Road work ahead as cities move away from street “fees”

Are the right-of-way charges for street maintenance that Minnesota cities charge property owners a tax or a fee? Recently the Minnesota Supreme Court clearly ruled that street maintenance charges are a tax. Does it really matter or is this just semantics like the late great debate over whether the Pawlenty Administration’s cigarette tax hike was a “health impact fee”?

The ruling means cities will be forced to be more transparent about the true cost of government services as a result of this case.  And cities can no longer impose the tax on thousands of non-profits like churches, universities and other charitable institutions. That’s a good thing, as Peter Nelson of American Experiment and Rinal Ray of the Minnesota Council of Nonprofits point out in a joint op-ed in the Pioneer Press.

Minnesota’s Constitution imposes some important limitations on a city’s tax power. For several years, the city of St. Paul has imposed a right-of-way assessment on all property owners to fund road maintenance. The city has claimed this ROW assessment is a “fee” and, therefore, not subject to constitutional limits on taxation.

Earlier this year, in response to a challenge by First Baptist Church of St. Paul and the Church of St. Mary, the Minnesota Supreme Court ruled the St. Paul “fee” is, in fact, a “tax” and subject to constitutional limits.

The St. Paul City Council is now in the process of building its 2017 budget. St. Paul should follow the law, as set out by the clarifying opinion of the Minnesota Supreme Court, and raise the resources to support city services with property taxes, rather than with unconstitutional fees.

Yet it’s far from clear how cities will respond to a change with big implications for their bottom line.  The clock is ticking for St. Paul and cities across the state to make a move with 2017 property tax statements soon to be sent out.

This isn’t just the law, it is good policy and the facts of the lawsuit underscore why.

The Minnesota Constitution exempts public charities from taxation for good reason. Charities, alongside local government, benefit the public. Donors give to charities with the intent that all of the donated dollars will be put to work for charitable purposes. Yet, over the years, millions of dollars in charitable assets have been diverted from charities’ missions to pay for St. Paul’s ROW assessment. This means millions of dollars were not used to provide food, shelter, clothing, education or support to those in our communities who need it most.

The situation with First Baptist Church is particularly striking. In addition to serving as a place of worship, the church provides free child care to families experiencing homelessness while parents search for work and shelter during the daytime. First Baptist is also a refuge for new immigrant communities, hosts recovery groups and provides other critical needs for the community. Yet the city’s ROW assessment diverts more than $15,000 annually from First Baptist’s charitable work.

The Minnesota Constitution also requires taxes to be uniform, meaning similar properties pay similar amounts. St. Paul’s ROW assessment clearly undermined this good policy. In contrast, the fee is only about $5,000 for the owners of the UBS Plaza, a 25-story office tower that places exponentially more demands on the city’s transportation network.

Finally, the Constitution requires taxes to be used for funding public purposes. The Supreme Court found that well-maintained streets benefit the broader public, not only the assessed property owner. Funding public purposes through taxation helps make city budgets more transparent and, therefore, more understandable and accountable to citizens. It’s far easier for people to track and compare how much they pay to city government when it’s not spread out over multiple taxes and fees.

Looking to St. Paul’s ROW assessment, city officials frankly admitted that “the changes in the ROW assessment since 2003 were all a result of policymaker wishes to control the growth of property taxes.” Shifting costs from property taxes in this way made it much harder for St. Paul residents to compare what they actually pay for public services against what residents in other cities pay.

Both American Experiment and the Minnesota Council of Nonprofits played a key role in the legal strategy behind the scenes. But they see potential roadblocks ahead as cities deal with the new reality.

As two attorneys who filed separate amicus briefs on behalf of the churches, we represent organizations that do not often agree. Here, however, we are brought together by our interest in a robust nonprofit sector, fair tax policy and sound budgeting.

This is not just about St. Paul. Many other cities are trying fees as an end-run to raise revenue to fund roads and other public services and not count it as taxes.

Duluth’s Mayor, Emily Larson, recognized the significance of the court’s ruling against St. Paul. She called the decision “unambiguous” and then proposed a 2017 budget that shifted funding for Duluth’s roads from the present street system maintenance utility fee to the property tax.

Unfortunately, in the same budget, Larson has proposed tripling the city’s electric utility franchise fee. This fee is also open to legal challenge under the recent court ruling because it goes to fund general public purposes and is passed through to everyone with an electric bill. Moreover, it’s also bad policy for all the reasons just outlined.

To avoid future lawsuits and to promote sound budget policies, cities across Minnesota need to begin transitioning away from any reliance on fees to fund general expenditures.