Business Property Taxes Not as High as We’re Led to Believe


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A recent publication from the Minnesota Chamber of Commerce contains a list of claims regarding the level of business property taxes in Minnesota relative to other states: 49th “worst” (i.e., second highest) among the fifty states for rural commercial property taxes, 45th worst for metro commercial property taxes, and 40th worst for industrial property taxes. Startling? Definitely. Accurate? Not so much.

The property tax statistics cited by the Chamber are from the 50 State Property Tax Comparison Study 2014 from the “Minnesota Center for Fiscal Excellence” (MCFE). The first thing to note about this report is that it does not compare average metropolitan1 and rural property taxes within the fifty states. Rather, it compares a selected metro and rural city within each state. In Minnesota, metro (or urban) tax computations are based on Minneapolis, while rural computations are based on Glencoe, the seat of McLeod County.

Neither Minneapolis nor Glencoe are representative of their respective regions in terms of property taxes. For example, Minneapolis’ 2014 total local property tax rate is 19 percent higher than the average rate for the seven county metropolitan area, while Glencoe’s rate is a whopping 64 percent higher than the average rate for greater Minnesota.2 Consequently, business property taxes in both communities are high relative to the average within their respective regions. Thus, neither community should be used as a basis for general claims about the level of metro or rural property taxes in Minnesota relative to other states; if interstate comparisons were based on more representative metro and rural communities, Minnesota’s rank relative to other states would improve.

It is also important to note that Minnesota’s rank relative to other states is dependent upon assumptions regarding the distribution of business value between real property (land and buildings) and personal property (equipment and inventories). The Chamber’s statements regarding the level of business property taxes in Minnesota are based on the MCFE’s assumption that commercial value is 17 percent personal and 83 percent real, while industrial value is 50 percent personal and 50 percent real.

For both commercial and industrial property, these assumptions understate the percentage of value that is personal. According to calculations from the Minnesota Department of Revenue (MDOR) based on U.S. Bureau of Economic Analysis data (the source of all real and personal value information presented in this article), approximately 30 percent of commercial value and 57 percent of industrial value is personal.3

Why does this matter? Minnesota is one of only eleven states that do not tax commercial and industrial personal property. By understating the percentage of property that is personal, the relative tax advantage that Minnesota businesses enjoy as a result of the personal property tax exemption is understated and Minnesota business property taxes relative to other states are overstated. Use of more realistic assumptions regarding the mix of real versus personal property value would result in a modest improvement in the Minneapolis and Glencoe commercial and industrial property tax rankings relative to cities in other states.4

A closer look at data compiled by MDOR reveals that specific subcategories of commercial and industrial property vary tremendously from the average in terms of the percentage of total value that is personal. For example, for real estate businesses, the percentage of total property value that is personal is about four percent—well below the 30 percent average for all commercial property. Consequently, real estate businesses derive relatively little advantage from Minnesota’s personal property exemption; the 50 State Property Tax Comparison Study rankings for commercial property probably understate property taxes on real estate businesses in Minnesota relative to other states. However, the sale of real estate likely requires physical presence within a state and thus the location of real estate businesses is unlikely to be influenced by interstate property tax differentials.

On the other hand, other subcategories of commercial property have concentrations of personal value much higher than the 30 percent commercial average. For the relatively footloose category of information and data processing services, 72 percent of total value is personal. Thus, these businesses derive a significant advantage from Minnesota’s personal property exemption. A review of literature on the subject of interstate tax differentials indicates that they generally are not a primary driver of business location decisions; however, to the extent that location decisions are influenced by such differentials, highly mobile information and data processing businesses could have an incentive to locate in Minnesota.

  Pers Prop graph

Over half of the commercial subcategories (comprising over half of total commercial value) examined by MDOR have concentrations of personal property value that are substantially different (10 percentage points or more) from the average for all commercial properties. For these businesses, property tax calculations and rankings based on the commercial average are probably not particularly meaningful.

In summary, the business property tax rankings cited by the Chamber (and other conservative groups) are not an accurate portrayal of Minnesota business property taxes relative to other states. First, they are not based on true regional averages, but on selected cities within each state which may or may not be representative of the state in general; we know that business property taxes in the two cities chosen to represent Minnesota are high relative to other communities in their region. Second, the rankings are based on assumptions which understate personal value percentages and hence overstate business property taxes in Minnesota relative to other states. Moreover, the average tax on a commercial or an industrial property may not be particularly meaningful for many businesses due to tremendous variation in personal property percentages among various subcategories of commercial and industrial property.

 

 

 

1What the Chamber publication refers to as “metro” property taxes are referred to as “urban” property taxes in the 50 State Property Tax Comparison Study.

2The property tax rate referenced here is the combined city, county, school district, and special taxing district “tax capacity tax rate,” which is the property tax rate that is applied to a property’s “tax capacity” (i.e., the property taxable market value multiplied by the class rate for the designated class of property). The local tax capacity tax rate generated the largest share of all property taxes paid by Minnesota businesses in 2014. The uniform statewide business property tax rate and the metropolitan and Iron Range fiscal disparity programs help to mitigate, but do not eliminate, regional business property tax disparities in Minnesota resulting from variation in local tax rates.

 3MDOR calculates the average percentage of commercial value that is personal by dividing the sum of equipment and inventories by the sum of equipment, inventories, land, and buildings. The proper treatment of inventories for purposes of interstate property tax comparisons is the subject of discussion. If inventories are excluded from the calculation of the commercial personal property percentage, the percentage drops from 30 percent to 24 percent—still significantly greater than the 17 percent assumed in the MCFE’s 50 State Property Tax Comparison Study. With the exception of the commercial subcategories of retail and wholesale trade, inventories comprise less than 1.6 percent of total value and thus have only a marginal impact on the personal property percentage. For retail trade, the personal property percentage is 36 percent including inventories and 17 percent excluding inventories. For wholesale trade, the personal property percentage is 67 percent including inventories and 38 percent excluding inventories.

 4The 50 State Property Tax Comparison Study lists industrial property taxes under two different assumptions: (1) 50 percent of total value is personal and (2) 60 percent is personal. The Chamber’s claims regarding Minnesota industrial property taxes are based on the 50 percent assumption, even though the 60 percent assumption is closer to the average personal property percentage for all types of industrial property according to MDOR calculations based on U.S. BEA data. Using the 60 percent assumption instead of the 50 percent assumption is sufficient to raise the Minneapolis and Glencoe rankings relative to cities in other states by 3 to 7 places, depending of the value of property being examined.