Next Tuesday, residents in St. Paul will vote on whether to approve a 1 percent sales tax hike whose revenue will be used for the city’s streets and parks. If passed, together with the 1 percent sales tax hike for the metro region, the proposal will bring St. Paul’s effective sales tax rate to 9.9 percent. This will be both one of the highest rates in the state and among the highest in the country for cities with more than 200,00 people. Considering that our legislators also raised taxes by $9 billion in this year’s session, the proposal certainly deserves scrutiny.
Proponents of the sales tax hike have consistently maintained that without it, there is no other reliable revenue source to fund St. Paul’s Street maintenance. This was one of the points that was emphasized during a sales tax forum on September 18 organized by the Union District Park Council and the League of Women Voters (which I was a part of). Even the city’s website uses nudging language that essentially guarantees other types of tax hikes if this proposal is not passed.
But is St. Paul (really) out of options?
Possible spending cuts
There is one idea that has not been seriously considered — spending cuts in other services. As I specifically noted in the forum, the St. Paul government, like any government, has limited resources. It is the role of city leaders to make much-needed value judgments on which services to prioritize over others. Clearly, not every service that the St. Paul city government spends money on is objectively vital. There has never been a better time than now to identify those services whose ends can be achieved more efficiently and effectively through the private sector, or some which are just plain unnecessary. Good examples include spending on business subsidies, affordable housing, and government administration.
Subsidies that the city gives to businesses, otherwise known as development incentives, for example, are worth some assessment. These subsidies do little to spur development mainly because businesses are rarely swayed by these incentives. And to the extent that businesses are swayed, deals struck by local governments and businesses usually end up costing taxpayers as benefits from these incentives mostly end up below cost, if they materialize at all.
Currently, the city of St. Paul has numerous TIF (Tax Increment Financing) districts, which essentially capture new tax dollars that are a result of new development and redirect them from city coffers to developers, not only denying the city much-needed revenue but also narrowing St. Paul’s already smaller than optimal property tax base. One such TIF district covering the River Center, Excel Energy Center, and the Convention Center Parking ramp just got extended for 10 more years, resulting in an estimated $3.8 million in tax revenue a year till 2033 not going to St. Paul’s general fund.
In 2021, St. Paul approved plans to redraw, expand, and extend for 10 more years, a TIF financing district for development around the Allianz field that was initially approved for 16 years in the fall of 2020, bringing the total cost to $209 million, $68 million of which is property tax revenue that would have been paid to the city. In the same year, the city also approved other two TIF districts costing over $45 million for the Highland Bridge development (at the former Ford Motor Company site). This was after the city already approved a $53 million package in 2019. Previously, in 2016, the estimated total cost to the city was pegged at a minimum of $275 million during the duration of the project. Looking at financial statements from St. Paul’s Housing and Redevelopment Authority (HRA), in 2022, recorded spending on TIF was around $40 million.
Existing research generally supports the idea that building more houses keeps housing prices down, even if new housing is at the market rate. So, if St. Paul can instead focus on removing barriers to housing construction, it will free up some much-needed funds and, at the same time improve housing affordability without imposing an extra burden on taxpayers.
St. Paul’s city’s general fund budget has consistently grown in the last two decades, outpacing both inflation and population growth. Between 2003 and 2021, for example, general fund per capita spending grew from $830 in 2003 to $1041 in 2021 ( a cumulative growth rate of 25 percent). So, lack of funds is certainly not the main issue.
One area that has grown significantly above others, and is thereby deserving of some scrutiny, is government administration. In per capita terms, St. Paul’s general fund spending on government administration has grown 42 percent between 2003 and 2021, surpassing all other major general fund spending categories, except for highways and stress. But that is only because in 2018, the city moved already existent street maintenance costs from the Right of Way (ROW) Fund to the general fund after the court ruled that charging for street maintenance through the ROW assessment was illegal. Since 2018, the share of the city’s general fund revenue dedicated to highways and streets has fallen every year through 2021, while the share of the budget dedicated to administration has stayed at elevated levels.
Figure: Cumulative growth in St. Paul’s General fund spending per capita by major category (in $2021 $)
Even prior to the 2023 legislative session, Minnesotans were among the most heavily heavily taxed residents in the US. Tax hikes enacted in the 2023 legislative session have only worsened this phenomenon.
Before hiking taxes even further in St. Paul, residents need to consider whether every dollar that they hand over to their local government is going to its best use.