News & Updates

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.

Big Debt, Big Deal

Minnesota is living under a $27 billion mountain of student loan debt.1 A student graduating in Minnesota today has an average of $31,000 in debt.2 Whether we realize it or not, it is affecting both individuals and the broader community. The challenge of student loan...

Minnesota Business Tax Rate Equals U.S. Average

Business groups—including the Minnesota Business Partnership and Minnesota Chamber of Commerce—actively cultivate the notion that business taxes in the Gopher State are high relative to the rest of the nation. However, total state and local business taxes as a share...

Ensure Respect for Minimum Wage Laws

(Note: This article is co-authored with Laura Huizar, a staff attorney at the National Employment Law Project in Washington, D.C.) A few weeks ago, the St. Paul City Council introduced a draft ordinance that would raise the city’s minimum wage to $15 an hour. That’s a...

Caring in Central Minnesota

Minnesota is getting older every day.1 The aging of our population is increasing demand for home health and personal care workers. We also continue to have population growth through both immigration and natural growth. To fill the needs of our changing population we...

Gas Tax Buys One-Third Less Today Than in 2000

The single largest source of funding for Minnesota’s transportation system comes from the state gas tax. However, the purchasing power of that tax has dropped by over one-third over the course of the century, leaving funding for state roads and bridges in a precarious...

State Aids: The Shrinking Slice of the City Revenue Pie

City property taxes have increased significantly in recent decades. Even after adjusting for inflation and population growth, the property taxes collected by Minnesota cities have increased by 48% from 1990 to 2018. However, real (i.e., inflation-adjusted) per capita...

Government Growth in Context

Shocking claims of growth in government abound. However, viewed in context of the economic, demographic, and societal changes that have occurred over the last fifty years, the growth in government is far less astounding than the sound-bite statistics indicate. For...

Impact of Legislative Decisions on School Funding

State aid to Minnesota school districts—properly adjusted for inflation—has fluctuated significantly over the last fifteen years, but the overall trend has been downward, as documented in a recent North Star report. Of course, long-term trends are not exclusively the...

Minnesota’s Shared Health

Minnesotans value a high quality of life. It is part of the Minnesota story and one of our competitive advantages. This includes having healthy people in healthy communities. Historically, policy makers have recognized the importance of health care access by investing...

Contact Us

Use this form to get in touch with North Star staff, or send your questions, suggestions, and ideas to staff@northstarpolicy.org.