A taxing issue

City shies from eliminating food, utility taxes

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The city of Littleton will give voters the option to repeal a 1 percent sales tax on groceries in November, becoming the latest municipality in Colorado to consider eliminating taxes on basic household necessities.

Steamboat Springs, which has a 4.5 percent sales tax on groceries and utilities, isn't likely to join that list anytime soon, city officials said.

In Littleton, a Libertarian, Democrat and Republican worked together to gather the 2,000 signatures needed to put the repeal question on the ballot. The group feels the tax unfairly targets lower income families.

Of the 64 counties in Colorado, 48 have a local sales tax. Of those, 18 exempt food for home consumption from the tax, Colorado Municipal League Director Sam Mamet said. Routt County is among the counties that exempt food.

At the city level, 214 of the state's 270 municipalities have a local sales tax and 42 of those exempt food, including Vail, Mount Crested Butte and Yampa, as well as larger cities such as Denver and Colorado Springs.

Mamet said the Littleton appeal has sparked debate about the fairness of taxing food and other necessities, such as utilities.

He said cities that tax food have a difficult time repealing the tax by raising other taxes. He cited Montrose, where an attempt to replace a 3 percent tax on groceries with property taxes was defeated.

The business community in Montrose opposed the tax reduction, Mamet said. Because of the Gallagher Amendment, commercial properties are taxed at three times the rate of residential properties.

"The city of Montrose had very strong backing and support (in fighting the sales tax reduction)," Mamet said. "They said if you reduce the sales tax on food, it is going to result in a fairly large reduction of services. It is also going to impact bond payments."

City of Steamboat Springs officials make similar arguments when asked about eliminating city sales taxes on food and utilities. Four cents of every dollar spent on groceries and utilities go to the city and another half-cent of every dollar spent on groceries and utilities goes toward education funding.

The Steamboat Springs City Council has voted to put a 3.55-mill property tax on the November ballot. When considering how big to make that property tax, which will help the city create a fund for capital improvements, City Finance Director Don Taylor presented the council with options for reducing sales taxes in conjunction with the property tax.

If sales taxes were eliminated on food, Taylor's calculations showed the city would need to impose a 4-mill property tax to generate the same income. If sales taxes were eliminated on utility bills, a 3.3-mill property tax would be needed to generate the same amount of money.

Councilman Paul Strong said the council has studied reducing the sales tax on food and utilities, because council members are concerned about the impact those taxes have on residents.

"They affect lower-income people more drastically than taxes on other items because food and utilities are necessities," Strong said. "(Lower income households) are going to buy food and pay for heat and pay the same tax rate as wealthier households."

Statistics show that many Steamboat families would benefit from eliminating the sales tax on food and utilities, even if the families had to pay an additional 7.3 mill in property tax.

Community Indicators Project data show the average single adult in Steamboat Springs spends about $183 per year in sales taxes on food and utilities. A household of two adults and two children spends about $423 in sales taxes on food and utilities.

A 7.3-mill property tax would cost the average resident about $53 per $100,000 valuation. A single-person household would have to own a home worth $345,000 or more to pay in property taxes what the person pays in sales taxes on food and groceries. A two-adult, two-child household would have to have a home worth $800,000 or more.

But in contrast to households, there is no benefit to businesses in eliminating sales taxes on groceries and utilities and raising property taxes. Businesses buy fewer groceries than households and pay triple the rate in property taxes.

Sales taxes on groceries bring in roughly $2.02 million per year, and city officials note, not all of that revenue is from residents. Tourists spend heavily on groceries as well, though it is difficult to determine how much.

One of Councilman Loui Antonucci's campaign pledges was to look at creating a card that locals could use to be exempt from a certain amount of sales tax. Antonucci also thought about giving residents a rebate, where they could bring in their sales receipts and get sales tax refunds.

The idea never took off, as officials struggled with a way to implement such a system fairly. "It seemed so cumbersome to the city, and it could wind up costing more than it was worth," Antonucci said.

One of the advantages of seeking a property tax is that it gives the city a way to increase the tax burden on second-home owners, who use city services but do not contribute as much in sales tax dollars.

But Strong said there is a limit to the amount of property tax the city can reasonably seek. The city ultimately determined that reducing sales taxes on food and utilities would have made the proposed property tax so high -- 10.85 mill -- it likely would not be approved.

Strong and Antonucci also fear that substituting property tax for sales tax could place an unfair burden on business owners.

Besides, Strong said, at a time when sales tax revenues are declining, it doesn't make fiscal sense to look at cutting those taxes.

He said, "We are cutting services as it is."

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