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To: Members, Property Tax Advisory Group FEB - 21998
Fr: Tom Weaver, Northern States Power Company
Re: Legislative proposals regarding the personal property tax
I would like to invite the members of the Property Tax Advisory Group to an informal
meeting on Tuesday, February 3rd at 9:30 a.m. in the St. Croix room, 1st floor at the
League of Minnesota Cities Building. The purpose of this meeting is to share NSP's
proposal on personal property taxes with you, as well as for us to hear about any
proposals you may have for this legislative session. You can plan on the meeting
lasting about an hour.
Please RSVP with Evaline at 229-2582. I look forward to seeing you on Tuesday.
JAN.30.1998 5:20PM NSP STATE METRO LOCAL N0.187 P.2/2
Northern States Power Company
RN' 145 University Ave,W.,Suite 470
St.Paul,Minnesota 55103
Telephone(612)229-2545
January 29, 1998
To: Members, Property Tax Advisory Group
Fr: Tom Weaver, Northern States Power Company
Re: Legislative proposals regarding the personal property tax
I would like to invite the members of the Property Tax Advisory Group to an informal
meeting on Tuesday, February 3rd at 9:30 a.m. in the St. Croix room, 1st floor at the
League of Minnesota Cities Building. The purpose of this meeting is to share NSP's
proposal on personal property taxes with you, as'well as for us to hear about any
proposals you may have for this legislative session. You can plan on the meeting
lasting about an hour,
Please RSVP with Eva line at 229-2582. I look forward to seeing you on Tuesday.
•
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•
I i
02-05-1998 10:03 P.01
• •
COALITION QF UTILITY CITIES
Fax News
Legislative Alert
Representative Loren Jennings has introduced legislation(HF 3009)that would phase out property taxes on
electric utility generating machinery by 2007(Senator Novak is authoring the Senate bill, SF 2748). NSP
has also unveiled its proposal to phase out property taxes on electric utility generating machinery over 5
years,and replace it with a kilowatt/hour charge on retail customers. Although NSP's bill has not yet been
introduced,NSP's summary of both proposals is attached.
One or both of these proposals will likely be heard in the House Regulated Industries Committee- chaired by
Rep. Jennings -sometime next week. In the Senate,Jennings'bill has been referred to the Local Government
Committee,chaired by Sen. Vickerman. Please call your legislators and make the following points about
this proposed tax exemption.
1. This tax exemption would dramatically raise property taxes in your community, and
make it extremely difficult to make future capital improvements.
2. The state is not going to deregulate this year, and it should wait to have the tax
discussion until after deregulation occurs and a competitive market exists. At that
time, more information will be available on the competitive position of Minnesota's
utilities. The state may also want to know the deregulated rates paid by various
consumers before it considers shifting more of the tax burden onto them.
3. None of the investor-owned utilities has demonstrated a need for this exemption. In
fact, objective evidence indicates that they will all flourish if the state eventually
deregulates.
4. Giving away the tax exemption now significantly reduces the state's ability to get the
investor-owned utilities to come to the table during future deregulation discussions.
These bills will be heard next week. Contact your legislator this weekend and ask them
to contact the following legislators to encourage them to vote against personal property
tax breaks for utilities:
Senator Steve Novak
Senator Doug Johnson
Speaker Phil Carruthers
Representative Loren Jennings
Prepared by Flaherty&Koebele for the Coalition of Utility Cities
02-05-1998 10:03 P.02
• •
Personal Property Taxes
Summary of NSP Bill
• Five year phase-out of personal property taxes on generation
• Replaced with kilowatt-hour charge on IOU retail customers; extended statewide
after customer choice
• Phase out kwh charge for five years beginning in 2005
• New generation facilities will pay at current level of phase-out
• Newinvestment in current plants will be exempt from personal property taxes or the
kwh charge
• Kwh charge to be itemized on customers bills
• Credit protection program for communities which receive more than 25% of property
tax revenues from generation facilities
Sun mary of HF 3008 (Jennlnasl
• Phase out personal property taxes on generation through 2006
02-05-1998 10:03 P.03
• •
House Committee on Regulated Industries &
Energy
Chair: Loren Jennings (D,Harris)
Vice-Chair: Rep.Mike Delmont(D, Lexington)
Lead Republican: Ken Ozment(R,Rosemount)
Rep. Iry Anderson(D, Intl. Falls) Rep. Edgar Olson (D, Fosston)
Rep. Bruce Anderson(R, Buffalo Township) Rep.Mark Olson(R, Big Lake)
Rep. Mindy Greiling (D, Roseville) Rep.Mike Osskopp (R, Lake City)
Rep.Alice Hausman (D, St. Paul) Rep. Gene Pelowski(D, Winona)
Rep. Bill Hilty (D,Finlayson) Rep. Jean Wagenius (D,Mpls)
Rep. Mark Holsten(R, Stillwater) Rep. Ken Wolf(R, Burnsville)
Rep. Phyllis Kahn (D, Mpls) Rep. Tom Workman(R, Chanhassen)
Rep. Becky Kelso (D, Shakopee)
01-16-1998 10:44 P.01
• S
•
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FAX COVER SHEET
TO: Mike Robertson,Oak Park Heights
FAX #: 6124390574
You should receive 4 pages including this cover sheet.
