Monday, March 29, 2010

Cook County - Pointing the Way to Revenue Stability

The Cook County Case

In November of 2009 residents of Cook County, Minnesota voted into law a local option sales tax (LOST) of 1% on purchases made in the county; the referendum passed with 64.2% of the vote. The passage is considered a victory by local officials who believed extra tax revenue was needed to fund local projects.

Disturbing market forces by adding a LOST is always a concern; it creates a dead-weight loss between the consumer and supplier price. However, the Cook County LOST will not likely influence consumer behavior for a few reasons. It is a low rate increase and still exempts basic commodities. Also, it was approved with consent of the voters, and because of the tourism in the area part of the tax will be paid through tax exportation.

Sales tax is more equitable in terms of benefit-received equity because people are taxed a constant rate on the goods they purchase. On the other hand, sales tax is regressive from an ability-to-pay perspective, since a 1% tax is less of a burden the higher one’s income is. Also, a 2004 Minnesota Revenue Department report noted that local option sales tax might result in uneven distribution of resources.

The Cook County LOST has an ambitious revenue raising target given the limited size of the community. An estimated $20 million dollars will be raised by the tax, and the individual burden is low as it will cost the average individual only $3.50 a month. The tax will be moderately sustainable because it draws on a larger tax base, but the recent recession showed that sales tax is more affected by economic downturn than other forms of taxation.

The administrative feasible of the Cook County LOST is high because the tax is collected in the same manner as traditional sales tax. The political feasibility of raising any tax can be difficult. In the Cook County case, a well organized effort was made by residents to pass the tax. Supporter tied the tax to specific local projects which created a belief that it would not be used to fund excess bureaucracy. In addition, because of tourism a share of the tax burden will be paid by non-residents through tax exportation.

Future Implications

Cook County has often been a trend setter for the state; when it passed its initial LOST in 1994 it was the only countywide sales tax in Minnesota. Since then it has been adopted by other counties to pay for large projects, most notably by the Twins to fund their new outdoor field. Cuts to Local Government Aid since 2008 have forced Minnesota cities to revise both expenditures and revenue sources. To deal with such large cuts to general funds, over 98% of cities reduced expenses, most often by delaying capital purchases, reducing services, and laying off public employees. LOST can expand the tax base and bring in new sources of revenue without exacerbating fiscal disparity and this form of taxation might become a more common occurrence as fiscal diversity is sought by local governments.

1 comment:

  1. Personally, I would suggest the MN state government formally authorize local governments the right to adopt LOST through certain democratic procedures, either referendum or in other ways. More local flexibility -- with due procedures to ensure accountability -- is especially needed at this difficult budget time.