Minnesota communities looking for local sales taxes stuck without a special session

New housing, streets, water projects and a recreation center in Rochester. Jails in Winona and Rice counties. A pedestrian bridge over Highway 36 in Roseville. Community buildings and park improvements in Bloomington, Brooklyn Center, Edina and Golden Valley.

These are among nearly $1 billion in projects that cities and counties across Minnesota want to pay for using local sales taxes this year. Those requests were included in tax negotiations at the Legislature, but lawmakers adjourned the regular session in May without passing a tax bill.

Without legislative approval, those requests are in limbo. And the communities face delays and cost overruns that could push added expense to taxpayers.

In Aitkin, city staff had to rent office space for $1,100 a month over the past two years as the police department outgrew the municipal building. If legislators fail to broker a deal for a special legislative session this year, Aitkin must delay construction of a building to accommodate police, firefighters, city administration and a possible community center.

"We're not in any position to build anything," Mayor Megan Workman said.

Legislators reached a global tax agreement earlier this year and a tiny part of it authorized local governments to ask voters to approve projects in 15 cities and two counties totaling about $944 million. Another $10 million would go to four communities with projects the Legislature approved in 2021, but that required more money because of construction cost increases.

Dozens of cities and counties throughout Minnesota adopted their own local sales taxes that come on top of the state's 6.875% sales tax rate. Those local sales taxes — most often from 0.5 to 1% — help pay new buildings, sports stadiums and improvements.

More cities and counties are looking to enact their own local sales taxes as state aid fails to keep up with demand and elected leaders try to keep property taxes in check.

Before enacting a new sales tax, a community needs legislative approval and local voter approval. Voters must OK each project individually, and all local sales taxes must have a firm end date, under state law.

Recent state law changes have limited what kind of projects sales taxes can fund and require legislative approval before a city or county can hold a vote. The delay at the Capitol means communities may not be able to put sales tax proposals on the ballot this fall.

If lawmakers don't pass a tax bill this year, those cities and counties will have to go back to the Legislature with new requests in 2023.

"Frankly, we're going to have at least 47 new legislators," said Gary Carlson, a lobbyist with the League of Minnesota Cities. "About a quarter of the Legislature will be new, so it's not clear that every proposal would be basically re-ratified next year the same way it was this year."

Waiting and planning

Communities are anxious to see whether state leaders can successfully negotiate a special session.

Bloomington seeks $150 million in local sales tax funding over the next 20 years to renovate the city's Ice Garden, Dwan Golf Course and Center for the Arts, as well as build a health and wellness center.A city spokesperson said officials are "hopeful that that legislative leadership and the governor will come to agreement" so a referendum could go before voters in November.

In Rochester, the local sales tax dates to 1983. It was renewed in 2013 and expires in 2024. But the city wants to raise an additional $205 million over 16½ years to improve streets, water quality and housing stock, and build a $65 million recreation center.

"We are anxiously awaiting any determination of a special session at the Legislature," City Administrator Alison Zelms said.

Rochester officials were already pivoting to the public campaign for voters to approve the tax hike by better defining how the money would be spent, including more details on the recreation complex.

As legislators and Gov. Tim Walz deadlocked in April, the Rochester City Council voted 3-2 to hold off on design work for the complex. Council members said the city needed to know whether the state would approve its sales tax before it could commit to funding a design team.

Some communities can afford to wait. Although the south-central city of Henderson has requested $240,000 to make campground and trail improvements, that project would be done with flood control and street reconstruction work along Highway 93, which is still a few years off.

"It would be easier if (a tax bill) happened, but we can afford to wait," Henderson City Administrator Lon Berberich said.

Winona County is in the middle of a $28 million jail construction project that relies on money from a local sales tax still hung up in the tax package. Its 83-bed jail was built in the 1970s and has been out of compliance with the state for almost as long. The Minnesota Department of Corrections ordered the county in 2016 to fix its issues and close the jail by last fall.

Interim County Administrator Maureen Holte said the County Board may have to use reserves or raise property taxes to start paying project bonds if a tax package isn't passed soon.

"We do need to pass something that will cover it for the 2023 budget," Holte said.

For Aitkin, city officials say a sales tax is imperative for the north-central community of about 2,300 people. Half of the residents are there only in the summer months, and the city is hoping robust sales taxes paid by visitors will help pay for a planned $8.3 million municipal building, as well as $1 million in parks and recreation improvements.

Workman, Aitkin's mayor, said the city's playground equipment is decades old. A merry-go-round at a city park was a notable feature when her husband was a kid. He's nearly 50.

City officials are reluctant to lean harder on local property taxes. The city passed substantial property tax hikes in recent years, 14% in 2021, 20% in 2022.

"Those increases are just to make our budget," Workman said. "There's no frills."