In time of plenty for state, Minnesota local governments fume over delayed sales tax break

ST. PAUL, Minn. — Local governments are fuming over an impending Minnesota law change that will cost them $20 million in sales taxes that won't go away as planned, an unwelcome prospect given the hundreds of millions of dollars lawmakers set aside to enable possible tax cuts next year.

The Legislature is set to delay by a year a previously approved sales tax exemption for cities, counties and other government entities that team up to provide services through "joint powers" arrangements. Local officials say the change, which is part of an education bill that will come up in a special session, came out of nowhere in May and runs contrary to the state's demands they deliver services more efficiently.

"Applying the sales tax to these entities can be a disincentive to their creation and unnecessarily diverts local resources from these important services to the state's general fund," six organizations representing local governments wrote recently to legislative leaders and Gov. Mark Dayton.

In 2013, the Legislature passed a law that exempted cities and counties from paying state sales taxes on certain equipment, computers and office supplies. But lawmakers had to clarify the law in 2014 to explicitly include transactions involving special taxing districts and joint powers arrangements in which police, fire and other services are collaboratively provided across municipal boundaries. For instance, the Metropolitan Airports Commission has joint-powers deals with counties that have regional airports.

The tax exemption was set to kick in this January, but the bill lawmakers will vote on pushes it back to 2017. The delay already cleared the Legislature on the last day of session, but Dayton vetoed the education funding bill. Some lobbyists had hoped the sales tax change would be stripped when a new $17.2 billion schools plan came together last week.

Gary Carlson of the League of Minnesota Cities said "it seems really rather crazy that they would delay an exemption that had been granted by the Legislature with bipartisan support" just to preserve a now $800 million-plus cushion for next year's tax-cut debate. He said some joint powers boards had already put off big purchases until 2016 with the understanding they would save 6.875 percent in sales taxes.

"It's going to cost us more," Carlson said.

Dayton said Monday that he would like to see the 2016 enactment date restored. "That was the intent of the Legislature clearly last year," he said. "It should be honored."

Republican House Speaker Kurt Daudt said he doesn't anticipate changing the education budget bill to address the sales tax issue in a not-yet-scheduled special session.

"There's a point in which you decide we're not going to put extra things on the table here," Daudt said when asked about the tax change. "There is give and take in negotiations. That is one area where I had to give."

Daudt said the idea of a delay originated with majority Senate Democrats in the regular session's waning hours as leaders worked to finalize a budget. Democratic Senate Majority Leader Tom Bakk has said leaders needed to find extra money because Republicans were insistent on leaving $1 billion aside for the 2016 session. It was put in the education bill because a separate tax bill stalled out.