Minneapolis to look at new taxes as downtown values plummet

Minneapolis Mayor Jacob Frey is considering new taxes as downtown property values plummet and city costs go up.

Frey said he will “bring experts together” to look at “new revenue streams” in the coming months to ease the burden shifting onto residential property.

Most of the changes being floated would require approval from state lawmakers — and couldn’t happen any time soon.

Property taxes are the largest revenue source for the city’s general fund. But with high vacancy rates and office towers selling at deep discounts — one pair of downtown towers recently sold for 9% of the price paid five years ago — in this new post-pandemic work paradigm, they are worth less, so their owners will pay less in taxes.

In August, Frey proposed an 8.1% increase in the amount raised from property taxes next year to fund his proposed $1.9 billion annual budget. That’s the biggest tax increase since the mid-2000s, fueled by inflation, higher city employee salaries, millions required for police reforms and the loss of federal pandemic funds.

The city had a projected deficit of nearly $22 million before Frey made adjustments to balance his budget proposal. During the Sept. 18 meeting of the Minneapolis Board of Estimate and Taxation, Frey said the additional revenue could offset shortfalls projected in 2025 and beyond.

Council President Elliott Payne said at the meeting he will “be in partnership” with Frey when it comes to raising new revenue, saying the council has a “huge appetite” to look closely at the budget and identify opportunities to keep the property tax burden as low as possible.

Steve Brandt, president of the Board of Estimate and Taxation (BET), said he thought the mayor’s proposed tax increase was too high but would support it if Frey took a serious look at diversified revenue sources so the city doesn’t depend on property tax revenue “ad infinitum.”

The BET sets the maximum tax levy for the city, Minneapolis Park and Recreation Board, Municipal Building Commission and the Public Housing Authority. The BET consists of elected officials from the city and Park Board, as well as two members elected specifically to serve on the BET. Brandt is one of them.

At the September meeting, the BET eventually approved a higher increase — 8.3% — over the objections of Brandt and Frey.

In the long term, Brandt hopes the city considers an income tax for higher earners, a wealth tax, a payroll tax or an increase in the city sales tax. Minneapolis now charges a 0.5% sales tax, while St. Paul charges 1.5%.

Interest in a wealth tax — imposed on the wealthiest taxpayers’ assets — has grown among progressives as cities and states grapple with budget shortfalls and income inequality.

The income tax could apply to property owners whose household income exceeds a certain threshold — say $200,000 — which would generate $40 million to $50 million annually, Brandt said.

The city is already looking at expanding the downtown taxing area where liquor and restaurant taxes apply. Two-thirds of the North Loop isn’t included, Brandt said.

More local government aid from the state would also help, Brandt said, although he acknowledged that would be a tough fight at the Capitol.

Council Member Jeremiah Ellison said everybody’s got an idea about how the city could generate new revenue, but he’s doubtful the city will find a receptive audience at the Capitol.

“I don’t see state electeds taking that hit, that kind of political hit, on our behalf,” he said.