Property Tax Dependence: Are there Alternatives?

Cam Gordon

BY CAM GORDON

This fall, many Southside homeowners received their truth-in-taxation estimated property tax notices for 2025 and discovered they are going up again.
The 2025 city budget is set to be approved on Dec. 10, and council members are looking at ways to cut costs and find new funding options to address what some consider the unfair and burdensome way we pay for city services.
In the past, the downtown business district has provided a larger share of the property taxes needed to operate city government and fund services, but this year more of that burden has shifted onto residential property owners, and through them, renters as well.
Property taxes are also going up because of the 8.27 percent levy increase approved by the city, the 5.5 percent increase by the county, and 4.52 percent increase by the school board.
Property taxes represent about 30 percent of the revenue the city brings in, and pays for many basic city services, like most of the police and fire departments, as well as debt service, pension funds and costs for our parks, public housing and public buildings.
Increases in property taxes are a challenge for many people. Unlike income taxes, property taxes are not connected to how much money a person is making or how much wealth they have beyond the property they own. They apply to all property owners, even those who are unemployed, on a fixed pension or social security income, or have otherwise limited financial resources. There are state programs that can help, but they don’t solve the problem for everyone.
So, what can we do about it?
Improving property values downtown is at the top of many lists but has been costly and challenging in the past. Many of the causes, and likely solutions, to declining values may be beyond the city to control or influence.
The state’s complicated and unpredictable system of local government aid is often seen as a source of relief and offers possible help.
Holding back on new funding ideas and budget cutting may also help.
“I will not be asking for any new funding and will not vote for any new funding given the proposed 8.3 percent property tax levy increase,” said Rainville. “With the lack of growth in new construction and the continued drop in value of downtown buildings, every renter and homeowner is facing increases in property tax for years to come.”
Rainville is offering 3 proposals that would, respectively, reduce the property tax levy increase by 2 percent, 1.4 percent, and 1 percent. They would cut spending equally across all departments, delay internal technology upgrades, or do both.
Across-the-board spending cuts offers some advantages. Although department heads may call out – or threaten to cut – popular programs, if approved, departments heads would then be empowered to make the cuts in a way least harmful to their goals. Then the council and mayor could avoid having to find and agree on a large number of budget decisions.
“I have heard loud and clear that continually rising taxes are causing financial hardship for renters and homeowners alike,” Rainville wrote in a recent newsletter on Nov. 22. “As a city, we have to tighten our belt, just as residents have had to. I will continue to speak with my colleagues on the City Council and I hope we can agree on this common sense proposal to keep money in your pocket.”
A longer-term solution could be to find fairer ways to raise revenue.
“Expanding and diversifying revenue sources,” wrote Ward 2 Council Member Robin Wonsley in November, “has the potential to shift the burden off of residents and increase revenue through more progressive strategies.”
In November, the council approved her proposal to study city revenue sources other than property taxes, comparing them to other cities, and explore “innovative strategies for independent revenue generation,” and “policy changes that would be required at the state and local level to implement a tax on the wealthiest individuals in Minneapolis.”
While currently prohibited by Minnesota state law, many states allow cities and counties to collect wage, payroll or income taxes.
As property taxes continue to put disproportionate pressure on low-income renters and homeowners, this might be a good time for cities, and the state, to reevaluate its prohibition on local level wage, income or payroll taxes.
In a 2019 study, Jared Walczak of the Tax Foundation, found that local income taxes are imposed by 4,964 local jurisdictions across 17 states, with most levied by municipalities (3,816) and school districts (954). These taxes are a long-standing and significant source of revenue for cities in many states including Indiana, Ohio, Pennsylvania, Iowa, Kentucky, and Michigan.
According to Walczak, local wage taxes can complement or replace other local revenue sources, like property, sales, business, meals, or lodging taxes.
Six states rely on income taxes for more than 10 percent of local tax collections, while the local income taxes in five states capture more than 1 percent of adjusted gross income.
In different states, local income taxes are levied on all income, earned income, or interest and dividend income. Nonresidents are sometimes subject to a lower rate than residents, or not taxed at all. The Philadelphia City Wage Tax, for example, is a tax on earnings applied to all Philadelphia residents and all non-residents who work in the city.
Maryland’s local income taxes range from 1.75 to 3.2 percent, while nonresidents pay a uniform rate of 1.75 percent. They are generally paid by the employee but withheld by the employer, although in San Francisco and Newark, they are paid directly by the employer. Kansas’s 485 jurisdictions only impose their local income tax on interest and dividend income. Four West Virginia cities impose a flat charge of $2 to $5 per week on all those employed in the city.
Minnesota’s system of “Local Government Aid (LGA)” could be another place to look. According to the city’s website, in 2021, Minneapolis generated 3.5 times more in tax revenue to the state than they receive in state aid. This revenue comes from sales, income, and property taxes and was $74,542,064 in 2023.
One way to relieve property tax pressure might be to modify our LGA program by increasing the progressive income taxes slightly and distribute a preset and more predictable portion back to the locality where the taxes were collected.
A state-level income tax plan that returns some of its collections back to the cities in which they were collected could not only help fund needed services in a predictable and uniform way to all cities, but it could make them less dependent on regressive sales and property taxes.
As we continue to see the pressure, and even hardship, property taxes place on many city residents, being open minded about innovative alternatives could pay off.