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Tweaking sales-tax laws could cost some cities big financial hit

Published December 28, 2005 12:59 am
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As Utah lawmakers gear up to tweak how sales-tax revenues are distributed among the state's 242 municipalities, a handful of cities are preparing to take a financial hit.

Consider these examples:

* South Salt Lake could lose $1.8 million, or 10 percent of its general fund.

* Riverdale could give up $900,000 of its $6 million operating budget.

"It's a huge issue for the city," says Kyle Kershaw, South Salt Lake's finance director. "Historically we've depended on sales taxes, and if this does happen - and all indications are it will - the future mayor and City Council will have to make some tough decisions."

Kershaw was voicing concerns about Republican Sen. Greg Bell's proposed legislation to phase out, over five to 10 years, the so-called hold harmless provision of a 1983 Utah law. That 22-year-old statute allows cities to receive sales-tax revenues in one of two ways, whichever proves to be greater.

Before 1983, municipalities received 100 percent of three-quarters-of-1 percent of sales-tax revenues, based solely on point of sale. That remains as one option.

Then, the 1983 law bumped municipal sales-tax revenues to 1 percent and switched to a 50-50 system. Under this new option, cities receive 50 percent based on sales within their boundaries and 50 percent based on population.

The hold-harmless provision allows cities to bounce back and forth between the two options, month by month, in order to maximize their sales-tax revenues - the meat and potatoes of most municipal budgets.

Getting rid of hold harmless would make the 50-50 rule more equitable, Bell says, citing Riverdale and Ogden as prime examples of a system out of balance.

Big advantage: Riverdale, a city with 8,000 residents, gets 20 times the sales-tax revenue, per resident, that neighboring Ogden pulls in - a city of 78,000,

"One city is being advantaged. It's not criminal because those were the rules," Bell says. "People go where the incentives are. But going forward, we need to correct that."

Riverdale city officials have a different perspective.

"People look at us and say 'deep-pockets Riverdale,' " says Larry Hansen, the Weber County city's chief administrative officer. "But we've avoided debt and haven't over-indulged our citizens. For our good behavior, this is what we get" - referring to the proposed elimination of hold harmless.

Since 1983, Hansen argues, Riverdale made long-term decisions based on that key provision.

"In terms of public safety, public works and what's become a retail destination for a broad community, those sales taxes go to pay for all that," Hansen says, noting the city has refrained from using sales-tax incentives to entice business to locate within its boundaries.

During the day, Riverdale's population swells to 50,000, bringing extra traffic congestion and demand for increased police and fire services.

Like Riverdale, South Salt Lake's population of 22,000 also expands by day, tripling in size.

South Salt Lake's general fund is further challenged because 35 percent of its land is tax exempt. This older urban area hosts Granite School District offices, Salt Lake County detention facilities and a waste-transfer station, Utah Transit Authority headquarters, and Central Valley water- and sewer-treatment facilities.

"Our first position is that we disagree with the elimination of the hold harmless. There are reasons for cities to still be included under the 1983 agreement," Kershaw says.

Riverdale officials agree. "We're lobbying to ask that they grandfather us," Hansen says.

The Utah League of Cities and Towns hosted several meetings with hold-harmless cities earlier this fall, examining the issue in depth.

The league has since defined its position, supporting the use of 2004-2005 sales-tax revenues as a baseline number, and giving hold-harmless cities time to switch to the 50-50 method of distribution.

"As soon as they overcome that number for a three-year period, they would be phased out," says Lincoln Shurtz, league legislative-policy analyst.

"Cities have been making land-use decisions based on receiving sales-tax revenues. They put all their eggs in that basket because it's so politically volatile to raise property taxes," Shurtz reasoned.

"In order for us to argue that 50-50 is inherently fair and doesn't encourage zoning for dollars, we had to get all the cities on the program. So we're giving them an opportunity to grow out of it," Shurtz says.

Murray wary: The Salt Lake County community of Murray, which could lose $1.3 million in annual revenues, also questions whether the hold-harmless agreement should get the boot.

"It's bad if it goes away," says Michael Wagstaff, Murray's deputy for legislation and communication. "But the real question is how it goes away. The proposed phaseout is not friendly for the hold-harmless cities. Legislators have said they'll work with us."

Bell predicts a seven- to 10-year phaseout period. "Hopefully inflation will year by year make it painless," he says.

How much pain Vernal - a Utah city of 8,000 near the Colorado line - will feel depends on the economy, says Ken Bassett, the city's manager.

"You'd have to show that your economy is healthy enough that you'd be able to hold your own," Bassett says. While Vernal attracts tourists, its economy has another big driver.

"Oil and gas are currently our mainstay," Bassett says. "Our economy is robust right now" - part of an upturn that began two to three years ago.

However, if the price of foreign oil drops, domestic production will decrease as well, Bassett explains.

"For Vernal it's more than just growth or visitors. It's how this economy with energy development goes."

Park City - Utah's magnet for well-heeled celebrities and international visitors - assisted the league in drafting its position.

"It's a big deal to us. Roughly 30 percent of our revenue is sales-tax-driven," says City Councilman Jim Hier.

Those tax dollars allow the city to create, and perpetuate, its resort atmosphere that benefits the state as a whole, Hier says. Like other hold-harmless cities, Park City's population is small - 7,500 - but grows to 35,000 during the Sundance Film Festival and other star-studded events.

"We have to provide sewer, roads and water to support a population of 35,000, even though we're not that big year round," says Park City Budget Manager Gary Hill. He plans to keep a close eye on this year's legislative action.

Riverdale - a community lined with big-box stores, car lots and Saturday gridlock - intends to do the same.

"To some degree, legislators look to the League to find out what to do with local revenue. The league says don't mess with the 50-50 and phase out hold harmless - so we fall on our sword," Riverdale administrator Hansen says.

"We'd have to triple our mill levy on property taxes to make up the difference, but there's no way we'd let that fall on our residents," he says. "The other option is to curtail services. No matter which way it goes, it means change - and not for the better."


Losing hold-harmless status

Of the state's 12 to 14 hold-harmless cities, five stand to be significantly affected by losing that status: Murray, Park City, Riverdale, South Salt Lake and Vernal.

Additional revenue resulting from hold-harmless status:

July 2004 to June 2005**

* Murray $760,120

* Park City $721,070

* Riverdale $946,501

* South Salt Lake $1,952,858

* Vernal $462,368

**Source: Utah State Tax Commission

Legislative session

* Dates: Jan. 16 - Mar. 6

* More information can be found at http://www.le.state.ut.us




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