By proposing to fund street improvements with a sales tax instead of property taxes, Duluth Mayor Emily Larson said she hopes to spread the financial burden of fixing the city's crumbling road network.
The half-percent sales tax she hopes to enact would raise an estimated $7 million per year from residents, visitors and others who transact business in Duluth, with the proceeds all earmarked exclusively for streetwork.
Larson's plan received a critical vote of support from Duluth's tourism leaders last week, when the board of Visit Duluth decided to endorse the tax. Yet many in the city's hospitality industry remain nervous about the growing costs of doing business in Duluth.
"We passed a resolution of support. Nobody loves the fact we have to do this, but a half-percent tax is reasonable," said Anna Tanski, president and CEO of Visit Duluth.
She said Duluth's taxes on restaurant food and lodging would remain on the high side but noted that some other communities in the Twin Cities metro area are poised to increase their own hospitality industry taxes in October. Tanski considers the timing fortuitous "because then we aren't pushing against the top of the ceiling."
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"It's still significant, and we recognize that. However, Duluth is not alone. Other communities are realizing that when you have only limited ways to generate extra revenue, it's unfortunate but it oftentimes gets passed on to the consumer," Tanski said.
Tax impact
A calculator for the Internal Revenue Service estimates the proposed half-percent sales tax would cost a single person living in Duluth and earning $40,000 to $50,000 annually about another $45 per year.
For a family of four earning $50,000 to $60,000, the same IRS calculator predicts the annual cost of the sales tax would be about $56.
If the city were to try to raise $7 million entirely via property taxes, residents could expect to shoulder a considerably greater cost. The owner of a typical home valued at $160,000 would see property taxes jump by $157, according to the calculations of Wayne Parson, Duluth's chief financial officer.
"The numbers really bear out the fact that the sales tax approach does spread the investment around in a way that's more manageable for everybody and certainly for residents," Larson said.
"In this strategy, more than just the 86,000 people who call Duluth home are sharing in that cost in a way that I do think is equitable and fair," said Larson, noting that her plan would also draw financial support from about 35,000 people who commute to work daily in Duluth and the 6.7 million who visit the city each year.
Duluth's voters will be asked via a referendum question on the November general election ballot whether they approve of the proposed sales tax. Any increase in local sales taxes also would need to be approved by the Minnesota Legislature.
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Tanski said Visit Duluth's board passed a resolution in support of the mayor's sales tax plan after what she called "a really robust discussion."
Brian Daugherty, president of Grandma's Restaurant Co., expressed concern that the city's growing reliance on taxing diners and visitors could deter business. He noted that local restaurants and hotels already are paying hefty sales taxes of between 10.625 and 13.875 percent.
"The increased costs of doing business in Duluth eventually gets passed down to the customers. Pretty soon the customer pushes back and may just stop coming to Duluth or find another way to make a visit affordable. Hotel rooms get replaced by Airbnb. Restaurant visits get replaced by stopping at delis, or grocery stores. And for Grandmas, this applies to the most important customer of all - the local," he said.
"The laws of economics eventually kick in for everyone and we hurt our own livelihood and homegrown industry. With these ... relentless increases, I see us at that tipping point," Daugherty said.
Critical need
Sandy Hoff, a Duluth businessman who was part of the development team that opened the waterfront Pier B Resort earlier this year, said he isn't sure whether the proposed sales tax is the best funding mechanism but agreed better streets are "a critical need."
"Certainly, community-wide, for commerce - whether it be tourism, restaurants, hotels or general hospitality - the quality of our roadways is very important, not just in terms of how they function but how they look and present the overall feel and experience of our community," he said.
Hoff said he has received numerous complaints from visitors about the poor quality of Railroad Street, the road that provides access to Pier B. Unless the street is improved soon, Hoff said it would give him pause to invest any more money in the neighboring Lot D property, which he and business partner Alex Giuliani, have been looking to redevelop.
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"Certainly, Lot D development will be contingent upon the city upgrading Railroad Street. It's long overdue, and you can't put $30 million of investment in at Pier B and now perhaps as much as $100 million in at Lot D without having good road access," Hoff said.
Tanski said the poor state of many of Duluth's streets has tarnished the city's image.
"It gets to the point where it's almost not passable. It's unacceptable. It's not just an eyesore. It's actually an impediment to businesses that are forced to deal with less-than-ideal and absolutely deteriorating gateways to multi-million-dollar investments. And we hear the complaints. You can follow it on social media. You can see it on TripAdvisor," she said.
