Grizelda by Margaret R. Taylor

In the Republic of Corvain, anybody who has a hint of magical power is rounded up and thrown into prison. They're doing it to defend the new nation, says the revolutionary government – defend it from the sorcerers and sorceresses who used to be the lackeys of the man-eating Auks in the bad old days of the monarcy. When Grizelda, a young seamstress from the poorer part of the capitol city, suddenly finds herself the government's target, she fears she is done for. But in prison she meets a group of rat-riding pixies and earns their undying friendship by mending their clothes. In exchange, they help her to escape and seek refuge in the world below the city. Living underground means Grizelda has to adapt to the strange customs of the goblins, a cheerless bunch who storm around muttering about the dictatorship of the proletariat. Not content to remain in exile, Grizelda winds up entangled with a group of human revolutionaries. Together they hatch a daring plan to return the Republic to its original ideals, before it decayed into a police state. If their plan is going to work, Grizelda will have to get Communist goblins, irresponsible pixies, and revolutionaries still deeply mistrustful of magic to work together.