More Minnesota suburbs will ask voters to impose local sales tax

More Twin Cities suburbs will be asking voters to enact a local sales tax after winning permission from Minnesota legislators to pursue the extra funding for city projects.

Oakdale, Edina and Maple Grove are among a growing number cities across the state pursuing the new sales taxes rather than raising property taxes. Sixteen cities received the taxing authority from the Legislature during its special session in July.

"More and more cities are looking at sales taxes as a way to fund local capital projects, especially if there's a [regional] spillover benefit to that project," said Gary Carlson, intergovernmental relations director for the League of Minnesota Cities.

The Legislature granted the cities the taxing authority despite some lawmakers' concerns that the tax creates an unfair advantage for cities with more retailers. State legislators had tried to rein in the use of such taxes in 2019 by adding more scrutiny to the process and requiring state signoff before cities could ask voters for permission — a move that reversed the approval process.

The questions will appear on the suburbs' ballots in November 2022. If voters say "yes," the cities would spend the additional revenue on new buildings, parks and a community center by adding a half-percent tax to the state's base sales tax rate of 6.875% for either 19 or 20 years.

"This is a way to add value and quality to the community without relying on property tax," said Scott Neal, Edina city manager.

The cities follow West St. Paul, Rogers, Excelsior and Elk River, the first suburbs to impose a local sales tax in 2019 and 2020. Bloomington twice received authorization but hasn't put it to use.

Dozens of Minnesota cities and counties have long had such a tax in place, including Minneapolis, St. Paul and outstate hubs, such as Rochester and Mankato. Eighteen cities won approval to add or extend a sales tax in 2019.

The number of cities seeking taxing authority continues to grow, said House Tax Committee Chairman Paul Marquart, DFL-Dilworth.

"I think what a lot of cities saw was that, 'All right, the Legislature has opened the door to these,' " he said.

Marquart said he understands why cities implement local sales tax but isn't a big fan.

"My concern has always been that it creates more disparity … between the economic haves and the have-nots," he said.

Local sales taxes seem more popular with the current Legislature and governor than they have been in the past, said John Spry, a University of St. Thomas finance professor. And they are often popular with residents, he said, because the taxes generate income while others pay.

A city, such as Maple Grove, could generate a large amount of local sales tax revenue because of its abundant retail districts, he said But, Spry said, shoppers from such nearby cities as Brooklyn Park and Brooklyn Center, which have less retail, would likely be among those paying that tax.

"What's popular and what seems fair kind of depends on where you sit," Spry said.

The state's stipulation that projects have "a regional benefit" is supposed to ensure that individual cities don't reap all the rewards of the tax.

Lawmakers changed the rules in 2019 so cities can't use the money for more than five projects and must offer more detail about spending and the projects' broader significance. Some projects, such as improvements to roads and sewers, don't qualify because they can be funded through other programs.

Oakdale wants the sales tax funding to build a $15 million police station and a $22 million public works building. The current police station lacks adequate office space and storage for evidence and equipment. Female officers have a "totally inadequate" locker room area, said Mayor Paul Reinke.

Explaining the broader benefit, Reinke said Oakdale has about 20,000 residents, but its Police Department serves 40,000 people during the day when nonresidents come to the city for work and other reasons.

Edina, which has several retail areas, including Southdale Center and Galleria, hopes to spend the sales tax money on two park projects. Braemar Park — home to an ice arena, baseball fields and trails — would get a $23 million face-lift, while Fred Richards Park would see $17 million in improvements, including ponds and open spaces with turf.

The park system "impacts a much larger footprint of people than just those who live in Edina," Neal said.

Maple Grove aims raise $90 million with the sales tax for community center improvements, including the addition of an ice sheet, pool updates and teen and senior center expansions. The city is also seeking state bonding money for the center.

Maple Grove is home to the Fountains at Arbor Lakes and the Grove, all retail hubs, said Heidi Nelson, Maple Grove city administrator. She said she realizes the new tax could drive shoppers elsewhere.

"Just the addition of a tax can be a negative piece," she said. "I think we're eyes wide open about those things."

Marquart said local sales taxes, intended for regional benefits, have typically been implemented in rural or urban areas — not the suburbs. In part, that's because proving a project had "regional significance" was thought to be harder in the suburbs, where cities are close together and amenities plentiful.

The suburbs recently receiving approval, though, have been able to justify the tax on that basis, he said.

Still, he said he worries that the widespread use of local sales tax could undermine the credibility of local government aid, a "very, very important program" to greater Minnesota.

Local government aid is a $564-million-per-year state program that, based on a formula, gives funding to cities to equalize their tax burdens and ability to provide quality services.

"I do think that we need to look at this issue more," Marquart said. "How do we keep a sense of fairness?"

Erin Adler • 612-673-1781