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Oct 13, 2023

See which Minnesota cities and counties won permission to put sales tax increases on the ballot

Despite lawmakers’ misgivings about the “inequities” of sales taxes, three-dozen

Despite lawmakers’ misgivings about the "inequities" of sales taxes, three-dozen cities and counties won permission to go ahead with proposals that would fund building projects.

St. Paul Mayor Melvin Carter sported an ear-to-ear grin as he faced television cameras last week in the imposing black marble lobby of City Hall.

At a press conference, he rattled off a long list of St. Paul's winnings from the recently-concluded Minnesota Legislature's 2023 session — funding for parks, playgrounds, arts and community centers — but saved the biggest prize for last: The city, he said, had won lawmakers’ permission to ask voters for a sales tax increase that would fund both streets and parks projects.

"This is our top priority," Carter said of the city's 1% sales tax hike proposal, now likely headed for the November ballot, that would generate nearly $1 billion over 20 years if voters approve it.

Minnesota law requires local governments to get the Legislature's authorization to put a local sales tax proposal before voters. This year, St. Paul was one of a record number of municipalities across the state to ask for that blessing this session, according to the League of Minnesota Cities.

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In the end, 32 cities and five counties won lawmakers’ permission to move forward with tax increase plans, hoping to fund local capital projects ranging from ice rinks and flood control measures to jails and trails. St. Paul is one of several cities hoping to fund street repairs with a sales tax hike.

What happened at the Legislature

For weeks, the prospects for these proposals at the capitol were uncertain.

House Taxes Committee Chair Aisha Gomez initially blocked every local sales tax proposal from moving through her chamber, citing her longstanding unease with the inequities inherent to sales tax hikes: They place a disproportionate burden on lower-income people, and they aren't likely to generate much revenue for a city without a strong retail base.

On top of that, Gomez argued, local sales taxes chip away at the spirit of a 1970s-era overhaul that put the state in charge of generating most sales tax revenue. In exchange for a cut of statewide sales tax revenues — and relief from soaring property tax bills — Minnesota cities and counties would face new limits on their ability to enact sales taxes locally. This overhaul was known as the "Minnesota Miracle."

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"Part of the Minnesota Miracle was moving away from exactly this kind of funding mechanism that we’re seeing the proliferation of, particularly in the last few years," said Gomez, a Minneapolis DFLer, at a committee meeting in March, adding: "Is access to public goods going to be dependent on one's proximity to a retail base or not?"

As an example, Gomez brought up Bloomington — which happened to be one of the cities that was seeking approval to put a sales tax increase before voters: "Give Bloomington a half-cent sales tax with the Mall of America, they’ll never have to raise the property tax again. Is that fair?"

Ultimately, lawmakers compromised. Going forward, Gomez won a two-year moratorium on new local sales tax proposals while a commission studied their use — but the Legislature also approved all but a handful of sales tax proposals that municipalities had requested this session, including those from Bloomington and St. Paul.

Carter acknowledged Gomez's concerns, saying he appreciated the effort to find a more equitable means of funding core services.

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However, city officials have said St. Paul has no better alternative to fund two-dozen upgrades of major thoroughfares through the city — including an ambitious rebuild of the iconic Summit Avenue with bike trails and pedestrian improvements. St. Paul's high concentration of non-profit colleges and government buildings mean an unusual amount of the city is exempt from property taxes, and recent court rulings have limited the city's ability to charge special property tax fees for routine street maintenance.

"There's a saying that democracy is the worst form of government except for all the others," the mayor said. "I sometimes think the sales tax falls in the same way: It's the worst way to fix our streets, except for all of the other courses we’ve been able to identify."

So, the Legislature paused local sales tax approvals. What will happen next?

Gomez said she doesn't feel her qualms are partisan, saying that rural cities and counties — represented more frequently these days by Republicans — often can't generate as much revenue through a sales tax as an urban community.

On the other hand, requests for local sales taxes come to the Legislature from both red and blue districts — and once a local sales tax proposal makes it to the ballot, it typically passes, according to the League of Minnesota Cities.

"Local sales taxes are generally popular with voters. They’re happy to vote for them because they see what they’re voting for and they see the results," said Nathan Jesson, an intergovernmental relations representative for the League and a former aide to both Gov. Tim Walz and the House Taxes Committee.

At the March House Taxes Committee hearing, Preston Republican Greg Davids said he likes local sales taxes as a means of funding a capital project "because the voters have to pass them. This is an issue of local control. If the voters don't want it, don't vote for it."

Any Minnesota city that didn't receive permission for a sales tax increase will have to hold their plans until June 2025, when the new moratorium expires. In the meantime, an advisory task force — on which legislators will not participate — will study Minnesota's use of local sales taxes; a new state law calls for this group to begin meeting by mid-July.

When the dust settles, Jesson said the League of Minnesota Cities hopes lawmakers will be willing to streamline the process for cities and counties to advance a local sales tax. Jesson's organization had pushed for legislation that would’ve allowed cities and counties to send "non-controversial" tax proposals to voters without asking the Legislature for approval first.

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"Legislative approval is kind of a black box to cities a lot of the time," Jesson said. "It's an opaque process. It's unclear sometimes why one city is included, but another is not."

While the Legislature has paused its approvals process for local sales taxes before, there's always the chance that lawmakers enact permanent changes.

In March, Rep. Andy Smith, DFL-Rochester, noted that his city was excited about the capital projects they’d be able to accomplish with sales tax revenue — even if that meant using an "inequitable" revenue mechanism.

"In the larger picture, I agree — even though my city is desperately in need of a lost sales tax," Smith said, punctuating those last words with a cartoonish wink before adding, "but we need to be able to find these through more equitable angles, and we need to … use our money here at the state capitol more responsibly and not force local people to make those decisions that they sent us here to make."

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Kyle Stokes is MinnPost's Twin Cities beat reporter, covering everything from local government to housing to transit. He can be reached by email at [email protected] or on Twitter @kystokes.

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