FROM: FLAHERTY & KOEBELE
PHONE #: 6122258840
FAX ID: uz387002
Received For Broadcast: 2/05/98 10:01 AM
Delivered To Recipient: 2/05/98 10:03 AM
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Northern States Power Company
RSP
145 University Ave.W.,Suite 470
St. Paul, Minnesota 55103
Telephone(612)229-2545
OWE
Date: January, 1998
•SAH 2 2 �
To: Property Tax Reform Advisory Group
From: Steering Committee
Subject: Update/ Report on Tax Reform
The Property Tax Reform Advisory Group met on Wednesday, December 17 at the League of
Minnesota Cities Building. At that meeting, the Steering Committee presented its work which is
summarized in the attached Report on Tax Reform.
Although we were thoughtful and creative, we were not able to develop one proposal that
addresses the interest and concerns of all parties. As you can see from the report we
explored many innovative possibilities.
When we began these Advisory Group discussions last May, we had two purposes. The first
purpose was to have these discussions be an educational tool for us all. We believe we have
been successful in reaching that goal. We have learned more about the electric industry
restructuring, utility taxation and local government financing. We believe we also have a much
greater understanding of the concerns and interests of both the host communities and NSP.
Our second hope was that we could jointly develop a proposal to take to the State Legislature.
At present, we do not have a proposal, but we believe we have made strides in this area. The
Steering Committee believes that this formal Advisory Group meeting process has
accomplished its work. However, we recommend that the conversations to find a solution
continue on a more informal basis.
If you have additional thoughts or more information to share, please feel free to contact one of
the Steering Committee members. A list is attached.
Thank you for working with us throughout these last six months.
Attachments: Steering Committee Report on Tax Reform
List of Steering Committee members
•
NSP - Host Community
Property Tax Advisory Group
Steering Committee Report
Property Tax Reform
December 1997
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NSP - Host Community Property Tax Advisory Group
Steering Committee Report on Property Tax Reform
Executive Summary
December 1997
Situation Analysis:
Unlike municipal utilities, cooperatives and other businesses, investor owned utilities in
Minnesota pay personal property taxes on equipment. NSP believes these taxes present a
serious problem in a competitive market, and that the matter should be resolved before
competition among electric suppliers opens up in the state.
Some local government officials agree that a problem exists, and others do not. Some
believe an independent authority, such as the PUC, should decide whether a problem
exists and the dollar extent of it. Others believe deregulation of the industry should occur
before these tax issues are addressed. Still others believe the value of Minnesota power
plants will increase under deregulation because they can produce power more cheaply
than other regions so they would be in greater demand.
Lack of consensus on the reality and size of the problem makes resolution nearly
impossible. The Steering Committee did agree, however, that if a problem exists, it has
three elements: money, the source of the money and security issues. Local governments
want to focus on protecting local taxpayers and do not believe communities could replace
utility property tax revenues from other local sources. NSP would prefer to repeal the
personal property tax but recognizes that local governments should receive replacement
revenues, preferably through general fund dollars, but this is a politically difficult
approach.
Whether a potential solution reduces or eliminates the personal property tax for utilities,
focuses on cutting NSP's costs through credits, or does some of each, there are legal
concerns about how the change would be funded.
