Why St. Paul’s sales tax hike proposal is problematic
In December of last year, St. Paul Mayor Melvin Carter proposed raising the city’s sales tax rate by one percent in order to pay for street maintenance and parks. The proposal, which was passed 6 to 1 by the St. Paul City council, will have to be approved by the state legislature. After that, it will be put on the ballot for St. Paul taxpayers to vote on.
Problems with the proposal
Generally, the state legislature is reluctant to grant cities their local sales tax proposals. Last year, for example, Bloomington and numerous other cities asked for permission from the legislature to enact or raise their sales taxes. Those bills died in the session.
But should St. Paul raise its sales tax to fund roads and parks?
Certainly, roads are an important infrastructure and they have to be funded somehow. But there are issues associated with using a sales tax to fund infrastructure. Sales taxes are regressive and are an inefficient tool for raising revenues for infrastructure. Not to mention, St. Paul just raised its property taxes by double digits last year, and this proposal will subject St. Paul residents to even more taxes.
Sales taxes are regressive
Speaking in the city’s proposal, Ramsey County Commissioner Rena Moran Said,
I have always been committed to ensuring that our community has the resources it needs to thrive. Investing in and improving Saint Paul’s streets and parks is an essential part of this effort. A one-percent sales tax increase is a fair and necessary way to fund these important projects.
But is a one percent sales tax hike fair? Research generally agrees that sales taxes are regressive. This is because low-income households spend a disproportionately higher share of their income on consumption goods.
At the state level, our progressive income tax system is able to make up for the regressivity of the sales tax, something that can’t be done at the city level. So, the idea that a sales tax would be fair is questionable at best.
St. Paul just raised its property taxes
In addition to a sales tax being problematic, this proposal is coming at a time when St. paul just approved a budget with a double-digit property tax increase.
Certainly, half of that tax hike offsets maintenance fees, but that still leaves a substantial tax hike on the table. Additionally, St. Paul’s tax hike is likely going to disproportionately impact homeowners because:
- About 20 percent of st. Paul’s properties are exempt from the property tax. These properties contributed to road maintenance through fees. But that burden will now be pushed onto other taxpayers — likely homeowners.
- St. Paul’s rent control has likely depressed the growth in property values of rental properties, which would further push rising property tax burdens to homeowners.
Infrastructure is better funded by user fees
Research agrees that infrastructure is usually better funded by user fees. This is fairer because user fees can be directly imposed on the people who enjoy the use of a certain good or benefit. Gas taxes, for example, approximate a user fee because they more direct charge commuters for road maintenance.
User fees are also a more efficient way to raise revenue because they aren’t as distortionary as other taxes — like income or sales taxes.
All in All
Infrastructure is an essential government service, but the city of St. Paul needs to be cognizant of the burden that it is asking its residents to bear. Minnesotans already face some of the highest taxes in the country. St. Paul has already done a double-digit tax hike. A one percent sales tax will bring the city’s sales tax to the highest in the state, further worsening the tax burden that St. Paul residents bear.
Not to mention, the sales tax is regressive and also an inefficient tool for raising revenue for infrastructure projects.