2026 LEGISLATIVE SESSION: What’s Ahead for Local Sales Taxes

By Suzy Frisch

It has been an annual rite at the Minnesota State Capitol for decades. Cities and counties of all sizes come to the Legislature to win approval of local sales taxes. Across Minnesota, cities have been increasingly turning to these taxes to build facilities and amenities for residents and to attract visitors.

Convention centers, regional sports venues, parks, and public libraries are just a few of the ways cities have used local sales taxes to achieve their development goals. Local sales taxes also fund infrastructure for core services, such as public safety buildings, water quality improvements, and roads and bridges.

But for the past two years, this funding tool has been on hold. A legislative moratorium starting in 2023 sought to give state leaders time to evaluate and determine how Minnesota could streamline its approval method for local sales taxes. Hopes were high that the Legislature would enact changes to the authorization law before the moratorium ended in May 2025. But that didn’t happen, leaving the existing system in place, said Pierre Willette, senior intergovernmental relations representative for the League of Minnesota Cities.

That means it’s back to the status quo for cities seeking new revenue for capital improvement projects. Though tax-focused legislators are still working on bills to improve the approval process, major changes to the local sales tax authorization law likely won’t be passed this upcoming legislative session, said Sen. Ann Rest, DFL-New Hope, chair of the Senate Taxes Committee. “I think it would be a really steep climb” to make significant changes in 2026, she said.

During the moratorium, lawmakers didn’t agree on a model law to completely replace the existing system. Now they will need to amend the current law and work through all the sticking points that prevented legislation from moving forward in 2025, Rest said. An election year, a tie in the Minnesota House, and philosophical disagreements about how to shape the new policy are just too many obstacles to clear this session. “I thought we’d have more success with having a model law to operate from, but that’s just not the hand we were given right now,” she added.

Instead, Rest said the best use of the 2026 legislative session will be to assess commonalities between cities’ sales tax proposals as they come to the Legislature for approval. Lawmakers can see what measures are passed and use that information to develop a new model law for consideration in 2027. Until then, cities should follow the regular order of operations to have their proposed sales tax vetted and approved [see sidebar].

How did we get here?

Minnesota cities have been able to enact local sales taxes, with approval from the Legislature, since the Minnesota Miracle tax reforms of 1971. For decades, a handful of cities at a time would raise revenue through local sales taxes. That number has increased significantly in recent years, as municipalities work to rein in property tax increases by generating other sources of funding. Cities are trying to counter substantial financial pressures, from rising costs across the board to reductions in federal spending, Willette said.

Two decades ago, 10 cities had local sales taxes, according to a 2004 Minnesota Revenue report to the Legislature. Now 70 cities in Minnesota have individual sales taxes. This does not include sales taxes involving multiple municipalities, such as metro area taxes designated for transportation and housing.

“There is pressure from property taxes on cities and cities that want to do large capital improvement projects,” Willette said. “They see this as a viable alternative, especially if they anticipate people from outside the jurisdiction using it. Then it makes sense to enact a sales tax rather than pay via property taxes.”

A growing workload for lawmakers

It has become a time-intensive operation for the House and Senate to each hold hearings and evaluate cities’ tax proposals. Dozens of cities come to the Legislature every year to get approval for new taxes, which must then be approved by local voters. In 2023, the Legislature approved new sales taxes for 32 cities and five counties — a state record. This increasingly heavy lift prompted lawmakers to attempt to change how cities get the green light for their new taxes.

There is a common sentiment that the Legislature should set clear standards and then hand the approval process to city officials. The current approach is not the best use of lawmakers’ time, said Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence. “Entire committee hearings are devoted to these bills. It’s costly because cities use lobbyists to push them forward, and there are costs on the homefront to line up support,” he said. “They are looking for ways to speed up the process. It takes a long time, and time is money. Cities want to get their projects going.”

Task force recommendations

During the moratorium, the temporary Local Taxes Advisory Task Force authorized by the Legislature went to work. It held 15 public meetings and gathered input to develop possible reforms, issuing its report early in 2024. Key recommendations included:

• Local sales taxes should be limited to capital projects that serve a regional population, draw individuals to the region, or provide economic development benefits and opportunities.
• Cities and counties would no longer need legislative approval to enact a local sales tax, as long as the project meets the regional criteria; voter approval would still be required.
• Sales-tax funded projects without a regional focus would need to come before the Legislature for approval.
• The state auditor would evaluate local sales tax proposals to ensure they do not require legislative approval.
• If a proposed project is not regional, the Legislature must consider equalization when determining state aid and other tax bases.

Reform proposals fall short

The Legislature took up local sales tax reform in 2024 and 2025. Proposals from the House and Senate were brought to the conference committee in 2024 but failed to advance. In 2025, the taxes committees worked on bills reflecting some of the recommendations from the task force. There was common ground that the Legislature would step away from approving every city and county request, leaving that evaluation to state officials. Similarly, both bills included a 0.5% total cap on local sales taxes.

Lawmakers also worked on defining what makes a project regional. A revenue-sharing model was proposed to assist smaller or less wealthy neighboring cities without the ability to impose their own local taxes. Another feature under consideration would have allowed cities to include a cushion for inflation.

The legislative session ended without enough support from legislative leaders to reach an agreement on major changes. When both parties returned for a one-day special session in June to pass the budget, wide-ranging local sales tax reform was not included. “With tax policy change this big, it doesn’t happen quickly,” Willette said.

Moving forward

Legislators will continue working on potential new measures with input from local government. Above all, Rest wants lawmakers to step away from the responsibility of approving new local sales taxes. “Local government should have this opportunity to move forward based on their own good judgment and based on what their local communities need,” she said.

“I see no compelling argument that local government shouldn’t have that authority. I don’t believe that if you look back over the last 10 years or so, that the authority given to and passed by voters has been abused,” Rest added. “I think it’s been used correctly to the benefit of the region and taxpayers.”

The League of Minnesota Cities agrees that local sales taxes should continue to be an option for municipalities. It backs the proposal for cities to go straight to voters for approval, as long as the state determines that cities are following its guidelines.

“It’s part of our philosophy regarding the state and local fiscal relationship,” Willette said. “There are parts that are important, like flexibility. Cities should have the flexibility to create other revenue sources to pay for the facilities they need.”

Equalization is still a key debate

One big sticking point will likely be the debate about how Minnesota approaches revenue equalization and whether it should be a required component of new local sales taxes, Haveman said. Equalization through local government aid has been a state tenet for more than 50 years. It aims to ensure that each community, no matter the size, has a base level of financial resources to operate. Yet there are major differences of opinion on whether and how that objective can be maintained with so many cities seeking revenue diversification through local sales taxes.

“The reality is that there is an increasingly difficult budget environment for state-level equalization of local government. Some degree of revenue diversification is necessary that also recognizes equalization objectives,” Haveman said. “And I think one way to do that would be to include local taxes in the LGA formula. It’s excluded now.”

A search for balance

The desire to reform the state’s local sales tax structure is there. It remains to be seen where lawmakers land when it comes to finding the right mix of approval speed, fairness, revenue diversification, and the funding cities need to meet their objectives.

“Legislators care deeply about their cities and want them to be successful, and they want them to have the ability to build the facilities they need,” Willette said. “Local sales taxes are a great tool. Everyone wants to find a process for cities to enact them with plenty of local input and a thorough process — and not necessarily with individual permission from the state.”

Suzy Frisch is a freelance writer.