Solutions lie within three fundamental approaches: 1) do nothing; 2) retain the current
personal property tax system but reduce IOUs' tax burden by reducing the property tax,
reducing other taxes, providing IOUs with state-paid tax credits, or reducing other state-
imposed costs of IOUs; or 3) end the current system and provide a replacement revenue
stream for communities.
The group could not reach a consensus on which approach to take. Local governments
prefer the first or second approach; NSP prefers the third. Despite the lack of agreement,
the group discussed and examined potential elements of reform in two major categories,
as follows.
• •
Potential solutions retaining the centrally assessed property tax system:
If this avenue were to be pursued, property tax reform should include a variety of changes
to the system, including: reducing the class rate on utility personal property; removing
the statewide general education levy from utility personal property; enacting a limited
market value concept for utility operating property that would limit increases; and
expanding the disparity reduction aid.
NSP believes property tax credits are unworkable for constitutional reasons. Additional
tax credit ideas were explored by the group, including income tax credit for personal
property taxes paid, income tax exemption and other state fees with a credit for property
taxes paid. Further ways to reduce IOU costs were also examined, such as paying some
costs now borne by IOUs out of state funds or reducing costs of some programs by
cutting back on requirements or requiring state funding.
In short, local governments prefer to retain the current property tax system. They are
open to paying IOUs out of state funds or cutting state-imposed costs, but would prefer
not to rely on general fund aid. NSP believes ideas proposed to date that retain the
current property tax system have problems of constitutionality or revenue sufficiency.
Potential solutions eliminating the centrally proposed property tax system:
The following options were explored, with no consensus:
1)Reform restricted to the utility tax problem: No agreement from the host communities
is expected, unless they can be satisfied it meets their security needs.
2) Statutory reform addressing local governments'concerns about the state/local fiscal
system from within the general fund: There is little chance of agreement, and general
fund solutions are generally viewed as lacking security. The current system is
dependable, but any state revenue stream replacing it is viewed as undependable.
3) Statutory reform of the state/local fiscal system outside the general fund: Local
governments are less opposed to a purely statutory reform program that's outside the
general fund and would prefer a constitutional amendment for security reasons but
recognize this presents major political problems. The group explored several methods of
bypassing the general fund, as well as other ideas, including an energy consumption tax,
local or metro sales tax, local payroll tax, local income tax, and others.
4) Constitutional amendment coupled with statutory reform of the state/local fiscal
system: This would dedicate certain revenue sources to local governments, but it would
be politically difficult to pass an amendment that would be perceived to guarantee the
status quo to the few communities that are now wealthy due to a power plant site.
i •
Steering Committee Report on Reform Discussions
I. How to View the Problem
A. Does a problem exist?
1. Local governments have not agreed that a problem exists.
a. Some local officials believe that the value of Minnesota power
plants will increase under deregulation because they can produce
power cheaper than areas outside the MAPP, that they will be in
great demand. They see some hope of increasing local revenues
under the existing system, but apparently are willing to settle for the
status quo.
b. Some local officials believe that an independent authority, such as
the PUC, should be involved in deciding whether a problem exists
and, if so, the dollar extent thereof. This could be part of the
trigger mechanism.
c. Some local officials think it is premature to discuss tax issues before
deregulation occurs and a competitive market exists. Then it would
be much easier to decide whether a problem exists and, if so, the
dollar extent thereof.
d. Some local officials agree that there is a problem.
2. NSP believes that utility personal property taxes present a serious problem
for them in a competitive market, and this problem must be solved ahead of
competition.
3. Lack of consensus on both the reality and the size of the problem makes it
next to impossible to agree on a solution.
B. If there is a problem, the Steering Committee viewed it as one with three elements:
Money
2. Source of money:
a. Local governments-
(1) Primary focus is on protecting local taxpayers.
(2) Do not think it is possible for many communities to replace
utility property tax revenues from other local sources.
1
•
(3) Do not want revenues flowing from the state general fund
to them for security reasons.
(4) Are not sufficiently convinced of the existence or extent of
problem for IOUs to warrant agreeing now to eliminate the
centrally assessed property tax system.
(5) Probably would not oppose any reasonable proposal to raise
funds for the state general fund that are then paid out to the
IOUs. However, constitutionally this would not appear
viable.
(6) Open-minded regarding the possibility of the IOUs'
proposing an electricity consumption fee, though as a
practical matter would be more interested if it ever appeared
that the Legislature might actually enact a solution paying
them out of the general fund.
