Crow Wing County: Sales tax revenue exceeds expectations

Revenue collected from a half-cent sales tax instituted last year in Crow Wing County exceeded projections by 60 percent in 2016.

More than $1.3 million was collected beyond the $2.25 million expected, said Finance Director Jason Rausch, for a total of $3.6 million generated from the sale of goods and services in the county between April and October. The sales tax revenue was the subject of an overview of the 2016 budget presented at Friday's county budget committee meeting.

Passed in December 2015 by the Crow Wing County Board, the local option sales tax funds county road and bridge improvements. The board joined a growing number of greater Minnesota county boards approving a sales tax, following the passage of a 2013 state law allowing local governments to collect the taxes for transportation needs without a voter referendum.

At Friday's meeting, Commissioner Paul Thiede noted the amount collected above projects mirrored the amount cut from the highway department's property tax levy in 2017.

"We have prepaid the levy shortfall that we cut in 2017," Thiede said.

When the county board approved the final property tax levy for 2016, the board also passed an amendment proposed by Thiede to eliminate the $1.2 million levy-funded construction portion of the highway department's budget.

Rausch said he preferred to view the revenue as a "nice fund balance."

"I know you like to, but I don't think of it the same way," Thiede said. "That's why I'm pushing you."

Rausch pointed to the volatility of a sales tax to support his rationale of considering the revenue as a cushion.

"I'm going to do a little future hypothesis on 2017," Rausch said. "The winter falls short. We all of a sudden get 90 degrees in February, and tornadoes all summer long. We rely on vacationers. Our sales tax would be reduced from what we saw this year, and the amount that we have saved up, we could use that to fill that in so that we can continue to deliver the projects based on what (the highway department) wants to do."

"We know that sales tax is the most volatile tax," said Tim Houle, county administrator. "It has peaks. It has valleys. And what we're budgeting for is the average. We don't really know what the right average should be, because we've got no track record. So we're kind of guessing."

The projected revenue was not a shot in the dark, however; it was based upon a study conducted by the University of Minnesota Extension office. Rausch added the finance department has conversed with representatives from the cities of Brainerd and Baxter, both of which also instituted local option sales taxes.

"Crow Wing County is a much broader area, but they're the closest entity we have that has the same sales tax," Rausch said.

"It's the only historical data on which we can gauge the volatility," Houle added.

To make comparisons, the county gathered data on the top end of tax collection for each month of year. These figures represented the highest combined tax dollars collected in Brainerd and Baxter in a given month, and were inflated in an attempt to estimate what the county might collect. Although the county collects sales tax across all of Crow Wing County, these two cities continue to represent the commercial centers-meaning the county sales tax was expected to track along a similar pattern.

What this analysis found was Crow Wing County's sales tax revenue exceeded projections in five of the eight months for which data is available. Rausch said although the state does not track a geographic breakdown of sales tax revenue, it's reasonable to assume the economic activity in the northeastern part of Crow Wing County-where the Whitefish Chain of Lakes is located-accounts for much of the difference.

July was the month accounting for the highest portion of the county's revenue, with August and September next in line. The months of April, October and November all returned revenues less than the cities' top ends. Data for December is not yet available.

County Engineer Tim Bray, who spent much of 2015 analyzing how the sales tax could benefit a highway system he said is underfunded, said he is in no rush to go out and spend the higher-than-expected revenue.

"We have to be able to go with the ebbs and flows," Bray said. "Next year might be a late spring, or a crummy summer, or no snow on the ground."

Bray said if the highway department planned to use every dollar collected in a given year, it might be forced to pull back on a project if the sales tax underperforms compared to expectations.

When Bray presented on the sales tax in 2015, he told the board if it cut the $1.2 million construction levy, his department would continue to face a $1.4 million annual shortfall compared to the needs of the county transportation system. This was based upon the U of M projection for sales tax revenue.

Bray said it was difficult to say whether the additional revenue could be used to chip away at this shortfall.

"It provides an avenue to get to it faster, however, there are some other limitations, too," Bray said. "We don't have the staff. ... We couldn't, with the staff that we have, deliver 20 projects going on at one time."

Bray said one option for increasing productivity within the highway department would be hiring consultants to do some of the design work, currently completed in-house. Bray emphasized it was too early in the history of the tax to make any determinations about future spending, and the county board would be involved in those decisions, too.

What is certain is the highway department increased its construction and road maintenance in 2016, thanks to the sales tax revenue. In 2017, construction on County Highway 23 will be funded entirely by $2.5 million in sales tax dollars.

"Most likely, if we didn't have access to this money, we would certainly see less construction," Bray said.

Rausch said the county budgeted $4.2 million in expected sales tax revenue for 2017, a figure slightly above that suggested by the U of M.