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Minnesota Legislature

Local governments seek state's OK to broaden uses for local taxes

When cities and towns ask residents to vote in favor of increasing their local taxes, state law requires there be a clear destination for the proceeds. Be they taxes on liquor, lodging, food, beverage or sales, that money goes into a fund that’s usually designed for one specific purpose.

But as budgets are expected to grow strained by the effects of the COVID-19 pandemic, municipalities are likely to need some help keeping city services flowing to citizens. One possible solution is put forth in HF3876, sponsored by Rep. John Petersburg (R-Waseca). It would remove most restrictions on how those local taxes can be used, allowing them to be transferred to a city’s general fund.

The bill, as amended, was held over Friday by the House Property and Local Tax Division for possible inclusion in a larger tax bill. Its companion, SF3873, sponsored by Sen. Dan Sparks (DFL-Austin), awaits action by the Senate Taxes Committee.

HF3876 would allow local governments the temporary authority to divert a portion of certain local sales tax revenues to their general fund. It would also allow the excess proceeds from tax increment financing districts to be transferred to a municipality’s general fund. Both temporary measures would be possible through Dec. 31, 2021.

And if said municipality is outside the seven-county metro area, it would have twice as long to “pool” the tax proceeds for redevelopment. What was once a five-year window would expand to 10 years.

“Normally, I don’t like to see expansions of the usage of taxes,” Petersburg said. “But there are times when it’s best for the local communities to have a bit more authority. This is temporary, because of the financial struggles expected within the next year-and-a-half or so. This gives them another tool in the toolbox.”

There are currently 17 special local food and beverage, liquor and admission taxes around the state that could potentially have their proceeds transferred to a city’s general fund.

Three of them are in Minneapolis (two related to financing U.S. Bank Stadium), and two each in Bloomington, Mankato, St. Cloud and Biwabik, which helps fund the Giant’s Ridge Recreation Area. Also potentially affected by the change would be Detroit Lakes, Duluth, Little Falls, Marshall, North Mankato and Proctor.

But it was the TIF language in the bill that drew the strongest endorsements from testifiers. Austin City Administrator Craig Clark said that the current five-year window for development in a TIF district is often too narrow.

“The reality is that redevelopment projects take much longer in rural areas,” he said. “Some properties sit abandoned and blighted for extended periods. So we’d like to be able to secure those properties and tear them down, then have 10 years to get developers on board.”

Rep. Jerry Hertaus (R-Greenfield) successfully offered an amendment that would add more “guardrails” to the TIF extension process.

As for what to expect going forward, he offered some history.

“During the 2010 recession, we saw a lot of extension requests for tax increment financing,” he said. “And I think we’re going to see more of that. Right now, commercial property owners are getting calls from their banks, asking about their backup plans. Suddenly, they have no cash flow, and banks are very tight-fisted right now about restructuring commercial loans.”

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