(7) Need some way to protect local bond ratings and capacity.
No replacement revenue will be as reliable as the property
tax.
b. NSP -
(1) Does not think it is practical for some communities to
replace utility property tax revenues entirely from other
local sources.
(2) Prefers to repeal the personal property tax but recognizes
that replacement revenues should be provided to local
governments, rather than providing assistance to NSP, for
constitutional/legal reasons.
(3) Prefers replacement of personal property tax through
general fund dollars, but recognizes the political difficulty of
this approach, and would support a consumption fee for
replacement.
3. Security-
a. For NSP, security is about competitiveness(present and
prospective future)and risk(of additional legislated change or from
competing sources of energy). For local governments, security
refers to fear of the loss of reliable revenues and creditworthiness.
2
• •
b. Local governments want to retain the current property tax system,
including taxation of utility personal property. This is a security
concern.
c. NSP wants to eliminate the disparity created by the personal
property tax. This is a competitive security concern.
d. Whether a possible solution reduces or eliminates the personal
property tax, focuses on cutting NSP's costs through credits, or
does some of each, there is concern about how the change will be
funded. This is a legal concern.
(1) General fund solutions are seen by both sides as inherently
short on security. For local governments, the concern
focuses on the likelihood that a replacement revenue stream
will be taken away, diverted, or not allowed to grow
sufficiently in the future. NSP is concerned about both the
political viability and constitutionality of proposals aimed
squarely at benefiting utilities and their customers.
(2) Avoiding the general fund, which could be done by having a
tax be locally collected and administered, but with
distribution in accordance with a state wide formula, is
viewed with some interest on the local government side.
(3) A constitutional amendment is seen as the ideal way to solve
the security concern,but very difficult politically. Probably
it would only be worth considering in the context of a major
reform of the state/local fiscal system that would provide
local governments with revenue source flexibility beyond
the property tax, as opposed to a$60-$200 million repair of
the existing system that deals solely with utility property
taxes.
C. There are three fundamental approaches to a solution.
1. Do nothing.
2. Retain the current property tax system, including taxation of utility
personal property, and some or all of the following:
a. Reduce IOUs' tax burden by-
(1) Reducing the property tax;
(2) Reducing other utility taxes;
3
• .
(3) Providing IOUs with state-paid tax credits;
(4) Reducing other state-imposed costs of IOUs.
b. Fund the reductions with-
(1) A replacement revenue stream for communities, subject to
the security concerns noted above;
(2) Credits for the IOUs, subject to the legal concerns noted
above.
(3) Reduction of other IOU costs through some combination of
transferring responsibilities back to the general fund or
reducing certain required expenditures.
3. End the centrally assessed property tax system, completely repealing the
property tax on utility personal property and providing a replacement
revenue stream for communities, subject to the security concerns noted
above.
D. There is no consensus on which basic approach to take.
1. Local governments prefer the first or second approach due to a
combination of security concerns and lack of consensus that there really is
a problem. Probably the only hope for their up front acceptance of the
third approach is as part of a major state/local fiscal system reform
proposal that addresses their deep concerns about revenue system
flexibility and stability.
2. NSP prefers the third approach, for constitutional/legal concerns and
because solutions under the second approach do not provide sufficient
relief.
II. Potential Elements of Reform Retaining the Centrally Assessed Property Tax System
A. Property Tax System Changes.
1. Reduce the class rate on utility personal property(and possibly operating
system buildings).
a. To 3.5% as business property generally is reduced to that legislated
target, with 1998 being thought a likely year to get this done.
4
• •
b. To whatever the rate is on the first value increment of business
property(now 2.7%), which might have some stability, this would
be more problematical to sell to host communities, presumably
requiring greater attention to replacement revenue streams than just
hanging with business property generally.
c. To the 1% level of low value homes, which might suffice to reduce
major bonding concerns over loss of tax base, and might have some
stability(as treating such property like most homes in exchange for
taxing personal property), but would be difficult to impossible to
sell to host communities.
d. To the .4%level (or some other level below 1%), which would
solve much or all of NSP's money problem in the first instance
(though leave it with security concerns), but is not thought to be
workable due to the risk that it would cause bond rating problems,
be opposed by the host communities, and be very difficult to sell
politically. (Utilities equated with disabled homeowners and family
farmers?)
