Minnesota’s business lobby wants to repeal or reduce the state business property tax, despite the fact that the constellation of 2001 changes that included the state property tax has worked out well for business, the affordability of such a large tax reduction is questionable, and the payers of that tax enjoy advantages that other Minnesota taxpayers do not. Nonetheless, Minnesota’s business lobby are flexing their considerable political muscle to get rid of or dramatically reduce the state business property tax, on the grounds that this would help small businesses and bolster Minnesota’s supposedly troubled business tax climate.
As it turns out, however, the elimination of the state business property tax is an inefficient way to target tax relief to small businesses. The second part of this series described three methods for reducing the state business property tax: (1) exempt the first portion of business value from the state tax, (2) eliminate the annual inflation adjustment to the levy, and (3) phase-out the tax until it is entirely eliminated. Two of these three options send the overwhelming majority of tax relief to large businesses.
Using business taxable value as a proxy for business size, a March 2016 North Star article found only 14 percent of the statewide commercial/industrial (C/I) property tax relief resulting from the elimination of the state business property tax would go to the 75 percent of C/I properties with the lowest taxable values (under $494,700), while 30.5 percent of the relief would go to the one percent of C/I properties with the highest values ($8.7 million or greater). The distribution of tax relief resulting from the elimination of the inflation adjustment would be identical. The chart below shows the estimated distribution of C/I tax relief resulting from the elimination of the state business property tax and repeal of the inflation adjustment, based on information from the March 2016 article.
Of the three state business property tax reduction options discussed above, only the exemption of the first portion of business value would distribute tax relief to low value businesses in an amount even remotely close to their proportion of all C/I properties. The chart below shows the estimated distribution of C/I tax relief resulting from exempting the first $150,000 of taxable business value from the state business property tax, based on the same data and methods described in the March 2016 article. Under this option, 61.4 percent of the statewide C/I property tax relief resulting from the exemption of the first $150,000 of taxable value would go to the 75 percent of C/I properties with the lowest values, while 1.5 percent of the relief would go to the one percent of C/I properties with the highest values.
The phase-out of the state business property tax and the repeal of the inflation adjustment provide tax relief to all Minnesota businesses, but do nothing to direct that relief specifically to small businesses. To attempt to sell these options as a targeted small business tax break is ludicrous.
As an indication of the need for business property tax reductions, Minnesota’s business lobby contends that Minnesota’s commercial property taxes are the second highest in the nation for rural properties and seventh highest for metro properties, based on annual tax rankings from the Minnesota Center for Fiscal Excellence (MCFE), formerly the Minnesota Taxpayers Association. Such claims are based on a misuse of MCFE data, which does not examine the average level of taxes in Minnesota relative to other states, but rather taxes for specific communities in each state. As noted in an April 2016 North Star article, the two Minnesota cities used in the MCFE report—Minneapolis and Glencoe—have atypically high taxes relative to other Minnesota communities in their respective regions and thus are not representative of all metro or rural communities. These two atypically high tax Minnesota cities are compared to cities in other states which may or may not be representative of their states. Conclusive findings regarding overall Minnesota rural and metro tax levels relative to other states cannot be derived from this data.
Furthermore, the MCFE commercial property tax calculations assume that 17 percent of total commercial value is personal (i.e., equipment and inventories) and 83 percent is real (i.e., land and buildings). Calculations based on data from the Minnesota Department of Revenue (MDOR), however, indicate that 30 percent of commercial value is personal.* This is significant because, as noted in the April 2016 North Star article, Minnesota is one of only eleven states that do not tax personal property. By understating the percentage of property that is personal, the relative advantage that Minnesota businesses receive as a result of the personal property tax exemption is understated and Minnesota business property taxes relative to other states are overstated. Assumptions closer to the average based on MDOR data would result in an improvement in the commercial property tax rankings for the two Minnesota cities relative to cities in other states.
Finally, calculations based on the average mix of real versus personal property value among all commercial properties are not particularly relevant for most individual categories of commercial property due to the wide variation in the real versus personal property mix among these categories. For example, the percent of total value that is personal for real estate businesses is about four percent, while for information and data processing businesses, 72 percent of value is personal. The April 2016 North Star article notes that most of the commercial subcategories (comprising over half of total commercial value) examined by MDOR have concentrations of personal property value that are substantially different from the average for all commercial properties. For these businesses, property tax calculations and rankings based on the commercial average are not particularly meaningful.
In support of their goal to reduce or eliminate the state business property tax, the business lobby also points to the conservative Tax Foundation’s State Business Tax Climate Index (SBTCI), which contends that Minnesota has the fifth worst business tax climate in the nation. The SBTCI, however, is not a meaningful indicator of business tax climate, for reasons noted in a September 2016 North Star article and elsewhere, but rather a highly contrived system for harshly grading states that—like Minnesota—have the least regressive tax systems. Despite proclamations that “taxes matter to business,” the SBTCI does not actually measure the overall level of taxes paid by businesses in a state, nor does it take into account the benefits that businesses derive from the expenditure of tax dollars.
For that information, we turn to a more impartial source. The FY 2015 “Total State and Local Business Taxes” report, prepared by the Quantitative Economics and Statistics practice of Ernst & Young (EY) LLP in conjunction with the Council on State Taxation and the State Tax Research Institute, found that Minnesota was:
- Slightly below the national average in total effective business tax rate
- Modestly below the national average in total state and local taxes per private sector employee
- Modestly below the national average in terms of the business share of total state and local taxes
- Slightly above or slightly below the national average (depending on the assumptions used) in terms business taxes per dollar of state and local government spending that benefit businesses†
Repeal of the state business property tax or the elimination of the inflation adjustment are inefficient ways to target tax relief to Minnesota small businesses and could return the state general fund to the deficit situation from which it emerged only a few short years ago. Furthermore, based on objective data from the non-ideologically driven EY report, Minnesota is not the tax outlier that business groups would have us believe. As the reality of business taxation in Minnesota sinks in, urgent calls for the need to repeal or dramatically reduce Minnesota’s state business property tax lose their credibility.
*Specifically, these findings are based on data used in the preparation of MDOR’s most recent Minnesota Tax Incidence Study. The average percentage of commercial value that is personal was calculated 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 annual property tax report. 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.
†The EY report measures business taxes relative to tax funded spending that benefit business under three different assumptions: zero percent of education spending benefits business, 25 percent of education spending benefits business, and 50 percent of education spending benefits business. Minnesota business taxes are slightly below the national average under the first assumption and slightly above under the second and third assumptions.