For five years, Excelsior city officials petitioned the state in vain for permission to levy a local sales tax so they could capture some of the dollars spent by out-of-towners at their lakeshore and picturesque downtown. They almost gave up.
But this spring the Legislature gave the west-metro city of 2,400 the authority to enact a half-cent sales tax on general purchases starting Oct. 1, making Excelsior — along with Rogers, West St. Paul and Elk River — the first metro-area suburbs to implement a local tax on top of the statewide general sales tax of 6.875%.
“This is sort of groundbreaking, because it’s never been done before,” said Ryan Schroeder, West St. Paul city manager.
Dozens of Minnesota cities and counties already have such a tax in place, including Minneapolis, St. Paul and outstate hubs like Rochester and Mankato. Bloomington twice has received authorization to tax purchases at or near the Mall of America but has never followed through on it.
“We just needed the state to help us in some type of capacity,” said Excelsior City Manager Kristi Luger, adding that officials plan to use the tax to fund new buildings for the Commons, the city park along Lake Minnetonka.
West St. Paul will use the tax to pay for road projects, something city officials said they couldn’t afford after amassing $21.4 million in debt from the reconstruction of Robert Street.
“We couldn’t come up with a reasonable way to better cost-share the expenses for Robert Street that gained legislative traction,” Schroeder said. “The sales tax sort of gets us there at no cost to the state.”
For Rogers and Elk River, the new taxes will pay for parks and recreation improvements ranging from new trail connections to a pedestrian overpass.
The $27.5 million price tag for a new community center “far outpaced our resources,” said Calvin Portner, Elk River’s city administrator. “How do you pay for something that’s so expensive?”
Many city leaders noted that several policy changes this year will make it harder to enact a sales tax in the future. Cities now must get legislative authority before going to voters, demonstrate that a project funded by the new tax has regional significance and provide more specifics on the projects to be funded.
Burnsville, for instance, nixed the idea of pursuing a local tax earlier this month after the policy changes, City Council Member Dan Kealey said. The council realized the projects for which they hoped to use the tax revenue were too general to fit the new criteria, he said.
Under state law, municipalities aren’t allowed to adopt their own sales tax unless the state gives them permission. “The Legislature has really kind of kept this very locked down,” said John Spry, a University of St. Thomas finance professor.
City leaders weren’t sure what prompted legislators to let four suburbs enact their own sales tax for the first time, though Luger said that an abundance of freshman lawmakers may have played a role.
A local-option sales tax offers cities a way to bring in revenue without raising property taxes, which spreads out the cost among everyone who spends money in a city or county, resident or not.
It makes sense for Excelsior, which has a small population but draws visitors from around the region, Spry said, or for a retail hub with big-box stores that draw regionally, like Rogers or West St. Paul.
“Elected officials love taxes where the burden of the tax falls on people who aren’t eligible to vote,” Spry said.
The downside is that additional taxes also may prompt shoppers to go elsewhere, though City Administrator Steve Stahmer of Rogers said a University of Minnesota study they commissioned on local sales taxes showed that most cities with a local tax saw continued sales growth.
In Elk River, Portner said, adding a few extra pennies onto a purchase “didn’t really seem to be much of a factor” since driving to another city to shop would cost money, too.
Competition was a concern in Excelsior, which has two boat dealerships and a jewelry store where customers make large purchases. “We know that [added taxes] can sometimes sway a decision,” Luger said. “It was something we didn’t take lightly.”
It takes more than permission from the Legislature to implement a local sales tax. Voters must first approve the change, as they have in all four cities. Even after legislative approval, the City Council must adopt the sales tax and forward proof to the Department of Revenue, which administers the tax.
Elk River will use its additional funds to pay for $35 million worth of projects, including building a multipurpose community center, dredging Lake Orono and adding trails. The half-cent tax will start Oct. 1 and last for 25 years or until the project cost is covered.
In Rogers, the tax will last 20 years or until it generates $16.5 million, the total cost of several projects that include new trails, a pedestrian overpass over Interstate 94 and a new aquatic center. Its quarter-cent sales tax begins Oct. 1, along with a $20 excise tax on vehicles.
Starting Oct. 1, Excelsior’s half-cent tax will last for up to 25 years and pay for $7 million in improvements to the Commons, including a new band shell, concession building and bathhouse.
West St. Paul will collect $28 million over 20 years to fund upgrades for collector streets, municipal state-aid roads and the city’s portion of county and state highway projects. The half-cent tax takes effect Jan. 1.