Record number of cities, counties seeking local sales taxes

As he sat down to testify at the Minnesota Capitol on Tuesday, St. Paul Mayor Melvin Carter joked that his pitch for collecting a sales tax in the capital city began during the morning commute — when lawmakers from across the state could see firsthand the dire need for repairs on heavily potholed streets.

"An estimated 7 million visitors come from all over the region to St. Paul each year to experience our businesses, museums, attractions, shopping, restaurants, entertainment districts," Carter told lawmakers. "A sales tax proposal uniquely invites those avid users of St. Paul streets and parks to be a part of the solution to maintain them."

St. Paul is among a record number of local governments in Minnesota — at least 31 cities and five counties — that are seeking permission this year from the Legislature to put sales tax requests before voters. The local taxes are becoming an increasingly popular way for cities and counties to share the costs of capital projects and infrastructure improvements with out-of-town visitors.

Tax proposals on the table would funnel billions of dollars to projects across the state, from libraries to jails to athletic complexes. Most amount to a half-cent on top of the 6.875% sales tax the state already collects, though that can vary. St. Paul's $984 million proposal, which would fund street and park maintenance with a 1% sales tax over 20 years, is the largest. Smaller requests would pay for amenities including campgrounds and trails in outstate communities.

The uptick in proposals is raising questions at the Legislature about who should be responsible for funding amenities that may have a regional draw. Critics say there are fairer ways to fund capital improvements, while proponents argue that local sales taxes empower voters to have a say in how their money is spent.

"It truly is a philosophical debate," said Gary Carlson, lobbyist for the League of Minnesota Cities. "It's a tax policy debate about how to best finance these projects."

Searching for solutions

The influx of requests this year likely is attributable to a variety of factors, Carlson said. For one, local government aid from the state has not kept up with inflation, meaning it makes up a significantly smaller portion of city and county budgets than it did two decades ago.

Local leaders are looking to provide property tax relief. Homeowners in many communities are seeing skyrocketing tax bills this year since local leaders held off on levy hikes at the height of the COVID-19 pandemic. Soaring home values also could shift a greater percentage of communities' property tax burden from commercial properties to homeowners.

Additionally, this latest round of sales tax requests includes proposals that were ready for inclusion in last year's tax bill, which never passed due to broader disagreements among lawmakers over spending. Other communities are asking for inflation adjustments to previously approved projects facing increased construction costs.

To implement local sales taxes, Minnesota requires cities to get two stamps of approval: one from the Legislature and one from voters. The law requires local officials to define the projects they wish to fund, the cost and the tax rate and duration needed to pay that. As of 2019, cities also need to explain how their projects are regionally significant.

Counties can implement a sales tax for transportation projects with a County Board resolution. Otherwise, they have to follow the same requirements.

Last fall, 21 cities had sales tax proposals on their ballots, Carlson said. Eighteen of them passed.

"That's an interesting statistic. That even in a high-inflation environment, with the threat of recession, concerns over the economy, 18 of these 21 city projects were approved by voters," he said.

Regional draws

In St. Paul, city officials are making the case for a sales tax with a warning: They have no better alternative.

The St. Paul Area Chamber has spoken out against the proposal, saying street maintenance is a core function of municipal government. But Public Works Director Sean Kershaw said the situation is dire due to decades of underfunding.

Pothole claims in St. Paul grew from 85 last year to 250 in just the first two months of 2023, Carter told legislators. Kershaw said while the capital city's streets have an expected 60-year lifespan, they're currently on a 124-year replacement schedule.

"With the scope of our backlog, there's no real source that is better or more equitable," Kershaw said.

Sen. Grant Hauschild, a DFLer sponsoring the Proctor, Minn., proposal for a $6.9 million trail spur, said he has noticed a lot of proposals for infrastructure that's aging or needed for growing populations. Though city property taxes usually pay for things like roads and fire stations, Hauschild pointed out that in rural parts of the state, one facility can serve a wide geographic area.

"There's clearly a regional benefit for that in greater Minnesota," he said.

The smallest of this year's proposals, from the Sibley County city of Henderson, seeks $250,000 to fix a campground and trailhead near the Minnesota River.

"Henderson is a pretty vibrant community in the summer. We've got a campground a lot of people stay at for various events and festivals," said City Manager Lon Berberich. "The users are pretty much all noncity residents."

Rather than putting the costs on residents who don't often use campgrounds minutes away from their own backyards, "it seemed like a reasonable alternative to fund it," Berberich said.

Differing philosophies

Republican state Sen. Carla Nelson, who serves on the tax committee, said she thinks it's right that residents — not the Legislature — should have the final say on decisions to implement a sales tax. Because she represents Rochester, which sees 1.8 million visitors to the Mayo Clinic each year, Nelson said she understands the need to collect revenue from nonresidents who use city services.

"Typically, if the local sales taxes meet all the requirements, we allow them to go to their voters," she said.

A House bill authored this session by Rep. Jeff Brand, DFL-St. Peter, proposes removing the legislative authorization requirement. If passed, local governments would just need a referendum to implement a local sales tax.

But state Rep. Aisha Gomez, DFL-Minneapolis, who chairs the House tax committee, has an alternate bill that would create an advisory group to study the use of local taxes and potential changes to existing state law. During a committee hearing last month, Gomez said increased dependence on sales taxes could make it so a community's access to services depends on their retail base.

Sales taxes are also some of the most regressive, meaning they take a larger percentage of income from low-income people, she said. Minnesota exempts food and clothing from sales taxes.

"I think part of the reason for the proliferation of these is because it takes the difficulty of making a decision to raise taxes off of elected officials," Gomez said.

Grand Rapids, Minn., previously got approval for a sales tax that would collect $6 million for a new civic center. But construction costs have risen, so city leaders are instead using the money to fund urgent repairs to the existing center. Ultimately, City Administrator Tom Pagel said, they didn't think voters had the appetite for a higher sales tax.

Still, he said, there are many needs pushing property taxes higher.

"What it comes down to is, I think, cities and counties are just looking for what options they have that they can control," Carlson said.