Fiscal Disparity Program Reduces Business Tax Disparities

The seven-county metropolitan tax base sharing program has successfully reduced property tax disparities within the metro region, as revealed by analysis presented in the previous article in this series. By taxing a significant portion of the business value in the metro area at a uniform rate, the program is particularly effective at reducing business property tax disparities within the region.

The first installment in this series described the mechanics of the metropolitan tax base sharing program, known more commonly as the fiscal disparities program. The following analysis will again focus on three groups described in the preceding installment, consisting of the third of communities that are the largest net contributors to the fiscal disparity program (measured in terms of the net fiscal disparity contribution as a percentage of local tax base), the third of communities that are relatively small net contributors or net recipients of tax base through the program, and the third that are the largest net recipients of tax base. The following analysis is based on assumptions stated in the preceding installment.

Largely because of the uniform statewide business property tax levy, the disparity in business taxes within the metro area (and statewide) is not as great as the disparity in homestead taxes. For a business with a taxable market value of $1 million, the typical property tax based on aggregate tax rates among the largest net contributor communities is currently $199 (0.5 percent) less than in the middle third communities and $1,850 (4.9 percent) less than in the largest net recipient communities, based on data for taxes payable in 2016. After the elimination of the fiscal disparity program, the $1 million business tax disparity between the largest net contributors and the middle third increases to $1,541 (4.4 percent), while the disparity between the largest net contributors and the largest net recipients increases to $6,419 (16.1 percent).

As a result of the way that referendum market value levies are factored into the fiscal disparity distribution levy calculation, the fiscal disparity program results in a small aggregate shift of taxes onto businesses in the seven-county metro area. However, not all metro businesses will benefit from the elimination of the fiscal disparity program. For example, while the tax on a typical $1 million business property would drop by $2,947 (8.1 percent) among the third of communities that are the largest net contributors and by $1,605 (4.4 percent) among the middle third, they would increase by $1,622 (4.3 percent) among the third of communities that are the largest net recipients. The communities that would see the largest business property tax increases are the same communities that tend to have the highest business taxes under current law.

The success of the fiscal disparity program in reducing business tax disparities across the region is the result of two effects of the program: first, as demonstrated in part two of this series, the program reduces tax rate disparities among the communities within the region; and second, the program taxes a large portion of business tax base across the region at a uniform rate. For taxes payable in 2016, approximately one-third of business tax capacity* in the metro area is taxed at the area-wide fiscal disparity rate. Both outcomes contribute to a substantial equalization of business tax levels across the seven-county metro area.

Are the incentives embodied in the fiscal disparity program sufficiently potent to bring about “more orderly regional development,” as envisioned by the framers of the fiscal disparity law? In theory, the requirement that a portion of the growth in business tax base be contributed to an area-wide pool should be sufficient to at least curtail the appetite of local officials to pursue the acquisition of business development to the exclusion of other property uses and to reduce the predisposition of businesses to locate in communities that already have low tax rates due to pre-existing business tax base. However, as a practical matter, it is difficult to prove that the fiscal disparity program has had these effects, since we don’t know how the region would have developed over the last 42 years in the absence of the program.

Even if the fiscal disparity program has failed to incentivize regional development in the manner envisioned by its framers, it has certainly mitigated the negative consequences upon tax base-poor communities that have not prevailed in the race to attract business development, since these communities now share at least a portion of the tax base growth resulting from new business development, even if it occurs outside their borders.

By grouping metro communities into three large groups, it is certainly possible that some anomalous outcomes have been overlooked. For example, it is possible that there are communities that are net contributors of tax base to the program that nonetheless benefit from the program; it is also possible that there are communities that are net recipients of tax base that are adversely impacted by the program. Of course, proponents of the program would argue that the benefits of the program to the entire region outweigh or at least mitigate some of the direct negative consequences experienced by some individual communities.

While the benefits of the fiscal disparity program in terms of promoting “more orderly regional development” have not been proven, the analysis presented in this series of articles demonstrates the general effect of the program in reducing tax base and tax rate disparities within the region and in equalizing the taxes paid by businesses and other properties across the region. By and large, low tax base communities with limited business development potential can at least share a portion of regional business tax base growth, thereby reducing local property taxes and providing greater “equity in the distribution of fiscal resources” within the region—which was one of the primary goals of the fiscal disparity program when it was established in 1971.

 

*“Tax capacity” is the principle form of property tax base in Minnesota. Tax capacity is equal to a property’s taxable market value times the property’s “class rate” (different classes of property have different class rates, with business properties having the highest class rates). Most property taxes in Minnesota are levied on tax capacity.