Metro residents face sales tax hikes from state and local government

In the last session, Minnesota’s legislature voted to raise taxes on Minnesotans by more than $9 billion over the next four years. But the legislators at the capitol aren’t the only ones with an insatiable appetite for your money. The Legislature also authorized more than three dozen cities and counties to seek voter approval of local sales taxes ranging from 0.25% to 1.5%.

Local sales taxes are some of the least objectionable taxes there are. The textbooks will tell you that sales taxes, which tax consumption rather than production, generate fewer economic distortions than taxes on production, such as corporate or individual income taxes. They also have the advantage that the people who will mostly bear the burden of the tax — the residents of the city or county — are also the ones who vote whether or not to impose it. You may ask yourself why, with a Net General Fund budget that has increased, in real terms, by 9.9% from 2017 to to 2023, St. Paul needs to impose a brand new sales tax to fix its roads, but if that is what the voters of St. Paul wish, so be it.

But the state government threw a spanner in the works. Among the blizzard of tax hikes was a new 1% sales tax imposed in the seven county metro. Three quarters of this is intended to fund transit projects and the remainder to cover spending on housing. In addition, while the proceeds from a local sales tax go straight to the community which voted for it, the revenue from the metro area sales tax will go where the state government decides. More than a dozen metro cities will be asking voters to increase sales taxes on top of the increase already imposed by the state government.

This will be a particular problem for retailers on Minnesota’s borders. Consider a retailer in Woodbury where a sale of $100 is subject to Minnesota state sales tax (6.875%) and Washington County Transit sales tax (0.5%) so that total sales tax is $7.38. Just across the St. Croix in Hudson, Wisconsin, a similar retailer making a sale of $100 would levy Wisconsin state sales tax (5.00%) and St. Croix county sales tax (0.5%) so that total sales tax is $5.50. Now, add to that Woodbury sale the 1.0% metro sales tax and Woodbury’s own proposed sales tax of 0.5% and the sales tax on that $100 transaction rises to $8.88, 61% higher than in Hudson.

Is it worth driving from Woodbury to Hudson to save $3.38 on a purchase of $100? Maybe not. But for larger ticket items the savings from that extra few minutes in the car will add up.

In my Border Battles report in 2020, I noted that the border regions of Minnesota had seen worse business growth than the border regions in each of its neighbors and worse job growth than in each neighbor except Wisconsin. That might be about to change.