A higher city sales tax to fund cops?

Could make city less competitive, let legislators off the hook for cuts - but a Council leader says alternatives are few

City Council President Paul Ostrow has proposed asking the Legislature for a higher city sales tax or a new parking tax - not as the city's first choice, but as a last resort to pay for police officers and fire fighters.

The Council's Intergovernmental Relations Committee could vote on new taxing initiatives as early as Tuesday, Feb. 8.

Ostrow said the Council's five-year financial plan projects unacceptable public safety cuts. The city can't fill the gap with property taxes and can't count on dwindling state Local Government Aid (LGA).

His proposal asked finance staff to look at different options, without specifying the tax amounts. According to a city Finance Department analysis released Jan. 25:

– An added quarter-percent city sales tax would raise approximately $13.6 million in 2005. That is enough to hire approximately 180 new officers and/or fire fighters, assuming it costs $75,000 per officer in salary and benefits.

– A 5 percent parking tax would raise $7.2 million a year on the 89,500 public fee-based stalls, or enough for at least 96 officers and/or firefighters. A 10 percent tax would double the numbers. (The proposal does not include residential stalls or business-provided parking.)

– A $10 annual surcharge on parking stalls would raise $895,000, or enough for 12 officers/firefighters.

Citizens have already begun complaining about Police Department cuts - which will only get deeper. The five-year financial plan says the Police Department would have to reduce its status-quo budget by $2.5 million in 2006, enough to hire 33 officers.

By 2010, the Police Department will lag $10.4 million behind inflationary cost increases, the Finance Department said. The Fire Department would be down $2.1 million in 2010 from its current services.

Councilmembers prefer paying for public safety through state aid because it comes from the progressive income taxes. The chances the Legislature will restore state-aid cuts are slim to none. The sales tax is more regressive, but at least sales and parking taxes pick up revenue from non-city residents who benefit from city services.

The potential of more city money from new taxes is more complex than it appears.

For instance, if the city raises its sales tax, it could lose state aid, if the Legislature offsets the new sales tax, said Chief City Lobbyist Gene Ranieri.

Further, state policy says new local sales taxes should pay for infrastructure, not ongoing operations such as police and fire services, he said.

Hiking Minneapolis sales taxes could also make the city less competitive. The city's sales tax already exceeds that of surrounding communities by a half-percent, a gap that could rise to .75 percent.

The parking tax estimates assume that raising across-the-board parking costs does not affect demand. (If fewer people park, the city's parking fund - already in the red - would have a bigger deficit. The city owns 24,000 of the 58,500 Downtown fee-based parking stalls.)

Councilmember Barret Lane (13th Ward) said he liked the idea of diversifying revenue through a sales tax but did not want to earmark it for a specific use, such as police and fire.

Councilmember Scott Benson (11th Ward), who chairs the Intergovernmental Relations Committee, calls a city sales tax increase "the worst option" that "should be put at the bottom of the list" because it lets the state off the hook for city aid.

Even if a new tax does not pass, the topic gives city leaders such as Benson the chance to air their grievances that the state is backtracking on a 34-year-old deal.

That arrangement is 1971's so-called "Minnesota Miracle." The state prohibited new local sales or income taxes, and lowered local property taxes by shifting the burden to the more progressive state income tax.

The state has approved local sales taxes in 12 cities and one county, according to a 2004 State Revenue Department report. The sales taxes generally support building projects such as hospitals, sewer improvements, convention centers and arenas.

The state has OKed several Minneapolis-only sales taxes. In 1969, before the Minnesota Miracle, the city instituted a 3 percent "entertainment tax" on admission fees, cover charges, amusement devices (such as jukeboxes and pinball machines), food and beverages sold during live performances, and short-term lodging.

The entertainment tax ($7.8 million in 2003) generally goes into the city's General Fund for police, fire and basic city services, said Pat Born, city finance director. The Target Center's entertainment tax pays off building bonds, about $1.1 million a year.

Other city sales taxes support the Convention Center. They are:

– 0.5 percent citywide sales tax ($25.6 estimated in 2004);

– 3 percent Downtown restaurant tax ($7.7 million);

– 3 percent Downtown liquor taxes ($3.3 million); and

– 3 percent lodging tax ($4.5 million)

Benson asked Finance to consider if it could divert excess Convention Center sales tax money to public safety. In 2005-2006, that fund will have a deficit, but have small surpluses starting in 2007, projections said.

Other cities with a local option sales tax include Duluth, which has a 1 percent sales tax that supports General Fund spending on police, fire and public works. It raised nearly $11 million in 2001. St. Paul has a 1 percent sales tax for the RiverCentre arena and neighborhood revitalization projects.

The state has a 6.5 percent general sales tax, begun in 1967. The rate started at 3 percent and increased to 4 percent in 1981, 6 percent in 1983 and 6.5 percent in 1991, according to a city memo.

Benson said asking for a sales tax increase would let legislators off the hook for cutting aid to cities while forgetting Minneapolis is "the goose that laid the golden egg," generating sales and income tax for state coffers.

Want to know more?

– Intergovernmental Relations Committee agenda, www.ci.minneapolis.mn.us (click on "Council Agendas and Schedules," then the "Agendas" drop-down menu. Committee agendas, linked to staff reports, are usually posted 24-48 hours before a meeting).

– State report on local sales taxes: www.taxes.state.mn.us/taxes/legal_policy/research_reports/content/local_sales_tax_study.pdf

– Paul Ostrow, 673-2201, [email protected].mn.us.

– Scott Benson, 673-2211, [email protected].mn.us.

– Barret Lane, 673-2213, [email protected].mn.us.