As winter ended, St. Paul’s residents once again experienced badly plowed streets and miles of potholes that needed not only patching but complete rebuilding. The City of St. Paul wants permission from the state and its constituents to increase the current sales tax by 100% to cover road maintenance costs.
While the city does not need additional revenue to perform basic city services such as road maintenance, the sales tax increase literally solves a larger problem for the city – how to increase its tax base.
The ramshackle streets have many roots.
One, for years road repair at best only patching. The city has stripped the surface asphalt without rebuilding the base, often the latter being the original, worn-out brick or cobblestone. Such quick fixes are cheap and long-lasting.
Second, St. Paul has failed for years to prioritize essential city services in its budget and staff allocation. This is especially true with streets.
But perhaps the most important reason is simple – St. Paul’s is bankrupt. It does not have the money to fund road maintenance, at least given the way it currently operates. Hence the demand for an increase in sales tax. However, the proposed increase will not provide sufficient new funding to cover even the aforementioned needs, and no less than to support many other new and existing needs.
The solution to the city’s streets and financial problems must ultimately lie in increasing its tax base. It cannot rely on the state for more local government aid. Partisanship and outside lawmakers who don’t feel obligated to support the cities, especially when they see obvious mismanagement as reasons for it.
Increasing sales tax is not an option. They fall back on the poor and especially in a city like St. Paul which is not a major tourist center, and will fall even more heavily on an already tax-weary population.
Other user fees are not reliable and individuals can avoid them. For example, according to the Bike Alliance, 5% of the population is an average cyclist. If this benefit was paid for with property taxes, the 95% of people who never use a bike path would have to pay for it. This is not fair to most people. Car owners pay licensing and registration fees and gas tax. This money is paid by car owners for the use, construction and maintenance of roads. Shouldn’t bicycle users pay a fee to cover all expenses for their own use of bicycle routes? Cyclists were able to shirk their responsibility to pay for amenities few of us use.
Again, the solution is not to increase taxes but to broaden the overall tax base.
The roots of the problem go back to the time when Norm Coleman was mayor. He persuaded the city to use the Tax Increase Funding (TIF) to fund development and St. Paul continues to rely on him to this day.
TIF operates by giving developers property and other tax breaks for developers for many years. In theory this development is tax exempt but in practice it is meant to be taken over by St. Paul’s in order to fund the tax exemption. It’s kind of supply-side economics for developers who have the misconception that if we cut taxes on them, everybody benefits.
The problem with TIF is that property taxes—which pay for city, school, and county services—are double. First, revenue is withheld to pay for services to St. Paul, its schools, and the county. Secondly, overused as in St. Paul’s, it exempts more and more property from taxation, thus failing to achieve its objective of promoting economic growth and broadening the tax base. St. Paul’s tax base, already challenged by the number of tax-exempt government and nonprofit properties in the city, is exacerbating its problem by giving TIF developers flyers they don’t need.
Since 1995, St. Paul has increasingly awarded TIFs to developers as an incentive to build in its city. This has been so abused that without TIF (Debt Service and Discounted Property Appraisals) expenses St. Paul’s could cover all of its road repair and park management needs. This support has long been welcomed by the business community, as have most elected officials who see benefit from the new development, often before elections.
St. Paul has numbers close to 60 TIF Districts (not just individual buildings). The legal requirement is that a TIF grant may be awarded for any development that will resolve a blight situation, and that the project will continue “only for” TIF. This was completely ignored in St. Paul’s. When asking the developers if they would develop without TIF, the answer, of course, was “no”. Property taxes are granted for all such projects, with a minimum term of 25 years for the developers. This shifts property taxes to corporations and other homeowners.
It doesn’t end there. Any developer interested in St. Paul, must contend with countless competition from TIF-backed properties. Often TIF is the easy answer. The theory is that the TIF will attract additional development that will provide for new taxes. But new development in these areas also qualifies for TIF and again does not increase any tax base. We have utilized our most attractive commercial properties for the development that does not generate taxes. Instead, it increases the tax burden that these developments require for services.
Stimulating the construction of new commercial developments in St. Paul, where there is insufficient demand, is depleting the overall commercial occupancy in the city. Rental rates are being forced down. The valuation of commercial real estate is determined by net operating income. When this is reduced, so is our tax base. This is the opposite consequence of what we were told TIF would do.
Now, the national impact of a 39% commercial vacancy in Midtown post-pandemic will hit our tax base even more. Much of the debt service for those projects would have to be covered by taxpayers with general obligation bonds and no appraisal agreements that guarantee the shortfall in tax receipts required to pay TIF debts.
Therefore, in order to recover, we first need to stop the financial bleeding. TIF addiction continues today. Increasing the sales tax does not solve the problem. The new strategy of broadening the tax base is really what St. Paul needs to do.
John Manilow He is a commercial developer and president of St. Paul Strong. David Schultz Distinguished Professor of Political Science at Hamline University and a former housing and economics planner and director of planning and law enforcement.