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The city of Mankato is planning to change how it taxes pulltabs played in local bars — a move that would direct $100,000 more annually to charity, cultural and anti-poverty programs.

MANKATO — A planned change in how Mankato taxes pulltabs will mean a double windfall for local charities.

The City Council next week will be holding a public hearing on the proposal to drop its current tax on charitable gambling, which must be used for gambling regulation and enforcement. Instead, the city is planning to institute a different tax that must be contributed to local nonprofits or used for social programs.

Essentially, the change will transfer roughly $100,000 a year from city coffers to community nonprofits or projects aimed at humanitarian efforts such as helping the homeless.

In addition, the city is planning to refund more than $200,000 in charitable gambling taxes collected in recent years to the area nonprofit organizations that paid the taxes.

“There’s a number of cities that have made the switch,” said Deputy City Manager Alison Zelms.

In fact, of the 28 Minnesota cities using the gambling enforcement tax in 2017, 10 have since rescinded it, according to the Minnesota Gambling Control Board. In 2018, 122 cities used the alternative tax where the proceeds are aimed at charitable works.

Part of the motivation for the switch appears to be the challenges of documenting that the gambling regulation tax is actually being used to monitor gambling activities. Cities must provide the Gambling Control Board with regular reports itemizing how the dollars are being expended to ensure that local bars that sell pulltabs — and youth organizations and other nonprofits that sponsor and benefit from the pulltab profits — are following state law.

“We’ve talked to many different cities about the 3% (gambling regulation tax) and how it was being used,” said Gary Danger, compliance officer with the Gambling Control Board.

A Mankato city employee who had been filling out the charitable gambling reports left city employment several years ago, and the reporting duty got lost in the transition, Zelms said. Attempts to document the city’s gambling-regulation spending after the fact didn’t fully satisfy Gambling Control Board standards, and the city’s reports since 2014 show between $40,000 and $45,000 in documented expenses even as taxes collected typically were about $100,000.

“So there will be some repayment,” Zelms said.

Those refunds totaling as much as $250,000 will go to the eight area nonprofits who raise revenue through pulltab sales at various bars — the Lake Washington Improvement Association, the Prairie Ecology Bus, the Eagles Club, the Mankato Area Hockey Association, the Govenaires drum and bugle corps, the Mankato Area Youth Baseball Association, Community Charities of Minnesota and the VFW.

Going forward, the city had the option of cutting the size of its gambling-regulation tax to match its enforcement expenses.

“We’ve seen the percentage reduced (in other cities) to reflect actual expense,” Danger said. “We’ve seen quite a bit of that. The charities are seeing more of the revenue for charitable uses. So everybody wins.”

Mankato staff is recommending the City Council take a different approach — implementing the pulltab tax that can only be used for charitable activities. (Officially, under state law, it’s not a tax but a “lawful gambling contribution fund.”)

Proceeds can be used for addressing poverty, homelessness, disabilities and problem gambling. Other options for the revenue include non-profit community festivals, public schools, scholarship funds, support for military families, fire and police equipment/training, and public trail maintenance. Allowable uses also include support for community art and music, along with nutritional programs such as food shelves and senior-dining services.

The spending would be very similar to the city’s existing Community Grants Program, which currently allocates about $25,000 a year to anti-poverty and cultural programs. Because that program is funded with property tax dollars, the city has been conservative in what it allocates — often turning down more requests that it funds.

The new lawful gambling contribution fund could more than quadruple the available money for those sorts of programs.

“There may be a little more we’ll be able to do,” Zelms said. “... Every year there are new ideas that come forward that are interesting.”

Editor's note: The first version of this story contained a typo in the description of the Govenaires drum and bugle corps.

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