The share of total Minnesota state and local taxes paid by businesses is comfortably below the national average, according to data compiled by Ernst & Young (EY) contained in a recent report from the Council on State Taxation (COST). In fact, Minnesota is among the bottom ten states in the nation in terms of the share of total state and local taxes paid by businesses.
The specific business taxes examined in the COST report were described in part one of this series. Information presented in part one revealed that total Minnesota business taxes as a share of statewide private sector economic activity is equal to the national average, while business taxes per private sector employee are below the national average. The COST report also contains information on the share of total state and local taxes paid by businesses in each state. This information is summarized in the following chart.
In FY 2014, Minnesota businesses paid 40.1 percent of total state and local taxes, significantly below the national average of 45.0 percent. In other words, for every dollar paid in state and local taxes in Minnesota, the portion paid by businesses is 10.9 percent less than the average paid by businesses nationally. Minnesota ranks 43rd among the states in terms of the share of total state and local taxes paid by businesses; business taxes as a percent of total state and local taxes in 41 states and the District of Columbia are higher than in Minnesota, while they are lower than Minnesota in only eight states. The share of state and local taxes paid by businesses in Minnesota is less than the average of that paid by businesses in adjacent states, even if the outlier state of North Dakota is excluded.*
Using data from the COST report, it is possible to break down the business share of total state and local taxes by type of tax. The chart below compares Minnesota to the national average in terms of this breakdown.
Property taxes and sales & excise taxes are the two largest categories of taxes paid by business, comprising over half of total state and local business taxes and over a quarter of total state and local tax revenue, both nationally and in Minnesota. As a percentage of total state and local taxes, Minnesota is significantly above the national average in business unemployment insurance taxes and modestly above average in taxes on pass-through income (no doubt due in part to Minnesota’s progressive income tax rate structure). Minnesota is slightly below the national average in terms of corporate income taxes and business sales & excise taxes and significantly below the national average in business property taxes and business license fees & other taxes.
The most noteworthy (and surprising) finding to emerge from this examination of COST report data is the fact that business property taxes in Minnesota as a percentage of total state and local tax revenue is below the national average. After all, Minnesota has a property classification system that results in businesses paying more taxes per dollar of taxable market value than residential and other classes of property. However, there are three features of Minnesota’s tax system that tend to lower business property taxes relative to other states.
- Minnesota relies less heavily on property taxes than most other states. According to U.S. Census Bureau data for FY 2013 (the most recent year available), property taxes comprise 27.9 cents of each dollar of state and local taxes collected in Minnesota—11 percent less than the national average. Furthermore, the share of total Minnesota state and local taxes derived from property taxes will decline in FY 2014 (the year corresponding to the COST report data) according to the most recent Price of Government report; this decline is the likely result of property tax relief and income tax increases enacted in 2013.
- While the property classification system shifts taxes on to business property, the exclusion of personal property value from the definition of taxable market value has the effect of shifting taxes away from businesses and on to residential property. This occurs because—relative to residential property—a much larger share of total business value is comprised of personal property and thus businesses derive a net tax advantage from the exclusion of personal property from taxable market value. Most other states tax business personal property. The importance of the personal property exclusion in terms of reducing Minnesota business property taxes relative to other states was described more fully in an April 26 North Star article.
- Over the course of the last fifteen years, the share of Minnesota property taxes levied against “tax capacity” has declined and the share levied against “referendum market value” has increased. To make a long story short, tax capacity levies are based on the classification system that shifts taxes on to business property and away from residential property. Referendum market value levies, on the other hand, largely bypass the property classification system, but do incorporate the personal property exclusion which benefits businesses vis-à-vis residential property. Thus, the growth of referendum market value levies relative to tax capacity levies has shifted taxes away from businesses and on to residential properties.
After considering the complex nuances of Minnesota property tax system, the finding that Minnesota business property taxes as a percentage of total state and local tax revenue are below the national average becomes plausible.
Based on Minnesota’s relatively high nominal corporate income tax rates, some may be surprised to learn that corporate income taxes as a percent of total state and local taxes in Minnesota are slightly below the national average. However, nominal corporate tax rates do not take into account the credits, shelters, deductions, and other tax preferences that corporate taxpayers in Minnesota enjoy; these tax preferences have the effect of reducing the corporate income tax liability and offsetting the effects of Minnesota’s high nominal rates.
Contrary to claims from conservatives and the business lobby, information from the COST report shows that Minnesota businesses are not bearing a disproportionate share of the state and local tax load. In fact, Minnesota is among the lowest states in the nation in terms of the share of total state and local taxes paid by businesses. The final installment in this series will examine the taxes that businesses in Minnesota and other states pay relative to the benefit businesses derive from public investments paid for with tax dollars.
*As noted in the first installment of this series, North Dakota is an outlier among states in that it has extremely high business taxes as a result of severance taxes on energy production.