Minnesota conservatives, with the backing of the business lobby, are keen on a plan to eliminate the state business property tax. A recent North Star article noted that the bulk of this tax relief will go to large multi-million dollar properties, as opposed to small Main Street businesses. This article will look at a different question: is the state budget surplus large enough to eliminate the state business property tax without sending the state back into deficit? Probably not.
Most of the proposals to eliminate the state business property tax start small, exempting only a portion of business value from the tax in the first year of the phase-out. Ultimately, however, the goal of many of these proposals is to completely eliminate the state business property tax. The first full biennium in which the repeal of the state business property tax will be complete will be FY 2022-23. Our best estimate of the amount of revenue that the state business property tax will generate in that biennium is $1.9 billion. Thus, eliminating the state business property tax would reduce state revenue by $1.9 billion in FY 2022-23.
Will the state have a big enough surplus in FY 2022-23 to absorb a $1.9 billion hit? No one knows for sure, since the state’s “planning horizon” does not extend beyond FY 2019. Currently, Minnesota Management & Budget (MMB) projects that the FY 2018-19 general fund structural surplus (i.e., the amount by which the revenues generated in the biennium exceed expenditures) will be just $1.2 billion. In other words, the amount of biennial revenue that the state will lose by the time the state business property tax is completely phased-out already exceeds the projected budget surplus at the end of the state’s planning horizon.
However, even the projection of $1.2 billion structural surplus in FY 2018-19 is based on rosy assumptions. MMB is required by state law to include the impact of inflation when predicting general fund revenues, but to largely ignore inflation when projecting expenditures. If—per the recommendations of Minnesota’s non-partisan Council of Economic Advisors—the effects of inflation were fully included on both the revenue and expenditure side of the state ledger, the projected state surplus for the FY 2018-19 biennium would largely evaporate. In fact, MMB informally projects that inflation will increase state expenditures by $1.7 billion beyond the officially forecasted amount in FY 2018-19, thus converting the projected $1.2 billion structural surplus into a $0.5 billion deficit.
This analysis indicates that there is a distinct possibility—even a probability—that the elimination of the state business property tax will more than wipe out any projected surplus that the state might have, even before we start to consider other priorities, such as other tax reductions or increased state investment in selected areas, such as pre-kindergarten education. Minnesotans need to carefully consider whether it is wise to embark on a tax giveaway that will ultimately cost the state $1.9 billion per biennium, when—under optimistic assumptions—the size of the projected state surplus is considerably less than this and—under more realistic assumptions—there might even be a deficit instead of a surplus.
