3 Key Ways Omar Fateh’s Proposed Tax Hikes Might Impact Minneapolitans

Omar Fateh has won the Democratic-Farmer-Labor Party nomination for Mayor of a large metropolitan city under a socialist platform. This victory follows his fellow socialist’s, Zohran Mamdani, stunning win in New York City, signaling a change in the political landscape among Democratic strongholds in large metropolitan U.S. cities. While Fateh and Mamdani have differing objectives and goals for their uniquely different cities, one thing that they do have in common is their aim to raise tax revenues to pay for their agenda and these tax raises primarily deriving from high-earning tax payers via a progressive local option income tax.

This article defines a local option income tax and outlines three key ways Fateh’s proposed tax hikes for the high-income earners might impact Minneapolitans.

Local Option Income Taxes

Most taxpayers are familiar with the Federal income tax levied on individual taxpayers who work and perform services in the United States. Taxpayers in all but nine states also must pay taxes on their income at the state level. What is less common is local income taxes, often referred to as local option income taxes.

Like the Federal and state income taxes levied, cities have the ability to levy taxes on the income of their residents. This tax means that taxpayers will have taxes deducted from their paychecks at an additional level for living and working in that city. However, according to the Institute on Taxation and Economic Policy, only 10 cities levy some form of local option income tax. Furthermore, the majority of these cities impose a flat tax rate on all income earned within that jurisdiction (only New York City has a progressive rate), meaning that the wealthy are taxed proportionally to everybody else.

As local option income taxes are rarer, there is a paucity of direct evidence on the economic consequences of the proposed tax hikes. However, the rarity alone illuminates potential concerns and issues that might arise as local jurisdictions consider imposing one.

3 Key Considerations For How Fateh’s Proposed Tax Hike Might Impact Minneapolitans

(1) The High-Earning Taxpayers Will Pay More In Income Taxes Under Fateh’s Tax Plans

Fateh’s vision, according to his campaign website, includes significant investments in making housing affordable and increasing the city-wide minimum wage. However, like Mamdani, Fateh must be financially responsible with these increases. As I previously discussed in a Forbes contributor piece, unlike the Federal government, most city and state governments cannot run at a deficit. This notion means that any significant increases in spending must be paid for.

Fateh’s campaign website specifically states that he aims to “Lobby the State of Minnesota to allow the City of Minneapolis to institute a local option income tax to ensure the wealthy pay their fair share.” This tax hike would be similar to the 10 other cities levying a local option income tax. However, it would differ in one key dimension: the local option income tax would be progressive rather than flat. This difference means that lower-income taxpayers would pay hardly any (potentially no) additional taxes, whereas higher-income taxpayers would be taxed more significantly.

(2) The Middle Class Might Also Face Tax Hikes Due To Low Income Inequality In Minneapolis

A study by SmartAsset ranks income inequality among the largest 98 U.S. cities. This study examines the ratio of the income floor for the top 20% of earners to the income ceiling for the bottom 20% of earners. Most very large metropolitan cities appear toward the top of this list (i.e., New York, Los Angeles, Chicago, among others). Minneapolis appears in the very middle of the ranking at 47^th, suggesting only moderate income inequality.

The reason this is important is that imposing a progressive local option income tax relies on the notion that there is a large number of people with high-income levels who can afford a higher tax bill. However, if the income inequality is low in the city, then more taxpayers with moderate incomes may be subject to higher taxes.

Fateh’s campaign website is noticeably void of details on who will be impacted by this tax hike and how much they will face in incremental taxes. However, unlike Mamdani’s proposed progressive income tax hike for New York City, the city of Minneapolis does not have nearly the same concentration of wealth, suggesting that those not considered ultra-wealthy may potentially see their income tax rates increase.

(3) The High-Earning Minneapolitans May Just Move To Avoid Fateh’s Proposed Tax Hikes

As I outlined in a Forbes contributor piece about Mamdani, a key concern with imposing a local option income tax is that the high-income taxpayers have a unique ability to relocate to avoid paying taxes. What makes Fateh’s situation in Minneapolis even more sensitive relative to Mamdani’s in New York City is that Minneapolis is in a sprawling suburban area. In fact, the region is often referred to as the Twin Cities because the nearby city of St. Paul is also a large city in its own right. In the more digitalized workplace, where working from home some or all of the time has become normalized, the taxpayer’s physical office location has become less important in determining the workplace for tax purposes. If high-income taxpayers were to relocate, they might be able to avoid paying the higher tax burdens.

This potential relocation of high-income taxpayers calls into question the ultimate economics of such a tax hike. For instance, if the tax hike on only the higher-income taxpayers causes many of them to relocate, the city will not only not gain these tax revenues, but it will also lose out on other revenues it raises from things like sales taxes and property taxes.

Potentially more pressing might be the message that Fateh sends to the many large corporations in Minneapolis. According to Twin Cities Business, Minnesota has 15 Fortune 500 companies, many of which are headquartered in Minneapolis (i.e., Target, UnitedHealth, U.S. Bancorp, among others). The executives of these companies are the ones who will ultimately bear among the largest burdens of a progressive local option income tax hike. These executives also control many important decisions related to the business’s operations (even where the company is headquartered), potentially leading to even larger tax concerns for Minneapolis.

As discussed by Forbes when highlighting Mamdani’s tax plans, these progressive policies being proposed now in many jurisdictions have the potential to sink or swim a city. While much of the proposed tax hike by Fateh is yet to be known, one thing is clear: it is important that he carefully weighs the economics of the tax hike with the stated objectives of his platform to ensure that his plans result in positive outcomes.