2. Remove the statewide general education levy from utility personal
property. One estimate is that this might save NSP $40-45 million and a
similar amount for the other IOUs combined. Adjustment to the incidence
of the General Education Levy would not reduce school district revenues
or otherwise harm them financially.
3. Enact a limited market value concept for utility operating property that
would limit increases to the increase in the implicit price deflator for
governmental purchases(or some other appropriate index). This would
not apply to new additions. This would only be helpful if the belief of some
that Minnesota power plants will be more valuable under competition is
borne out. Limited market value is questionable from a policy perspective,
but that has not stopped the Legislature from using it in other situations.
4. Expand the disparity reduction aid along the following lines: Each power
plant would be a special taxing district(and a unique taxing jurisdiction).
The aid amount could be set at whatever level was desired, up to and
including the most recent level of utility personal property tax paid by the
power plant. Aid would be paid to the communities in the special district
(city, county, school and special taxing districts) and would reduce, on a
dollar for dollar basis, the property taxes that otherwise would be collected
from the property in the special district.
a. The DRA approach would reduce the property tax rate in the
special district (i.e., on the power plant)to whatever level the
5
• •
Legislature desired, or to whatever extent the money appropriated
would provide. This would be a general fund aid program payable
to local governmental units, but benefiting the IOUs.
b. The amount of aid would be subject to the annual general fund
funding battle. If it were reduced, the taxes in the special district
(i.e., on the power plant)would increase, and if it were eliminated,
such taxes would be at whatever level they would be at without the
program.
c. Is there a constitutional problem? The program plainly would only
be enacted to benefit in-state generation, but there would be no
direct payment to IOUs.
(1) If funded from moneys paid by out-of-state generators,
there could be a problem.
(2) What about an electricity consumption tax flowing through
the general fund?
(3) If there were no special tax at all on electricity, the situation
would simply be the typical one of attempting to benefit in-
state businesses with incentives. Would there be something
special about the rationale for moving from monopoly to
competition in the electric industry that would make this
susceptible to challenge where the typical subsidy of in-state
business production clearly is not?
B. Other Tax Credits
1. NSP thinks that property tax credits are unworkable for constitutional
reasons, at least if funded from an electricity consumption tax, or enacted
contemporaneously therewith(See West Lynn Creamery). Local
governments are not so sure it is unworkable. Other states that are
exploring these issues will probably have their approaches either upheld or
struck down in federal court in time for Minnesota to potentially consider
similar approaches.
2. Income tax credit for personal property taxes paid.
a. NSP feels that the amount is inadequate. Local governments
disagree on total amount necessary, and many feel that total amount
need not come from a single source.
6
• •
• b. Perceived adequacy problem could be exacerbated if IOUs are
broken up into separate, unrelated entities, as income and property
tax levels might not correlate well.
c. NSP feels West Lynn raises a potential constitutional challenge.
3. Income tax exemption.
4. Other state fees with a credit for property taxes paid. (GM v. Tracy?)
C. Other Ways to Reduce IOU Costs
1. Pay some costs now borne by IOUs out of state funds. Local governments
think these are worth exploring, but NSP believes that their would be
political issues and that the potential relief would be inadequate.
a. State-mandated social programs affecting rates.
b. Conservation improvement programs.
c. Pollution control measures.
d. Repair of utility infrastructure damage caused by natural disasters
(which would seem to have major legal issues).
2. Reduce costs of some programs by cutting back on requirements or
requiring state funding.
a. Very vague.
b. Clearly would require a political battle. Takes this out of the realm
of just dealing with money.
D. Local governments prefer to retain the current property tax system. They are open
to paying IOU's out of state funds or cutting state-imposed costs,but would prefer
not to rely on general fund aid.
E. NSP believes that anything proposed to date that retains the current property tax
system has problems of constitutionality or revenue sufficiency.
III. Potential Elements of Reform Eliminating the Centrally Assessed Property Tax System
A. Reform restricted to the utility tax problem.
1. There appears to be no chance of the host communities agreeing now to
such a reform unless they are satisfied that it meets their security needs and
7
i •
that the utilities can demonstrate that they actually need it.
2. No purely statutory general fund solution would be viewed now as meeting
local governments' security needs.
