Minnesota lawmakers seek to limit cities' growing use of sales taxes

More Minnesota cities are imposing local sales taxes than at any time in state history, and some state legislators are worried a proliferation of the new taxes could create unfair advantages for communities with more retailers.

Legislators allowed 18 cities, from Willmar to West St. Paul, to add or extend a sales tax in 2019, and 14 others got the go-ahead in 2017. That's a dramatic jump from decades past, when the state signed off on fewer than two local sales taxes per year on average. Cities' leaders are increasingly relying on these local sales taxes to pay for millions of dollars in new projects and expenses without raising property taxes.

"Cities are looking for ways to try to alleviate the burden on property taxpayers, and yet they have a lot of these increased demands," said House Tax Committee Chairman Paul Marquart, one of the legislators concerned about potential disparities between cities with and without sales taxes.

Lawmakers, seeking to rein in the use of local sales taxes in Minnesota, changed the requirements for cities last session. Cities cannot use the money for more than five infrastructure projects. They need to give the Legislature more detail about how the money would be used and document the projects' broader significance to the region. City leaders also have to come to the Legislature first for approval of a tax plan before taking the idea to voters — reversing the previous order.

Nonetheless, local officials and lawmakers said they expect the high rate of requests will continue at the Capitol in 2020.

League of Minnesota Cities lobbyist Gary Carlson estimated about a dozen cities are planning to ask for permission to move forward with tax plans. St. Paul is among the cities that recently announced plans to add a local sales tax. City officials said last week they would like to add a 1% tax that would be spent on prekindergarten services, roads and housing.

The local taxes are in addition to the state sales tax of 6.875% and, like the state tax, certain things — such as food and clothing — are exempt.

Cities and towns have until Friday to submit proposals to the Legislature for approval this year. If lawmakers sign off, local officials would then take the idea to voters.

Willmar got permission at the Capitol last year for a 0.5% sales tax to generate up to $30 million for a variety of recreational projects, including new athletic fields and a community center, as well as stormwater system improvements.

Smaller towns in the area will be able to use the recreation and event venues, City Administrator Brian Gramentz said.

"We can service a larger area for everyone's benefit," he said.

Detroit Lakes also got the OK to boost its sales tax, but the $6.7 million that city officials expect to generate will be used for a single project: a police department building.

Those cities, both regional hubs that serve a broader swath of greater Minnesota, are the type that have traditionally used local sales taxes for projects.

But use of the local sales taxes changed in the past year.

In 2019, St. Louis Park Mayor Jake Spano campaigned in part on the idea of increasing the city's local sales tax. Suburban and exurban cities historically didn't think that source of income would be an option for them, he said.

Then the Legislature agreed to local sales taxes in Excelsior, West St. Paul, Rogers and Elk River last session.

"That flipped the switch," Spano said, and metro area cities like St. Louis Park started to ask, "Why not us?"

However, St. Louis Park officials opted Tuesday to wait another year before deciding whether to submit a request for legislative approval. Spano said they chose to spend more time talking to the community about the idea after residents and business bombarded him and others with questions.

But other metro cities, including St. Paul, Oakdale and Edina, plan to seek approval this year.

While the local sales tax is an appealing idea to many mayors and City Council members wary of high property taxes, state lawmakers added a warning in the legislation they passed last session, noting that those taxes could increase inequality between communities.

Marquart, DFL-Dilworth, said that's part of the reason he opposes an idea some legislators have pushed: allowing cities to impose a 0.5% sales tax for capital projects, like libraries and bridges, without the Legislature's approval.

That could exacerbate disparities, particularly in rural Minnesota, and favor towns with more retailers selling taxable goods, he said. Marquart also is concerned it would undermine the local government aid program, in which the state gives communities financial assistance based on a formula.

Sen. Roger Chamberlain, R-Lino Lakes, had an even stronger response to the idea of allowing cities to boost their sales tax without the Legislature weighing in.

"Zero. Nada, out of the box," he said. "Ultimately this is crazy, right? Where does this all end?"

Chamberlain, chairman of the Senate tax committee, said cities need to start restricting their spending and determining what is a need and what is a want.

"These are not bad things, bad tools, for locals to use to try to do what they need to do," he said of the sales taxes. But the state should have oversight of those taxpayer dollars, he said. "There needs to be a balance."

Jessie Van Berkel • 651-925-5044