Minnesota Business Property Taxes Below Average

A common mantra among conservatives is that Minnesota business property taxes are high relative to other states—a view promulgated by Minnesota’s business lobby and interest groups. Analysis of data from impartial sources, however, suggests that the opposite might be true.

The most commonly cited claim that Minnesota business property taxes are among the highest in the nation is based upon a comparison of taxes as a percentage of business value for selected properties in two Minnesota communities relative to communities in other states. A critique of this assertion appeared in a 2016 North Star article. In a nutshell, the cities chosen to represent urban and rural Minnesota in this study have atypically high property taxes relative to their respective regions and thus are not representative of other urban and rural communities in the state. In addition, taxes in these Minnesota communities are compared to cities in other states which may or may not be representative of average urban and rural tax levels in those states. Finally, the tax calculations are based on assumptions which arguably inflate the level of business property taxes in Minnesota relative to other states.

The following analysis is based on data compiled by the Quantitative Economics and Statistics practice of Ernst & Young (EY) and published in conjunction with the Council on State Taxation (COST) and the State Tax Research Institute in an annual report entitled, “Total State and Local Business Taxes.” The most current edition of this report examines fiscal year (FY) 2015 business taxes in all fifty states. The information in the EY report is based on cumulative business taxes paid in each state—not upon tax levels for properties of selected value in a limited number of cities under a set of arbitrary assumptions. Previous North Star analyses from the EY report revealed that total business effective tax rates, business taxes per private sector employee, the business share of total state and local taxes, and the business tax-to-benefit ratios in Minnesota are in general slightly to significantly below the U.S. average.

Previous North Star articles based on EY report data focused on total business taxes. The following analysis will focus exclusively on business property taxes. Using information from the EY report, it is possible to calculate business property taxes as a percent of private sector gross state product, referred to below as the business effective property tax rate (BEPTR). The business property tax information reported in the EY report includes taxes paid on income-generating residential rental property.* Because of the rounding of business property tax and other information in the EY report, the rates calculated using this data are approximate,† but are nonetheless useful in creating a rough gauge of the level of business property taxes relative to economic activity in each state.

Based on these calculations, the nationwide BEPTR is 1.7 percent, significantly higher than Minnesota’s BEPTR of 1.4 percent. The chart below lists the BEPTR of all fifty states, the District of Columbia, and the entire U.S.

Minnesota ranks 31st among states in terms of its BEPTR, meaning that 29 states and the District of Columbia have a higher BEPTR than Minnesota and twenty states have a lower BEPTR. Minnesota ranks eighth among the twelve Midwestern states‡ in terms of its BEPTR, with a rate 0.2 percent below the regional average (1.6 percent). Of the four adjacent states (Iowa, North Dakota, South Dakota, and Wisconsin), only North Dakota has a lower BEPTR than Minnesota.

Conventional business property tax effective rates measure business property taxes as a percentage of business property market value. The business BEPTR examined here is a useful alternative to this standard measure insofar as it examines business property taxes relative to the base of economic activity from which the revenue to pay those taxes is generated. An analysis of this alternative BEPTR shows that Minnesota is not a high business property tax state, but rather has a BEPTR that ranks below the national and regional averages and below that of most other states.

Using other information from the EY report, it is possible to determine business property taxes per capita and per private sector employee nationwide and in each state. This information will be the subject of the concluding article in this series.

 

*As used in Minnesota policy discussions, “business property taxes” typically refers to the property taxes paid on commercial, industrial, utility, railroad, and mineral property, excluding taxes paid on income-generating rental residential property. Since the denominator of the BEPTR includes all private sector gross state product, it is appropriate to include taxes on rental residential property in the numerator. Using EY data, it is not possible to calculate a BEPTR for all fifty states excluding rental residential property. If the ratio of non-rental residential business property taxes to rental residential property taxes nationwide is the same as it is in Minnesota (approximately 3 to 1 based on Minnesota Department of Revenue data), Minnesota’s BEPTR excluding residential rental property taxes relative to the national average would be the same as represented in this article. If the national ratio of non-rental residential business property taxes to rental residential property taxes is 2 to 1, Minnesota’s BEPTR excluding residential rental property taxes would be only slightly less than the national BEPTR.

Total state and local business taxes and business property taxes in each state as presented by the EY report are rounded to one-tenth of one billion dollars and the total effective business tax rate is rounded to the one-tenth of a percent. Since the BEPTR is calculated using this data, the rounding is a source of potential inaccuracy in the BEPTR estimates presented in this article. In general, the smaller the total amount of total state and local business taxes and business property taxes paid in a state, the larger the potential error in the BEPTR. The BEPTR presented in this article for the entire U.S. and for the states of California, Florida, Indiana, Massachusetts, Michigan, New York, Ohio, and Pennsylvania should be accurate. The BEPTR for Alaska, Hawaii, Idaho, New Hampshire, South Dakota, the District of Columbia, Maine, Montana, Rhode Island, West Virginia, and Wyoming have a rounding-related margin of error of 0.2 percent. (For example, Rhode Island’s BEPTR—represented as 2.5 percent in the above chart—could be as low as 2.3 percent or as high as 2.7 percent.) The BEPTR for Vermont has a rounding-related margin of error of 0.3 percent. All other states, including Minnesota, have a rounding-related margin of error of 0.1 percent. Because of these potential rounding errors, Minnesota’s rank in terms of the BEPTR—represented as 31st in the above chart—could be as high as 28th or as low as 35th.

The twelve states of the Midwest as defined by the U.S. Census Bureau are Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.