3. Theoretically, a constitutional amendment could solve local governments'
and NSP's security problems, but it seems unlikely that a constitutional
amendment focused solely on the utility tax problem would have any
chance of passage by either the Legislature or the voters.
B. Statutory reform addressing local governments' concerns about the state/local
fiscal system from within the general fund.
1. There appears to be little chance of the host communities agreeing now to
such a reform because local governments regard reliance on funding from
the state general fund as inherently insecure. This includes any imaginable
augmentation of general fund revenues to make this affordable.
2. General fund solutions are viewed as lacking security and likely to be taken
away as fast as they are created.
3. The major concern appears to be the dependability of the property tax and
insecurity of any state revenue stream to replace it, and not over whether
IOUs would benefit unduly if property taxes are reduced, though proposing
the elimination of the personal property tax will make undue benefit an
issue.
C. StatutoryReform of the State/Local Fiscal System Outside the General Fund.
1. Local governments are slightly less opposed to a purely statutory reform
program that is outside the general fund. They would prefer a
constitutional amendment for security reasons, but recognize that there are
major political problems in passing one.
2. Methods of bypassing general fund.
a. Provide local authority to switch on a tax, with revenues retained in
community in which collected. Problem: No significant help to
host communities on the property tax problem because of a lack of
local tax base.
b. Enact a tax at the state level, with revenues retained in community
in which collected. Same problem.
c. Enact a tax at the state level, administered and collected by the
Department of Revenue, with distribution to local governments in
accordance with a statutory formula. This could be described as a
8
dedicated revenue source. It could get money to host communities.
It might be perceived as more secure than a general fund aid
program, but security is still seen as a big issue.
d. Enact a tax at the state level, with joint administration by Revenue
and the counties and distribution of proceeds pursuant to statutory
formula. Similar to c, but probably seen as slightly more secure.
Problems: administrative complexity; potential political difficulty if
advertised as a local tax if the revenues flow to communities other
than where collected. (Electricity production tax modeled on
taconite production tax as an example.)
3. Other ideas discussed
a. Electricity (or energy) consumption tax.
b. Local sales tax.
c. Metro sales tax.
d. Local payroll tax(city, school, or county).
e. Local income tax(county, school, or city).
f. A statutory distribution program(whether built into the tax or as a
non-general fund aid, or perhaps even a general fund aid)that
would distribute money based on the cost(or physical extent or
value?) of infrastructure.
(1) Infrastructure clearly would include utility operating
systems. Here is where host communities benefit.
(2) Could also include major public infrastructure.
(3) Given(1), might also include business property(or perhaps
industrial, but not commercial).
(4) May also be a way to encourage whatever is needed to
provide Minnesotans with full access to the benefits of the
information revolution.
g. Revisit LGA formula. This is almost certainly unworkable.
h. End levy limits.
i. Annexation reform to deal with the problem of people fleeing city
property taxes, but returning to use city services. Note that some
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of the foregoing options could make this less of an issue.
j. Perhaps shifting more of the burden of K-12 funding to the state
(assuming that the traditional problems of volatility in the sales and
• income taxes can be overcome), but explicit recognition of the state
wide nature of the K-12 operating levies is of greater initial interest.
D. Constitutional Amendment Coupled with Statutory Reform of the State/local
Fiscal System.
1. Constitutional amendment would dedicate certain revenue sources to local
governments.
2. It seems to be agreed that it would be politically difficult to pass an
amendment perceived principally as guaranteeing the status quo to the
handful of communities that are now exceptionally wealthy relative to other
communities due to the power plant site.
3. It might be possible to eliminate the current details on gas tax distribution
from the Constitution, if the price for providing such flexibility were to
dedicate not only the gas tax(or a hefty portion thereof), but also one or
more other revenue sources to local governments.
4. Possible additional taxes for dedication include:
a. Electricity or energy consumption tax.
b. Business activities tax.
c. Guaranteed local right to piggy-back on certain state wide taxes.
5. Provision regarding the state responsibility for funding education might
also be considered.
6. Development of a proposal would require recognition and resolution of
tension over specificity vs. generality. Could a proposal that dedicated
certain revenue sources to local governments, but left the Legislature with
some flexibility on distribution among them find favor with local
governments? Could a proposal that got very specific about distribution
formulas find favor with legislators, governor and the public?
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