Senate Omnibus Tax Bill Heads to Senate Floor

April 26, 2021

The bill contains many provisions of interest to cities, including those related to housing, city sales tax exemption, fire protection districts, and more.

The Senate version of the omnibus tax bill, which was passed by the Senate Taxes Committee on April 23, contains many provisions of interest to cities, including those related to housing, city sales tax exemption, fire protection districts, and more.

The committee’s recommendations are contained in SF 961, a bill initially authored by the committee chair, Sen. Carla Nelson (R-Rochester).

Housing tax credit contribution fund

The amended bill includes the League-supported Minnesota housing tax credit contribution fund, which would allow taxpayers to receive a tax credit for contributions to the fund in support of affordable housing development.

This innovative tool, along with the provision of $10 million each year of the biennium for the credit, will create new opportunities to encourage local businesses and members of the community to invest in affordable housing.

Public safety facility sales tax exemption

The bill includes a version of the League-supported construction sales tax exemption simplification. However, the provision will only apply to building materials used in local government public safety facilities. It will not cover construction material purchases for other local government capital projects, such as roads, water and wastewater treatment, storm sewer, and other important local facilities and infrastructure.

The effective date for the new streamlined exemption process is July 1, 2021, and will not benefit several cities that have been seeking specific exemptions for projects that have been or are being built.

The House version of the omnibus tax bill includes the city-specific exemptions as well as the general public safety facility exemption. The League notified Senate members about the apparent oversight.

Fire protection districts

Similar to the House omnibus tax bill, the Senate bill would give local governments authority to establish fire protection and emergency medical services special taxing districts. The League supports this measure.

The Senate bill includes a new requirement that each special taxing district established under this new authorization submit a levy and expenditure report to the Legislature. It also requires each participating political subdivision to submit a levy and expenditure report to the Legislature. The report is intended to document the shift in taxes from the participating jurisdictions to the new fire protection district.

4d Low-income rental tax treatment

The bill continues to include significant changes to the 4d low-income rental housing property classification. It reduces the property tax classification rate for class 4d properties to 0.25%, making it the lowest property classification in the Minnesota property tax system.

Under current law for taxes payable in 2022, when this new law will become effective, class 4d properties carry a class rate of 0.75% for the first $174,000 of value and a reduced class rate of 0.25% on the value in excess of $174,000.

The League and Metro Cities have expressed concerns about the significant reduction in the class rate and the associated tax shifts, especially as it impacts cities that have encouraged 4d housing within their boundaries. The League and Metro Cities also raised concerns about whether the tax savings would benefit the tenants though reduced rents or property improvements.

In an attempt to partially address city concerns about the class rate change, the bill requires an annually updated notice to be posted in all 4d properties. The posted notice would explain that the building is classified in whole or in part as low-income rental housing, and would provide the income and rent restrictions required under the 4d program.

The bill also requires that a property owner receive approval by the governing body of the city or town where the property is located before applying to the Housing Finance Agency for initial class 4d designation, for property that was not in whole or in part classified as class 4d prior to assessment year 2022.

Sen. Ann Rest (DFL-New Hope) indicated she is working on a transition aid amendment that would provide state aid to the 43 most impacted cities. The aid would be used by the recipient cities to reduce their property tax levy, which would prevent the shifts in taxes otherwise caused by the significant class rate reduction.

Child care provider property tax credit

To assist child care providers, the bill establishes a property tax credit for licensed, in-home child care providers. The credit would be equal to 50% of the amount of net tax owed on the property for the current taxes payable year after subtracting all other applicable property tax credits.

The state would reimburse local units of government for the credit to the property owner. The credit would be effective beginning with taxes payable in 2022.

Business tax relief

The bill increases the market value exclusion on commercial-industrial property subject to the state general tax, from the first $100,000 of market value to the first $150,000 of market value, effective beginning for taxes payable in 2022. To prevent shifts in the state general tax to all other commercial and industrial properties, the bill would reduce the state general levy by $26.3 million per year.

Energy improvement special assessments

The bill authorizes cities to impose special assessments to construct, reconstruct, alter, extend, operate, maintain, and promote energy improvements in existing buildings if petitioned by a property owner. The municipality would fund and administer the improvement project, and other requirements would apply.

Local government aid

The bill provides a one-time supplemental aid for each city that would otherwise experience a reduction in local government aid (LGA) in 2022. This hold-harmless provision, which will temporarily add roughly $5 million to the LGA distribution for 2022 only, was accompanied by a statement from Sen. Bill Weber (R-Luverne), chair of the Senate Subcommittee on Property Taxes, that he expects the city organizations to begin working on a formula review and update in the near future.

Study of affordable housing funding

The bill requires the commissioner of Revenue, in consultation with the Minnesota Housing Finance Agency, the Minnesota state auditor, the League of Minnesota Cities, and the Association of Minnesota Counties, to develop a report on affordable housing projects paid for in whole or in part by tax increment or through a city or county housing trust fund for local housing development. The report also requires an accounting of all authorized expenditures from each established housing trust fund. The report is due to the Legislature by Jan. 31, 2022.

Local sales taxes

The bill includes local sales taxes for Cloquet, Crosslake, Edina, Fergus Falls, Floodwood, Hermantown, Litchfield, Little Falls, Moorhead, Oakdale, St. Peter, St. Cloud, Staples, Wadena, Waite Park, and Warren as well as for the counties of Carlton, Itasca, and Mille Lacs.

During the committee markup, Sen. Weber offered an amendment to the bill that would expand the current prohibition on local taxes on sales and income to include excise taxes and fees related to the manufacture, distribution, wholesale, or retail sale of food, based on volume of product sold, product sales value, or the type of product manufactured, distributed, or sold or any container or instrument used for transporting, protecting, or consuming food. Several members recalled the debate over that language in previous sessions and the League’s opposition. Despite opposition on the committee, the amendment was approved.

Next steps

The bill will next be considered on the Senate floor, where it will be amended into the House bill, HF 991. Then a conference committee will negotiate the differences between the Senate and House bills.

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