Minneapolis ought to diversify its income

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Facing the prospect of onerous property-tax increases on residents next year and beyond, it’s time for Minneapolis City Hall to take a serious look at diversifying how it finances city services, including seeking the power to impose a municipal income or wealth tax.

That may be a startling idea, but with several years of nasty property tax increases for residential property projected ahead, it’s vital to explore.

A modest tax on higher incomes or accumulated wealth could help to offset the regressive impacts of ever-increasing property taxation as a mainstay of city finances. Regressivity means that lower-income people pay a higher share of their household income than wealthy people.

Finding new revenues is one long-term budget-balancing idea that I carried to a recent meeting with Mayor Jacob Frey. But I also suggested some shorter-term steps that could help bridge the city’s $21.6 million budget gap for 2025. City finance officials project such a gap will continue through at least 2030. That gap is based on merely maintaining current service levels for existing programs. The gap calculation factors in maintaining current services plus solidified-cost items for next year, such as already negotiated or expected salary increases for city employees.

Why should you care?

If you’re a homeowner, this budget gap exists even if the property levy rises by 6.1% in 2025 — the target set by the City Council last December as part of its five-year budgeting scenario.

The gap means more pressure this fall to raise the property taxes by even more than that target. The mayor told me that he doubts the levy increase can be held to 6.1% — the limit that Samantha Pree-Stinson and I prefer. We’re the directly elected members of the city’s Board of Estimate and Taxation. Other members include the mayor, two council members and a park commissioner. We don’t control city spending. That’s the council and mayor’s job. But BET does monitor city finances, authorize borrowing and set the property tax limit each year.

Here’s the problem. Even a 6.1% tax hike for 2026 could mean double-digit increases in property-tax bills for homeowners. That’s because of something called burden shift. The Minneapolis property-tax base sagged in the 2024 assessment, the valuation that will be used for next year’s tax calculations. That’s due mostly to high interest rates undercutting demand to buy apartments and houses, and to weakening downtown commercial values.

The problem for homeowners is that the residential property base dipped less (-1.2%) than that for apartments (-9.5%) and commercial property (-8.7%). So our homes will make up proportionately more of the property-tax base. That means your city property tax could well rise even if your home’s value dipped. And in places like the North Side’s 4th and 5th wards, which have the lowest median home values, the bite will be worse because the typical home there gained value, unlike other wards.

What can we do?

I offered the mayor a bundle of short-term ideas for narrowing next year’s budget gap. Some examples: Tell the City Council that any new programs must be funded by cutting or eliminating outmoded programs — and back that with a veto. Reschedule the Target Center renovation debt over a longer term to reduce that $5.7 million annual payment. Put the Convention Center’s $12 million annual budget for equipment and improvements on a diet for few years. Draw down the Convention Center’s $17 million fund balance, and the growing $78 million balance in the Downtown Assets Fund.

None of these is cost-free. Extending the term of Target Center debt means paying more in the long run, but it helps to get the city through the next few projected lean years. Convention Center wear and tear must eventually be addressed. But these ideas also buy the city time because they free up some of the local sales and special taxes the city collects to support the general fund.

Residents and visitors alike pay local sales tax and special taxes on restaurant meals, liquor, entertainment and lodging. Much of this by law goes to debt on the Convention Center, Target Center and the football stadium. But some goes to the city’s general fund, which finances some or all of core city services like the public works, fire and police departments. The sales tax is regressive but the special taxes rely more on discretionary spending like a nice meal or a night on the town.

In pre-pandemic 2019, these spending-based taxes generated $31 million for the general fund. The pandemic slashed that severely but the blow was cushioned by federal pandemic aid. Now that aid has expired, but the council’s five-year budget plan only returns this subsidy from sales and special taxes to its pre-pandemic level. That provides no increase for the ravages of inflation on city services for the past several years. The general fund’s share of sales and special tax collections needs to go up so that property taxpayers aren’t left holding the bag. Some tweaking of state law on the use of these taxes may be needed.

The city already sends to state coffers in state sales and income taxes several times what it gets back in aid. That could bolster the city’s case for a modest income or wealth tax. The advantage of such a tax is that it would diminish reliance on the regressive property tax, which is slated to supply $317 million of the general fund in this year’s budget, its largest single revenue source. This supplemental tax could be calibrated to apply only to incomes or assets exceeding certain levels. For example, levying an income tax solely against household incomes of, say, more than $200,000 or $400,000 ensures progressivity and could add tens of millions of dollars in revenue. That new money could close the budget gap or give property-tax relief or both.

Another argument for a new income- or wealth-based tax is that Minneapolis is getting shortchanged by state’s local government aid program. LGA uses some state sales and income taxes to subsidize city budgets so that local property taxes don’t become too onerous. But the Legislature’s LGA formula has increased local government aid to Minneapolis by just 3% since 2018, while the amount of such aid paid to cities statewide rose 24%. This aid is intended to buffer citizens from property tax sticker shock. If the state isn’t going to adequately protect Minneapolis taxpayers, it should let the city diversify its revenue sources.

The biggest benefit from diversifying city revenues is that no single tax is relied on. Imposing a modest income or wealth tax will lessen the regressive burden that property and sales taxes pose for low-income residents, especially seniors. And it will shift more of the tax burden to those who can better afford it.

I’ve earlier suggested that a sagging tax base and a budget gap almost certainly will mean property-tax pain for Minneapolis residents in 2025. That’s even if the mayor and City Council stick to the 6.1% levy increase that was set last December as the target for 2025. And the mayor told me recently he doesn’t think that the levy can be limited to that target.

Steve Brandt is president of the Minneapolis Board of Estimate and Taxation. He’s a retired Star Tribune reporter.