Many believe that Minnesota businesses bear a disproportionate share of the total state and local tax load compared to businesses in other states. This notion is perhaps the result of significant corporate and individual income taxes, the presence of both state and local business property taxes (most states impose only local business property taxes), and a property classification system which requires businesses to pay more taxes per dollar of taxable value than other types of property. If we actually crunch the numbers, however, this common perception appears to be a misconception.
Previous installments in this series have examined fiscal year (FY) 2015 state and local business taxes in Minnesota relative to other states based on estimates from the most recent “Total State and Local Business Taxes” report prepared by Ernst & Young in conjunction with the Council on State Taxation and the State Tax Research Institute.* Information from this report shows that Minnesota is below the national average in terms of state and local business taxes per private sector employee and state and local total effective business tax rates.
This same report also shows estimated FY 2015 business taxes as a percent of total state and local taxes. For the vast majority of states, the business share of local taxes is higher than the business share of state taxes. This is largely because, in most states, businesses pay a major share of property taxes—the primary source of local government revenue. According to the EY report, U.S. businesses pay 53 percent of local property taxes, which comprise 75.7 percent of total local tax collections. Meanwhile, state governments rely more heavily on sales taxes, which are primarily paid by households. In Minnesota, the business share of both state and local taxes is somewhat below the national average.
Based on the FY 2015 EY report, Minnesota businesses pay 39.3 percent of all state and local taxes, compared to 44.1 percent nationwide. In other words, the business share of each dollar collected in state and local taxes in Minnesota is approximately eleven percent below the U.S. average. The chart below lists all fifty states and the District of Columbia based on the percentage of total state and local taxes paid by businesses in descending order.
Minnesota ranks 45th among all states (including D.C.) in terms of the share of total FY 2015 state and local taxes paid by businesses. Only six states receive a lower share of total state and local tax revenue from businesses. At 39.3 percent, the share of total taxes paid by Minnesota businesses is slightly to significantly lower than the share paid in each of the adjacent states.
The EY report notes that the share of state and local taxes paid by businesses is dependent to a significant extent upon the structure of each state’s economy. For example, the four states that derive the largest percentage of state and local taxes from businesses are energy-producing states. As noted in the preceding article in this series, these states tend to impose significant severance taxes on energy production, which are largely exported to consumers; however, even if we exclude energy-producing states,† the average share of total FY 2015 state and local taxes paid by businesses in the remaining states is approximately 42.4 percent—still modestly greater than the 39.3 percent share borne by Minnesota businesses.
How do we reconcile these findings with what we know—or what we think we know—about Minnesota’s tax structure? Data from the EY report cited in the first article in this series confirm that corporate income taxes, individual income taxes on business income, and unemployment insurance taxes as a share of total state and local business taxes in Minnesota (approximately 11.4 percent, 6.8 percent, and 7.6 percent respectively) are higher than the national average (approximately 9.5 percent, 5.5 percent, and 6.5 percent respectively), but these taxes combined are dwarfed by business property taxes.
Business property taxes in Minnesota comprise approximately 32.6 percent of total state and local business taxes in Minnesota, compared to 36.5 percent nationally. On the one hand, this conclusion is somewhat surprising, given that Minnesota is one of a relatively small number of states that imposes a general state property tax on businesses and apportions local taxes at a higher rate per dollar of taxable value on business property than other classes of property. On the other hand, it should be noted that:
- Minnesota has an extensive system of state aids and credits, which reduce the level of property taxes paid by businesses and other classes of property to school districts and other local governments;
- For the most part, personal property is not taxable in Minnesota.‡ The exclusion of personal property from the definition of taxable value results in a significant tax advantage for Minnesota businesses, since a greater share of business value consists of personal property relative to other classes of property. To a significant degree, the definition of taxable value in Minnesota offsets the effects of Minnesota’s property classification system on business property taxes;
- A growing percentage of property taxes in Minnesota (12.5 percent in 2017, up from 5.9 percent in 2002) are levied against referendum market value, which affords Minnesota business property the favorable treatment afforded by the personal property tax exemption without the higher business assessment rates that exist under the property classification system; and
- In inflation-adjusted dollars per capita, the state business property tax has declined significantly since it was first imposed in 2002, even before considering the recent freeze of the state property tax. As a result, it is a steadily diminishing share of total business property taxes in Minnesota.
Businesses in Minnesota are not paying a disproportionate share of the state and local tax load, relative to businesses in other states. In fact, the business share of taxes in Minnesota is below the national average, based on data from the EY report. The final installment in this series will examine the benefit that businesses derive from state and local taxes in Minnesota relative to other states.
*The first installment in this series lists the business taxes that are included in the FY 2015 EY report, as well as other information about the EY report.
†The energy-producing states identified for purposes of this analysis are described in a footnote to the second article in this series.
‡Electrical generation machinery is the only form of business personal property subject to the property tax in Minnesota. Minnesota is one of only eleven states that do not tax commercial and industrial personal property.