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Column: LGA, or a spending addiction?

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ST. PAUL -- You never know what the hot topic of any legislative session maybe before it starts, and you never know how or when the Legislature will complete its work.

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With three months of the debate behind them and only six weeks left before the constitutional adjournment date of May 23, one of the most heated debates has been about Local Government Aid (LGA).

Republicans have been insisting on LGA reductions in order to balance the budget, but Gov. Mark Dayton has been claiming that any reduced payments to cities will result in automatic property tax increases.

This battle between the "haves" and "have-nots" has been simmering for years with growing acrimony. A key point of contention is that, as state aid payments continue to grow, is the money truly offsetting property taxes or does it just fuel more city spending?

The LGA program was created to distribute state tax dollars in order to help provide a basic level of service statewide. It started in the seventies by redistributing income and sales tax dollars to cities across the state based on a complex formula that includes such things as population, property tax base, traffic accidents and several other factors.

The concept was cities with lower property tax values would have to enact higher property taxes in order to pay for basic public services. Cities with higher property values could charge less in order to provide the same level of service. With this aid-distribution plan, the Legislature also imposed a restriction against cities imposing local sales or income taxes to provide a level playing field statewide.

Fast forward 40 years and you have a heated debate at the State Capitol about who is trying to level the field and who is working to rip up the field.

Currently, the state is budgeting to distribute $536.7 million in 2011 and $527.1 million in 2012 to 762 cities across the state. House legislation reduces that amount by $74.6 million and removes LGA payments to Minneapolis, St. Paul and Duluth, while in the Senate they reduce payments by $101.8 million.

But there is another side to this debate -- an erosion of the prohibition on local option sales taxes, giving some cities revenue from both state aid and a local sales tax.

To date that list includes 23 cities that have local sales taxes ranging from .05 percent to 1 percent. In most cases the sales tax is dedicated to pay for only certain projects, but in Duluth the 1 percent sales tax can be used for any general city purpose. Each of these local sales taxes has been approved with a local referendum, except -- of course -- in Hennepin County where the ballpark tax was exempted from a vote by the people.

With LGA payments growing and more and more cities wanting to impose local sales taxes, the Legislature must grapple with the question of which cities should receive state aid and how much. Faced with this dilemma, the Senate Taxes Committee had selected to allow any city in Minnesota to impose a local sales tax by referendum, but also included an offset in local government aid. However, when the tax bill came to the Senate floor for debate, more rational thinking prevailed. The provision to open the floodgates for locally mandated sales taxes was removed.

For almost 40 years Minnesota has been a "high aid" state, providing hundreds of millions of dollars to cities across the state. For the most part, this prevented a patchwork of local sales taxes based on which city or town had the most retail business. But as many big box-stores build outside the city limits and small towns dwindle, the states distribution formula has failed to level the playing field. Almost half of Minnesota's population lives in communities that receive zero LGA, while some cities receive more state aid than they levy in property taxes.

With more and more cities wanting a local sales tax in additional to their state aid, it's time for the legislature to wipe the slate clean and start over. Currently the state distributes over half a billion dollars per year to cities that for the most part only make local government spending decisions.

Perhaps citizens would be more aware of city spending if they had to pay the entire bill, rather than only a fraction of the true cost for the services they receive. Thankfully, the State Senate delayed opening the floodgates on local sales taxes until they can more closely examine how and when cities should be allowed to tax non-residents. After all, this is another case of taxation without representation.

Phil Krinkie is a former state representative and president of the Taxpayers League of Minnesota.

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