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Twin Cities area businesses brace for 1% sales tax hike

Higher sales taxes have local retail trade groups concerned about losing business to neighboring counties.
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If you’ve noticed the totals on your receipts looking a little higher, it’s not just you: On Oct. 1, sales tax in several Twin Cities area counties rose by 1% under two new bills passed by the Minnesota Legislature earlier this year.

Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington counties are all affected by this tax increase. While you might see higher prices on most retail items, food, clothing, and medicine remain exempt from sales tax in Minnesota.

Sales tax rates in the metro area are now between 8%, but cities like Minneapolis and Edina are seeing rates as high as 9%. In counties like Wright that border the metro, the tax rate hovers at just over 7%.

0.75% of the tax raise was approved in the Minnesota Department of Revenue’s recent transportation bill. Officials expect the new tax to generate roughly $560 million over the next fiscal year. The proceeds will be put toward bus and light-rail improvements.

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The additional 0.25% raise comes at part of the Legislature’s recent housing bill. Revenue generated will be put toward affordable housing initiatives like rent vouchers and assistance.

These were just two hikes approved by the Legislature, which saw a record 36 proposals from cities and counties across the state. These increases in local sales taxes are often used for funding city or countywide projects, which can include everything from new transit projects and infrastructure repairs to improving parks and recreation areas.

Bruce Nustad, president of the Minnesota Retailers Association, said that some businesses in the seven-county area are concerned that the tax hike will push customers away from shopping in the metro area. He pointed to a 2017 study published by the National Bureau of Economic Research showing that consumers adjust to sales tax increases in many ways, including cross-border shopping.

“Customers are smart, they pay attention to these things,” Nustad said. He added that outer metro counties like Washington are at the highest risk of losing business to nearby counties with lower sales tax rates. Hudson poses the biggest threat to businesses in the metro with a sales tax rate sitting at 5.5%.

Nustad called for additional aid to be given to businesses when a hike in sales tax rates is on the horizon.

“We aren’t against the sales tax increases, but we know that there can be ramifications,” said Nustad.

He said there are both direct and indirect costs associated with a sales tax hike. That includes everything from the cost of employee training to sales tax audits, as well as potential loss of customers. Nustad’s suggested solution is the incorporation of a vendors collection allowance, which would help offset some of these costs. Over a dozen local business associations have supported such an allowance, he said.

For businesses in the metro area trying to stay competitive amid the tax hike, Nustad said the best way to keep customers is to sell your value in other ways. Focusing on the quality of service or increasing convenience and product availability are the best ways to counteract the deterring higher prices that might drive away loyal customers.