Opinion | Minneapolis needs an alternative to rising property taxes

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Minneapolis needs to diversify its revenues to reduce its reliance on a property tax that crushes some senior and low-income property owners, as I maintained on these pages early last year. We’re making headway at City Hall on studying the alternatives for doing so. Here’s a progress report. I welcome your feedback at my email below.

The goal is to rely less on property taxes to fund inevitable increases in the cost of government. Those increases arise from many factors, from the cost of paying city workers to prices for such basic materials as asphalt for paving and rebuilding streets. Many voters I met in this year’s campaign urge digging deeper into that budgetary growth, which I support.

My first preference for shifting the tax burden is a more steeply progressive property tax so the percentage of a home’s value that is taxed rises more as its value increases. Such a statewide change could be a heavy lift at the Legislature. But it might also have appeal outside the Twin Cities where home values are generally lower. As columnist Lori Sturdevant suggested recently, the issue is starting to simmer statewide (“When will Minnesotans reach their limit on property taxes?” Nov. 15). In Minneapolis, the state’s local government aid that was intended to dampen property tax increases has been stagnant for years.

Alternatively, Minneapolis could ask the Legislature to let it devise its own property tax relief by authorizing one or more new, Minneapolis-specific taxes. Serving on the city Board of Estimate and Taxation, I conditioned my support for 2025’s property tax increase on a pledge by city leaders to study those alternatives. They could relieve the endless hefty property tax increases that have shifted to homeowners since the pandemic slashed downtown’s commercial property values. The City Council authorized such a study. We now have a preliminary report that inevitably raises more questions.

A key finding is that Minneapolis ranks highest among 10 peer cities for its percentage of tax income that comes from the property tax. It ranks last among those cities in levying other types of taxes. That argues for tax diversification here. Looking ahead, the report projects that property taxes may rise from 48% of Minneapolis revenue this year to 57% in 2031, absent additional revenue sources. That’s unsustainable.

But even a higher-earner tax poses many questions that should be considered before the City Council decides whether to bring this or another proposal to the Legislature. Will it drive higher-earners out of the city? Or does a high property tax already do so? Should we tax all income of high-earner households or just the amount above a certain threshold, say $200,000 (roughly two-and-a-half times the city’s median household income)? Do we index that threshold to rise with inflation? Should the infusion of cash be used to reduce current property taxes? Or to fund spending in areas where the feds and state may cut? Or split between those purposes? Should property tax relief be targeted to supplement state property tax credits for lower-income people? Should use of the income tax be restricted to years when the adopted property tax increase is kept below a certain percentage?

We can find guidance to answer these questions by studying further the thousands of localities already using local income taxes in the 15 red and blue states that have authorized them.

But our peer cities nationally also employ other taxes that could be alternatives to an income tax. I find a real estate transfer tax appealing. It’s already charged by the state and Hennepin County. Charging only one-quarter the state rate would raise at least $25 million annually for the city. Charging sellers this tax extracts the money when they’re flush with cash.

Another possibility would be a voluntary payment-in-lieu-of-taxes that asks larger tax-exempt property owners to pay a fair share of the property tax they’d otherwise pay in recognition of the various services that the city provides them. For example, my church was spared even more significant fire damage in 2022 by a prompt response from city firefighters. Boston collects tens of millions this way even though it exempts all but large nonprofits. It encourages payment by publishing how much each exempt property owner coughs up.

My preference is to further study the feasibility of a higher-earner income tax, voluntary property tax payments by large nonprofits and the land transfer tax. But research lists other options. Some examples include excise taxes, a traffic congestion charge, a business income or gross receipts tax, service fees for goods or services (for example, higher parking meter fees), and more expansive special service districts. Any proposed new tax should be evaluated on how much it generates, on whom its burden falls and ease of administration.