Minneapolis cannot tax its way out of its downward spiral
Vice Presidential candidate JD Vance visited Minneapolis yesterday. Standing outside the ruins of the Third Precinct, he painted an unflattering picture of our state’s biggest city, suggesting that it was heading in the wrong direction.
This drew an immediate response from the city’s mayor, Jacob Frey:
It is not immediately clear what Mayor Frey is referring to in this list of positives. As I wrote in June, data actually show that Downtown Minneapolis has had the worst recovery of daytime and weekday activity in the United States. This is why the area’s offices are empty, their values are collapsing, commercial property tax revenues are tanking, and residential property taxes are being hiked to make up the deficit. None of this suggests a city on the up.
Indeed, Mayor Frey’s own actions show just how much trouble his city is in. The Star Tribune reports:
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.
The article recounts the familiar problems and solutions:
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…
There are concerns about ramping residential property taxes up too far, so “diversified revenue sources” — new taxes — are being examined. The article reports that Steve Brandt, president of the Board of Estimate and Taxation (BET):
…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. [Emphasis added]
As I wrote in August, new income and wealth taxes for Minneapolis are terrible ideas. I wrote then that:
Minnesota already has some of the highest rates of income tax in the United States. Research shows that these taxes are a factor in driving people out of the state. How much greater will this effect be when people don’t have to move out of the state to avoid it but simply out of the city?
The current property tax is already a form of wealth tax, levied, as it is, on the assessed value of an asset. This proposal is, then, for another wealth tax on top of that, presumably on all assets, such as stocks and bonds. The problems with this are well known, which explains why most countries which have dabbled with wealth taxes have ended up abandoning them: They typically cost more to administer than they bring in. This is hardly surprising given the fluctuations in stock and bond prices, and the consequent fluctuations in an individual’s wealth. Just take a look at how your 401k has done over the past month.
Note, also, that this additional wealth tax isn’t being presented as an alternative to the proposed additional income tax, but alongside it. This will only increase the desire of wealthier Minneapolitans to skedaddle. Brandt will soon find that a tax rate high enough to cause your tax base to split yields nothing.
I concluded that:
Minneapolis is in grave danger of entering the Doom Loop that cities across America entered in the 1960s and 1970s. As people left, tax revenues fell. Taxes were hiked and services cut in response, with the result that more people were driven to leave and the problems intensified. From 1950 to 1990, the population of Minneapolis fell by 153,335, or 29%. One sure way to set that process in motion again is to repeat the mistakes that set it in motion last time. Instead, we must look at the root causes of the decline of Minneapolis.
Mayor Frey would not be considering such a dreadful slate of policies if Minneapolis really was in as strong a position as he claims. He should take Vance’s critique more seriously, it has much truth to it.