House and Senate Tax Bills Move Out of Committees

The House and Senate released their tax bills during the week of May 5 and floor votes are expected this week.

The House and Senate taxes committees advanced their omnibus tax bills last week. The bills reflect different fiscal targets, and a final tax package will not come together until joint legislative spending targets are established.

Local sales taxes

In 2023, a moratorium was placed on legislation granting local sales tax authority to local governments. A task force was established to study the topic and make recommendations to the Legislature. The moratorium is set to expire on May 31, 2025.

The task force recommended that cities and counties be allowed to enact a local sales tax for specific projects with voter approval without needing a special law passed by the Legislature.  

The House bill, HF 2437, (Rep. Greg Davids, R- Preston, and Rep. Aisha Gomez, DFL-Minneapolis) proposes extending the moratorium to June 30, 2026, and would create a new legislative task force to continue studying the issue during the interim.

The Senate bill, SF 375, generally aligns with the 2023 task force’s recommendations. It would grant cities general authority to enact a local sales tax for specific projects with voter approval. If that authority is not adopted, the Senate bill would also extend the moratorium to June 30, 2026. The bill is sponsored by the Senate Taxes Committee Chair Sen. Ann Rest, DFL-New Hope.

Local aids

Both the House and Senate bill would eliminate local government cannabis aid. This aid, established in 2023, was to be funded by revenue from the excise tax on cannabis products. No city has received this aid yet, because it is based on the number of licensed retailers in a city and none currently exist.

The Senate bill would reduce the local government aid (LGA) appropriation by $20 million, about a 3.1% cut for cities. County program aid (CPA) would also be reduced by $20 million. The House bill maintains current funding levels for LGA and CPA.

Both bills also include aid penalty forgiveness for the cities of Alpha, Odin, Stewart, and Trosky.

Tax increment financing

The House bill would establish, extend, and modify tax increment financing (TIF) districts in 14 cities. It would also make several changes to TIF rules, including:

• Extending the five-year rule to 10 years and the six-year rule to 11 years for districts outside the metropolitan counties.
• Adjusting income limits for housing districts outside the Twin Cities metropolitan area.
• Allowing a one-year extension for using unobligated TIF funds.
• Increasing the share of TIF revenue that non-housing districts can use for housing projects.
• Permitting certain transfers to local housing trust funds.
• Allowing income averaging in some housing districts to help them qualify for funding.

The Senate bill would establish, extend, or expand tax TIF districts in 16 cities. It does not include general law changes.

Testimony on the bill

League IGR Representative Beth Johnston testified in both the House and Senate committees voicing concerns about the proposed aid reductions. Many Senate committee members also expressed concerns over the proposed LGA cuts.

Your next step

Floor debates on both bills are expected during the week of May 12. City officials are encouraged to contact their senator and oppose the proposed LGA reduction. You can find your senator’s contact information on the Minnesota Legislature’s Who Represents Me webpage.

When reaching out, consider including:

• That local government aid is a key element of the state-local fiscal partnership and does not automatically grow with inflation or through increased demand.
• That cities, like the state, are facing rising costs for maintenance and construction, aging infrastructure, increased personnel and labor costs, and uncertainty around federal funding.
• Specific examples of how your city uses LGA and the potential impact of cuts on your budget.

LMC staff take

The House and Senate bills are based on significantly different fiscal targets, requiring each committee to either reduce tax expenditures or raise taxes. Without joint budget targets, it remains difficult to predict the final shape of the tax bill.

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