The elimination of state business property tax is projected to reduce state revenue by nearly $1.9 billion by the time it is fully phased-in. However, the amount of net tax relief received by Minnesotans will only be about $0.9 billion. What happened to the missing $1.0 billion? It will be exported to out-of-state taxpayers or to the federal government.
The first article in this series on the elimination of the state business property tax focused on the distribution of the tax relief between high and low value businesses, while the most recent article focused on the distribution between metro and greater Minnesota businesses. Both of these articles examined the initial impact of the tax reduction in the form of the tax relief for the business that is legally required to pay the tax.
However, from a tax incidence perspective, the initial impact of a tax is just the beginning of the story. For example, while a portion of Minnesota business taxes are borne by business owners or shareholders (referred to as “capital”), a portion of the tax is shifted on to Minnesota labor in the form of lower wages, Minnesota consumers in the form of higher prices, or exported to out-of-state taxpayers. Conversely, a reduction in Minnesota business taxes goes not just to Minnesota capital, but is shifted to Minnesota labor and consumers and out-of-state taxpayers. In addition, a portion of a reduction in Minnesota business property taxes is exported to the federal government in the form of increased federal taxes resulting from a reduced Minnesota tax deduction.
The following analysis focuses on the final impact of the elimination of the state business property tax after taking into account this shifting based upon the 2015 Minnesota Tax Incidence Study and other Minnesota Department of Revenue (MDOR) sources.
Based on MDOR estimates, 53 percent of the tax relief resulting from the elimination of the state business property tax is exported out of Minnesota, with most of this 53 percent going to the federal government in the form of increased federal taxes. Only 47 percent of the relief will flow to Minnesota capital, labor, and consumers. In other words, for every $1 in revenue lost to the State of Minnesota from the repeal of the state business property tax, Minnesota taxpayers will see a 47 cent net reduction in taxes.
By focusing on the initial impact of the elimination of the state business property tax, as opposed to the final impact after shifting, previous installments in this series have overstated the actual amount of net tax relief estimated to stay within Minnesota by over one hundred percent.
Comparatively, only about 16 percent of homeowners’ property tax relief is exported out of Minnesota—with the exported amount going entirely to the federal government through higher federal taxes.* If the relief is concentrated on low-income homeowners through progressive changes in the Minnesota property tax refund (a.k.a., “circuit breaker”) the amount of tax relief exported to the federal government would be even lower and the amount staying with Minnesota taxpayers higher.
These facts should not be construed as an argument for never providing business property tax relief, as there could be benefits of business tax breaks not encompassed by a tax incidence analysis. However, Minnesotans should be cognizant of just how little of the huge amount of the relief provided by the repeal of the state business property tax truly stays within Minnesota.
*The amount of the federal offset is much lower for a homeowner property tax reduction than for a business property tax reduction because some homeowners are non-itemizers and thus their federal income tax deduction is unaffected by the property tax reduction. In addition, an increased number of homeowners will become non-itemizers as a result of the additional property tax relief.