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A record number of Minnesota cities and counties are pursuing sales tax hikes: Here’s where — and why

If the Legislature advances all of the 36 proposals, perhaps one-quarter of Minnesotans could see a local sales tax proposal on their ballots soon.

Bloomington Ice Arena
Bloomington is one of 36 cities and counties hoping for state approval to pursue a local sales tax increase to fund building projects. In Bloomington’s case, $35 million in improvements to the city’s ice arena.
MinnPost photo by Kyle Stokes

Want to spruce up the city park? Erect a new county jail? Maybe fix a pothole problem, once and for all?

To create the cash for these projects, an unprecedented number of cities and counties across Minnesota are pushing to increase local sales taxes.

Gary Carlson, a lobbyist and finance expert at the League of Minnesota Cities, is tracking proposals from 31 cities and five counties — a record number of municipalities to seek a local sales tax hike in a single year, he said.

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Local governments must get state lawmakers’ permission to pursue a local sales tax increase, a process that’s playing out at the State Capitol right now — and legislators sometimes block or make changes to a city or county’s proposal.

But ultimately, voters in each city or county have the final say on whether to enact a local tax hike.

If the Legislature advances all 36 proposals that Carlson is tracking, perhaps one-quarter of Minnesotans could encounter a local sales tax proposal on an upcoming ballot — including in three of the state’s five largest cities (Rochester, Bloomington and St. Paul) — to fund projects like trails, recreation centers, sports complexes or library improvements.

How Minnesota funds cities — and why that helps explain these sales tax proposals

Why is the state government involved in deciding the future of projects as hyperlocal as a trail or a wayside rest stop?

The reason stems from the 1971 package of laws known as the “Minnesota Miracle.” One basic idea of the overhaul was that the state should shoulder the responsibility for generating sales tax revenue, in part to relieve skyrocketing property tax bills.

The laws constrain cities’ and counties’ ability to collect sales taxes, but the state shares revenues it collects with cities through a program called Local Government Aid. Municipalities hoping to charge an additional sales tax are essentially bucking this arrangement — so they need the Legislature’s permission.

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(For the record: Minnesota counties do have the power to enact sales taxes for transportation without legislative approval or a ballot measure.)

But in recent years, after waves of both cuts and restorations in state funding, cities’ funding from the Local Government Aid program has been effectively flat, Carlson said.

“Twenty years of lack of growth in [Local Government Aid] has really impacted city finances, and they’re looking for other ways to finance projects,” Carlson said during a recent panel discussion of the Greater St. Paul Chamber of Commerce.

Lawmakers are considering proposals to pump more money into the Local Government Aid formula.

A DFL-backed proposal in the Legislature would inject another $150 million into the formula — a 26% increase over last year. Gov. Tim Walz’s budget calls for a more modest $40 million increase to the formula, though the Legislature is also considering other one-time investments that could help cities.

Carlson doubts the state would commit to $150 in ongoing Local Government Aid. Plus, some city leaders have noted that a successive Legislature could slash this funding, anyway.

That’s one upside to a local sales tax hike: If enacted, it’s guaranteed to generate revenue for its entire lifespan.

Why are there so many proposals this year?

Under the “Minnesota Miracle” system, local governments cannot enact sales taxes for general purposes. State law says local governments must draw up plans for a specific project they hope to fund with the sales tax increase — and then convince lawmakers that this project would bring benefits beyond the borders of the city or county.

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Last legislative session, this process of securing legislative approval ended in gridlock. That’s one big reason behind the record number of proposals at the Capitol this year: Carlson said most local sales tax pitches had won bipartisan support but did not pass after the Legislature adjourned without approving broader spending bills. Many of those same cities are back this year.

But Carlson also suspects the November 2022 election showed local governments that this hassle can be worth it. In 2021, the Legislature green-lit nearly two dozen sales tax proposals for the ballot. Of the 20 that went to the ballot the next year, 18 won approval from the voters.

“That fact garnered a lot of attention from cities to say, ‘Hey, we're hearing a lot from our property taxpayers about high property taxes,’” Carlson said in an interview. “Voters seem willing to vote for a sales tax to fund some of these projects rather than put it on the property tax rolls.”