expensive equipment or major projects drive much of these costs), this tax exemption along with several other proposals passed by the Legislature this session will have a significant impact on reducing the growing pressure we've seen applied to property taxes in the past decade.

This past session saw passage of a wide array of changes to the tax code that are being felt and debated far and wide. No matter what you think about the totality of these changes, I think all Minnesotans can agree that bringing a little more sanity to our state's tax system is a laudable achievement.

Commissioner Vene was elected to the Beltrami County Board in 2004. His experience also includes 20 years as superintendent of the Northwestern Minnesota Juvenile Center and 17 years on the City of Bemidji Planning Commission.