The Minnesota Supreme Court on Wednesday delivered a blow to a key municipal finance mechanism in St. Paul for the last decade.
The court ruled that so-called "right-of-way assessments" instituted more than a decade ago by the city should legally be considered taxes, not fees. That's a crucial distinction, since millions of dollars in assessments have since been levied against thousands of tax-exempt properties — everything from public schools to churches.
Then-mayor Randy Kelly argued that those properties still needed streetlights, snowplowing and tree trimming, and should pay regardless of their status, so he proposed the fees in 2002. The plan also allowed him to extend his predecessor's record of eight straight years without a property tax increase, even though Kelly's budget effectively took more money from most of the same taxpayers.
It also significantly redistributed the tax burden. Corner properties and less-intensive land uses paid more, while property owners with little street frontage or tall buildings paid less. Xcel Energy effectively got a $158,000 tax break, according to calculations in 2005.
Officials say about a third of the city's property value is considered "off the books" or exempt from property taxes. The right-of-way assessment now amounts to nearly $30 million a year, compared to a total property tax bill across the city of about $100 million, according to city finance director Todd Hurley.
Two downtown churches with extensive street frontage and in one of the most intensively maintained areas of the city challenged their street assessments in court about five years ago. The First Baptist Church of St. Paul and the Catholic Church of St. Mary sit on adjacent blocks in the northeastern corner of downtown St. Paul, not far from CHS Field. Minnesota Public Radio, also tax-exempt, joined a later appeal.
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Attorney Jack Hoeschler, who took the case against the city, said the key test of an assessment — that it is based on an investment that increases the value of a nearby property — isn't met for things like plowing snow or keeping on the streetlights. Those are general functions of government, he argued, and should be paid for by taxpayers, which would not include his clients.
But Hoeschler said it has had an impact on 70,000 homeowners in St. Paul, as well: the assessments for regular taxpayers have sidestepped the traditional property tax system.
"You know, they never wanted to admit that they were increasing the property taxes," Hoeschler said. "They always wanted to say, 'We're holding the line on your property taxes, because we're ignoring these special assessments that appear on your tax statement below the line.' So this would require them to get honest."
It isn't clear how the city will proceed with the case, which has been handed back to Ramsey County District Court for a final chance for the city to show what special value street maintenance may have.
Calculations in 2005 showed about 77 percent of homeowners saved money by shifting some of the tax burden to tax-exempt properties and to taxpayers with a lot of street frontage. If the Minnesota Supreme Court decision dismantles the city's street assessment system, tens of millions of dollars could be shifted back onto regular property tax payers and high-value properties, such as downtown office towers.
This decision doesn't ban the practice, and the city says it intends to keep collecting the fees, although this decision opens the door for many more challenges. City attorney Samuel Clark said in statement the city is going to "evaluate" the program.
"It's not a question of if the city can collect assessments but how it goes about doing so," he said.
The decision, though, will have an impact around the state. Cities have been pinched in recent years by cuts in local government aid and have been reluctant to raise taxes. There are a wide variety of other funding mechanisms out here. This seems to be an indication that there's a limit to how creative tax collectors can get in Minnesota.