State Property Tax: A Good Deal for Businesses


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Since 2002, property taxes on Minnesota businesses have been growing less rapidly than taxes on most other classes of property. As with all things pertaining to the property tax system, the explanation for this trend is varied and complicated. However, the state business property tax is one of the principal reasons why Minnesota business property taxes have grown less rapidly than property taxes in general over this period.

As noted in a previous installment in this series, the state property tax was enacted in 2001 and first imposed in tax payable year 2002. The imposition of the state property was part of a quid pro quo that involved a 40 percent reduction in business class rates and a dramatic reduction in general education property taxes. The net result of the 2001 tax act changes was a modest reduction in business property taxes from 2001 to 2002 and—over the longer term—a substantially slower rate of growth in business property taxes relative to other property classes.

A comparison of business and homeowner property taxes from 2002 to the present helps to illustrate the effect that the state business property tax has had in dampening the growth in business property taxes. Over this period, statewide homeowner property taxes have increased by 105 percent (39 percent greater than combined rate of inflation* and population growth), compared to 69 percent for business (two percent greater than the combined inflation and population growth rate). The far lower rate of growth in business property taxes occurred despite the fact that the taxable value of Minnesota businesses grew more rapidly than that of homesteads.

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How does the state business property tax contribute to a slower rate of growth in business property taxes? Since 2002, cuts in state aid, population growth, an aging state population, growing numbers of special need students, and other factors have contributed to rapid growth in local levies and local property taxes. However, the state business property tax has been insulated from all of these forces that have been pushing local property taxes higher, since by law the state tax can grow no faster than the rate of inflation.

While some business groups complain about a state property tax that is on “autopilot,” other property taxpayers in Minnesota would have been happy if a large portion of their property tax bill had been capped so that it could not grow more rapidly than the rate of inflation. The extent to which business property taxes have grown more rapidly than the rate of inflation since 2002 is entirely the result of local property taxes, since the state levy stays flat from year to year in real dollars.

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If the state business property tax has contributed to a slower rate of growth in business property taxes relative to other classes of property, why is the business lobby attempting to eliminate it? The explanation is simple: the elimination of the state business property tax directs relief solely to businesses, to the exclusion of all other classes of properties, many of which (like homesteads) have seen much more rapid property tax growth over the last fourteen years than have businesses.

In addition to slowing the rate of total business property tax growth, the state property tax adds stability and predictability to business property taxes. And because the state business property tax is more reliable and predictable than other state revenue sources, it also adds stability to state finances, which benefits everyone. Despite complaints from the business community, the state business property tax has been a pretty good deal for Minnesota businesses.

 

 

*The conversion from nominal (i.e., unadjusted for inflation) to real (i.e., adjusted for inflation) dollars in this article is based on the implicit price deflator for state and local government purchases. The use of this implicit price deflator was the subject of a recent North Star article.