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Minnesota localities must soon pay state sales tax.

Local governments in Minnesota will soon have to pay state sales taxes on most of their purchases. The state legislature imposed the sales tax in the closing days of this year's session in order to reach agreement on next year's state budget.

The 6.5 percent sales tax will apply to virtually all purchases made by cities and towns, counties, townships, special districts and other units of local government. Only a few exemptions are allowed for schools, public library acquisitions and purchases by publicly supported hospitals, clinics and nursing homes. The tax becomes effective June 1.

The League of Minnesota Cities opposed the tax, calling it "regressive tax policy" because it imposes ultimate cost on the revenue systems of local governments, which are the most regressive.

"The real impact of the sales tax will be to increase local property taxes in Minnesota," said Donald L. Slater, executive director of the Minnesota league. "This will be the fourth consecutive year cities have contributed to resolving the state's budget difficulties through cuts in state aids or new taxes."

The state league faced a virtual "no win" situation because Gov. Arne Carlson adamantly refused to consider any change in the state income tax and called for slashing budgeted state aid to cities by $66 million if the sales tax failed. The amount is about what the new sales tax is expected to generate.

Slater branded the threat as "extremely unfair" for cities because they would be "the only local government institutions to contribute to solving the state's budget problem."

Counties, townships and school districts were left intact in the governor's cutback proposal, Slater said.

"It would have been extremely unfair to balance the state revenue shortfall by taking $66 million from previously budgeted state aid to city governments," Slater said. "We certainly would have preferred to have seen a different solution to the one which passed, but this is much more preferable than the governor's original proposal."

The new tax is likely to create additional strains in many municipal budgets, and steep increases in state-imposed fees, in the range of 40 percent, will only aggravate the situation further.

Red Wing, a small city with a population of 15,000, gave the Minnesota league a rough estimate that the new tax would translate into $125,000 of additional costs each year.

Although unusual, the imposition of the sales tax on local governments is not unique. According to information obtained by the Daily Bond Buyer newspaper, Minnesota will become the eighth state to require local governments to pay. The others are Arizona, Arkansas, California, Hawaii, North Carolina, South Carolina and Washington.

Last year, the Louisiana legislature went the other way and enacted a sales tax exemption for local governments, which became effective September 1.
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Author:Arndt, Randy
Publication:Nation's Cities Weekly
Date:May 11, 1992
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