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Question of the Month ~ September 2013

 

Q. Do state laws in the Midwest allow local units of government to levy sales taxes?

With the exceptions of Indiana and Michigan (which allow for local income taxes), all Midwestern states give local governments the statutory authority to impose a local-option sales tax — revenue collected for use by a city and/or county.
According to the Tax Foundation, as of January 2013, the average local sales tax in the Midwest ranged from a high of 1.95 percent in Kansas to a low of 0.29 percent in Minnesota.
Minnesota’s low rate is in part a reflection of statutory restrictions. A proposed local sales tax must be approved by three different entities: the local governing board, local voters and the state Legislature (with passage of a special law). Revenue from the tax must also be earmarked for specific capital improvements.
Since 2008, though, the state has provided an alternative path for local governments to levy a local transportation sales tax. Counties in the Twin Cities area, for example, now impose a sales tax of 0.25 percent for transit services; this tax does not require approval by local voters.
Voter approval of local sales taxes is required in Iowa, Kansas and Nebraska. Counties in Iowa and Kansas can have a local sales tax rate as high as 1 percent. The maximum rate for Kansas cities is 3 percent.
Prior to 2012, Nebraska municipalities could impose a sales tax rate as high as 1.5 percent with approval by the local governing board and voters.
In 2012, Nebraska legislators raised the maximum rate to 2 percent (LB 357). This law requires a supermajority vote by the local governing body as well as voter approval for rates above 1.5 percent.
This year, though, the Legislature removed the state’s largest city, Omaha, from municipalities with the power to tax over 1.5 percent. Nebraska counties can levy a sales tax of up to 1.5 percent for a specific purpose — funding joint public safety services — with voter approval.
Five Midwestern states — Illinois, North Dakota, South Dakota, Ohio and Wisconsin — allow local governing boards to adopt sales taxes without voter approval. In Illinois and North Dakota, this authority is extended to the states’ home-rule counties and municipalities; no limit is set on the local sales tax rate.
South Dakota allows municipalities to have a sales tax rate as high as 2 percent.
In Wisconsin and Ohio, the power to levy local-option sales taxes rests with the counties. Wisconsin’s state statute sets the rate at 0.5 percent and allows the tax only if it directly reduces the property tax levy. Ohio’s counties and transit authorities can set rates of up to 1.5 percent. Voters must OK the levies for transit authorities; however, a county board does not need voter approval for local sales taxes that raise revenue for the general fund or local criminal justice system.

Article written by Tim Anderson. Question of the Month highlights an inquiry received by CSG Midwest through its Information Help Line, a research service for lawmakers, legislative staff and other state officials. We can be reached at csgm@csg.org or 630.925.1922.