The state revenue loss resulting from changes to the state business property tax in the tax conference committee report are likely to increase rapidly over time—for reasons described in a recent North Star article—and ultimately surpass the revenue loss associated with other tax cuts in the report. As the magnitude of that tax break swells in future years, the relief will shift from low-value to high-value businesses, and from Greater Minnesota to the seven-county metropolitan area.
House File (HF) 4, the tax bill recently passed by the House-Senate tax conference committee, makes two changes to the state business property tax. The first change is exempting the first $150,000 of taxable business value. This primarily benefits lower-valued businesses that have all or at least a large percentage of their total value below $150,000. Because most of these low-value businesses are located in Greater Minnesota, most of the tax relief resulting from this change flows there as well.
The second change to the state business property tax removes the annual inflation adjustment to the tax. Under this provision, the state business property tax, which was already insulated from population growth and all of the other spending pressures that push state expenses upward over time, would be guaranteed to stay flat in future years—a preferential treatment afforded to no other state tax. The tax relief provided through this change would go primarily to higher value businesses and flow primarily to the seven-county metropolitan area (i.e., Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington counties).*
HF 4 freezes the state business levy at the 2018 level, so it would provide no tax relief to any Minnesota businesses in fiscal year (FY) 2018. All the state business property tax relief provided in FY 2018 (a projected $40 million) would be the result of the exemption of the first $150,000 of value. Consequently, a large share of the state business property tax relief in FY 2018 would go to lower-value businesses.
Within a few short years, however, the property tax freeze would surpass the $150,000 exemption as the primary source of state business property tax relief. While 100 percent of state business property tax relief is provided through the $150,000 exemption in FY 2018, only half is projected to be provided through the exemption by FY 2022, with the remainder provided through the freeze. By FY 2027, only a quarter of the relief is projected to be provided through the exemption and three-quarters would be provided through the freeze. As the share of tax relief provided by the exemption shrinks and the share provided by the freeze expands, the distribution of tax relief shifts in favor of high-value properties. The chart below shows the projected distribution of state business property tax relief for commercial/industrial (C/I) properties by property value.†
In FY 2018, the one percent of C/I properties with the highest taxable values (approximately $8.7 million and above based on tax payable year 2016 values) would receive a projected 1.5 percent of the aggregate C/I tax relief resulting from the changes to the state business property tax contained in HF 4. By FY 2027, however, the share of total relief received by the top one percent is projected to swell to 25.7 percent. Meanwhile, the projected share of total C/I relief received by the lowest 75 percent of C/I properties by value (approximately $495,000 and below) would decline from 61.4 percent in FY 2018 to 21.9 percent in FY 2027. The shift in the share of tax relief away from low-value businesses and toward high-value businesses should continue after FY 2027.
The shift in the share of tax relief over time from low- to high-value properties is the result of the rapid growth in tax relief provided through the freeze, which is far more beneficial to high-valued properties than is the $150,000 exemption. As the share of tax relief going to high value businesses increases, the share of relief going to the metro area—where a disproportionate share of high valued business are located—also increases.
In FY 2018, nearly 60 percent of the total state business property tax relief is projected to flow to the eighty counties that comprise Greater Minnesota, while a little over forty percent goes to the seven-county metro area. By 2027, the projected regional distribution is reversed, with the metro area receiving 61 percent of the total tax relief and Greater Minnesota receiving 39 percent. The shift in tax relief in favor of the metro area should continue after FY 2027.
During 2016 tax negotiations, the Governor and legislative leaders compromised by agreeing to exempt the first $150,000 of business value, but foregoing the freeze.‡ This agreement had the benefit of directing the lion’s share of business property tax relief to low-value and Greater Minnesota businesses, while avoiding the rapidly escalating cost of the state business property tax freeze, which would deplete state revenues and potentially return the state budget to a deficit situation in future years.
*The analysis in this article focuses on the direct relief provided by the changes to the state business property tax, prior to shifting. As noted in a 2016 North Star article, most of the final incidence of tax relief (after taking shifting into account) resulting from the elimination of the state business property is exported out-of-state. The distribution of final tax relief resulting from the freeze of the tax should be similar to the distribution of relief resulting from the elimination of the tax.
†The information in the two charts presented below is based on a North Star breakdown of Minnesota Department of Revenue (MDOR) projections of revenue reductions from FY 2018 to FY 2027 resulting from the $150,000 exemption and the freeze of the state business property tax. The first chart breaks down the share of projected C/I tax relief over this ten-year period for C/I properties by the value of those properties using C/I value data from the 2015 MDOR parcel specific data base (corresponding to tax payable year 2016) and based on assumptions outlined in a 2016 North Star article. The second chart shows the distribution of tax relief between Greater Minnesota and the metro area using data from the preliminary 2016 (corresponding to tax payable year 2017) MDOR abstract of assessment. In both instances, business values within each value range and within each region are held constant over time.
‡This compromise was not enacted due to a drafting error in the legislation unrelated to the state business property tax.