Most cities fund basic services such as street lighting, sweeping, and maintenance through property taxes. In 2003, St. Paul became the only city in Minnesota to assess property owners directly for these services using special assessments.
The Law on Special Assessments
From the United States Constitution down, a fundamental premise of the tax code is that taxes must be levied evenly (uniformity). It is not necessary that everyone should pay the same amount of tax, but the same rules should apply to everyone.
Special assessments, as a use of a city's tax power, are intended as a strictly limited exception to this principle. If a municipality completes a public project that provides a special benefit to a group of properties, over and above the benefit to the general public, this justifies levying additional taxes on the properties benefited to recover some or all of the value created.
These taxes are levied in the form of special assessments. To be legal, special assessments must pass all three limbs of the special benefit test (see panel).
When applying the test, the cost of the work is irrelevant. (1) The project must cause an increase in the market value of those properties, (2) the amount of the special assessment is limited to this increase in market value, and (3) in any case the tax must be levied uniformly to all properties in the assessed group. Otherwise, the special assessment violates the Minnesota Constitution and is an unjust taking under the 5th and 14th Amendment of the United States Constitution.
Examples of public projects that might satisfy the special benefit test include paving a dirt road, connecting a set of properties to city water, or lighting a previously unlit city street. In each case, the public project would typically cause a measurable increase in market value to the properties benefited by the improvement. Routine maintenance work on the other hand – such as the costs of lighting and sweeping or street maintenance – does not create new market value. It therefore fails the special benefit test, and cannot be assessed to properties over and above regular property taxes.
The Special Benefit Test
For a special assessment to be valid, it must satisfy all three components of the 'special benefit' test:
The ROW System (2003-2016)
Special assessments are routinely used to pay for public projects. What made St. Paul unique in Minnesota was that it tried to use special assessments to fund the kind of routine maintenance normally paid for by property taxes - the 'Right of Way' (ROW) system. The assessments funded a broad package of street maintenance services - everything from sweeping to tree trimming, traffic signs, snow ploughing, seal coating, street lighting pot hole repair, seal coating and mill & overlay.
By assessing properties in this way, St. Paul was able to shift approximately $32m of its annual operating budget out of property taxes and into a separate revenue stream. This novel use of special assessments was good politics - it allowed elected officials to pay for street maintenance while avoiding the political pressures of an equivalent rise in property taxes.
The city operated its ROW assessment program until 2011, when a group of churches challenged the system in the courts on the basis that the special assessments were unconstitutional as they did not provide a special benefit to their property over and above the general benefit. Over the course of the litigation, St. Paul changed its legal theory. Instead of attempting to answer the charges directly, the city claimed that the assessments weren't taxes subject to the special benefit test at all, but were instead fees, charged to properties under the city's police power.
The case reached the Minnesota Supreme Court in 2016, as First Baptist Church v. City of St. Paul.
First Baptist Church v City of St. Paul (2016)
The First Baptist decision remains the leading legal authority in this area of law.
The key question for the court was whether St. Paul's ROW assessments were taxes or fees. This distinction was critical to the City's case. If the ROW assessments were taxes, they would almost certainly fail to meet the special benefit test, because the City would have trouble demonstrating that they gave rise to an increase in the market value of the assessed properties. If they were fees, however, they only had to be 'reasonable' – a much easier bar for the City to meet.
Taxes v Fees
Local governments have two broad powers that they can use to demand money from property owners:
Local governments can levy taxes. The purpose of taxes is to raise revenue in order to provide basic services to its residents.
Local governments can enforce the law. They can collect fees incidental to a valid regulatory function e.g. parking tickets.
In order to decide whether the special assessments were taxes or fees, the Supreme Court had to assess their primary purpose. The court summarized the relevant legal standard as follows:
Determining whether a particular charge imposed by a city government is an exercise of the taxing power or the police power requires a reviewing court to examine the charge’s “primary purpose.” … If “a city’s true motivation was to raise revenue—and not merely to recover the costs of regulation,” the charge is a tax.
- First Baptist Church v. City of St. Paul (884 N.W.2d 355 (Minn. 2016)).
The Supreme Court's Decision
The Minnesota Supreme Court comprehensively rejected the City's argument that the special assessments were a use of the city's regulatory (fee) power:
The City’s ROW assessment functions as “a revenue measure, benefiting the public in general,” rather than as a “purely regulatory or license fee”… many of the services funded through the ROW assessment benefit the general public in precisely the same manner as they benefit the properties assessed.
- First Baptist Church v. City of St. Paul (884 N.W.2d 355 (Minn. 2016)).
In other words, the features of the ROW program made it a use of the tax power. As taxes, the assessments were only legal if they passed the special benefit test.
The Street Maintenance Service Program (2017-)
The adverse Supreme Court decision in First Baptist forced the city to reform the ROW program, which had been raising approximately $32m in annual revenue.
Most of the services previously covered by the ROW system were moved to the general fund (approximately 2⁄3 of the overall budget), to be funded through property taxes. Four services – street lighting, sweeping, seal coating, and mill & overlay – were still assessed directly to property owners. The program was rebranded as the Street Maintenance and Service Program (SMSP) from 2017 onwards.
Instead of dividing up the overall cost of street maintenance amongst all properties in the city, under SMSP property owners would be directly charged for each service the city provided to "their" street. In practical terms, this meant that expensive services such as mill & overlay were no longer shared city-wide, creating a heavy financial burden that applied only to properties abutting busy streets.
The new SMSP assessments were appealed on much the same grounds as the old ROW charges: despite the city's changes to the program, they were still fundamentally taxes, not fees.
The first appeal to reach the district court was First Baptist Church of St. Paul, et al. v. City of St. Paul (2018). This case was essentially a re-run of the arguments that had already been put forward in the original First Baptist (2016) case.
District Court Decision in First Baptist (2018)
In response to the churches' argument that the assessments still failed to meet the special benefit test, the City claimed once more that its assessments were regulatory fees and were therefore legal so long as they were 'reasonable'.
In an opinion handed down on August 9th, 2019, Judge Millenacker rejected the City's fee theory once more, following the reasoning in the prior First Baptist case:
The City argues that because it has wide latitude to regulate use of the roadway under its police powers, and both its Charter and state law provide authority to assess benefited properties for fees incurred due to such regulation, the charges at issue here are fees despite providing no unique benefit to the properties charged. But if this were the state of the law, the Minnesota Supreme Court would have upheld the ROW assessments as valid regulatory fees under the City's police power.
The relevance of this case is that it draws a straight line between the discredited ROW program and the new SMSP program. The changes the City have made to the program do not meaningfully change the substance of the assessments – they are still taxes, not fees.
Our Appeal - Christina Anderson et al. v. City of St. Paul
We're making many of the same arguments as the appellants in both First Baptist cases in our appeal against the 2018 mill & overlay assessments.
The SMSP mill & overlay charges are no different to the same assessments under the discredited ROW program. They have the same essential characteristics (for example, that they benefit the general public, and their primary purpose is to raise revenue), and are taxes, not fees. Our view has been affirmed by Judge Millenacker's decision in the 2018 First Baptist case.
As taxes whose primary purpose is to raise revenue, the 2018 mill & overlay assessments fail to satisfy all three limbs of the special benefit test, as is required under Minnesota law. Routine maintenance work of this kind simply does not create a special benefit as measured by an increase in market value.
In the absence of a special benefit, the assessments are also an unjust taking without due process under Article X of the Minnesota Constitution and the 5th and 14th Amendments to the US Constitution.