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Minnesota's cities and their property taxpayers are under severe stress because of the same inflationary pressures faced by Minnesota businesses — compounded by the need to make catch-up infrastructure investments that were postponed during the pandemic. At the same time, the property tax burden has shifted from businesses to housing as the value of homes skyrockets while the value of offices plummets due to the rise of teleworking.
To cope, cities are searching for alternatives to the property tax to raise revenue. Many Minnesota cities have been attracted by the lure of municipal sales taxes.
Several of the largest cities in the state were granted authority to enact small municipal sales taxes as far back as 1970, including Minneapolis, St. Paul, Duluth and Rochester. Since then, other cities have sought legislative approval to fund their infrastructure through temporary municipal sales taxes, which must also be approved by local voters.
A relatively small number of these Local Option Sales Taxes (LOST) have been approved by the Legislature over the years, mostly for small cities in greater Minnesota to fund local needs generated by seasonal visitors to their communities. However, over the past few years, the Legislature has been inundated with requests for sales tax authority from cities large and small, and from every corner of the state, all seeking to reduce their reliance on property taxes. The amount requested has exploded from $226 million in 2017 to $699 million in 2022 to requests from 35 cities totaling over $2 billion so far this year.
What makes this option so appealing to cities?
Cities prefer a local sales tax over a property tax hike because it "exports" much of the tax burden to nonresidents. If your city has a regional shopping center it draws customers from surrounding communities. When Edina, home of the original regional shopping center, Southdale, requested its local option sales tax, it estimated that 55% of the tax would be paid by residents of other cities. If my city, Bloomington, home of the Mall of America, were to enact a local option sales tax, it's estimated that 75% of the sales taxes would be paid by nonresidents.