House Division Hears Bill That Factors Sales Tax into LGA

The bill would reduce LGA payments to some cities with local option sales taxes, and redistribute the reductions to all other cities.
(Published Apr 16, 2018)

The House Property Tax and Local Government Finance Division on April 11 considered a bill that would offset the LGA for cities with local option sales taxes. HF 3830 (Rep. Cal Bahr, East Bethel) would modify the LGA formula by reducing the “need” factor for cities by the amount of revenue generated by their local option sales tax. The bill would phase in the offset for sales tax revenue over a five-year period.

Cities that would see lower LGA
Currently, there are approximately 30 cities that have been granted authority to impose local option sales taxes. According to estimates prepared by the House Research Department, only the following 12 cities would experience a reduction in their LGA under the bill: Minneapolis, Duluth, Rochester, Bemidji, Fergus Falls, Mankato, Marshall, New Ulm, Sartell, Medford, St. Augusta, and Lanesboro.

(Note: Cities with sales taxes authorized in 2017, including Spicer, New London, Fairmont, East Grand Forks, Moose Lake, and Walker, do not yet have available sales tax collection information and, therefore, do not reflect any potential aid loss.)

The reduction in LGA for local option sales tax cities would be redistributed though the formula and would result in more LGA for cities currently receiving LGA.

—See the estimated impacts of the bill in the first year of the phase-in and under the full phase-in from House Research (pdf)

League opposes the bill
The League testified in opposition to the bill, indicating that the bill would change the rules for the cities with existing local option sales taxes. In most cases, the projects funded through the local option sales tax are structured with bonds supported by the sales tax revenues and the city cannot simply sunset the sales tax to avoid any LGA loss.

In addition, all cities with local option sales taxes have been required to receive legislative approval and, since 1999, general law has required approval by voters at a general election.

Committee members acknowledged the problems the bill would create for cities with existing sales taxes. However, there was ample bipartisan discussion about local sales taxes and the fact that many small cities have little retail activity and, therefore, would not be able to access a local sales tax.

The bill was laid over for possible inclusion in the division report to the full House Taxes Committee.

For more background information about this bill, read a previous Cities Bulletin article.

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