Minnesota Business Property Taxes Per Capita, Employee

Minnesota business property taxes really aren’t that high, based on analysis of information from the annual business tax report prepared by Ernst & Young (EY). As described in the preceding article in this series, Minnesota’s business effective property tax rate is below national and regional averages and less than in most other states. An analysis of data from the same EY report indicates that Minnesota business property taxes per capita and per private sector employee are also below average.

As noted in the preceding article, the most current edition of  “Total State and Local Business Taxes” is prepared by EY’s Quantitative Economics and Statistics practice in conjunction with the Council on State Taxation (COST) and the State Tax Research Institute, and contains information for fiscal year (FY) 2015.* Data from that report can be used to calculate business property taxes per private sector employee; combined with population estimates from the U.S. Census Bureau, it is also possible to use EY information to determine business property taxes per capita (i.e., business property taxes per state resident). Because of the rounding of data in the EY report, the calculation of business property taxes per capita and per private sector employee contain a margin of error,† but nonetheless allow for a useful gauge of the level of business property taxes in each state.

Minnesota’s FY 2015 business property taxes as calculated using EY data were $784 per capita, 2.5 percent less than the U.S. average of $804 per capita. Minnesota ranks 22nd among the fifty states in terms of business property taxes per capita, with twenty states and the District of Columbia having higher taxes per capita and 29 states having lower taxes per capita.

Minnesota ranks eighth among the twelve Midwestern states‡ in terms of business property taxes per capita, although business property taxes per capita in the Gopher State are slightly (0.5 percent) above the regional average ($780). Business property taxes per capita in Minnesota are less than in each of the four neighboring states (Iowa, North Dakota, South Dakota, and Wisconsin).

Total state population is not the best base against which to compare business property taxes, however, since states can vary in terms of the percent of the state’s population that is involved in commercial activity through employment. Thus, business property taxes per private sector employee are likely a more appropriate gauge of the relative level of business property taxes among states.

The shift from business property taxes per capita to taxes per private sector employee results in a modest reordering of states in terms of business property tax levels, with the rank of states with high labor force utilization rates—such as Minnesota—dropping (i.e., displaying relatively lower business property tax levels) compared to the tax per capita measure. FY 2015 Minnesota business property taxes per private sector employee were $1,733, 18.1 percent less than the national average of $2,116. Minnesota ranks 32nd in terms of business property taxes per private sector employee, with thirty states and the District of Columbia having higher property taxes per private sector employee and nineteen states having lower taxes.

Minnesota ranks seventh among Midwestern states in terms of business property taxes per private sector employee, 9.0 percent below the regional average ($1,904). Minnesota’s business property taxes per private sector employee are less than in each of the four neighboring states except North Dakota.

Conservatives have made much of Minnesota’s progressive “blue state” policies and their allegedly detrimental impact on the state’s business tax climate. A close look, however, at FY 2015 data from EY casts doubt on this storyline. Minnesota is below the national average in terms business property taxes per capita and per private sector employee, and in terms of business effective property tax rates. If we broaden our perspective to include all state and local business taxes (instead of just property taxes), Minnesota’s total effective business tax rate, total business taxes per private sector employee, and business share of total state and local taxes are each below the national average, while Minnesota’s ratio of business taxes to the benefit that businesses derive from state and local government expenditures is approximately equal to the national average.

Too much can be made of relative business tax differentials between states, since taxes are only one of many factors that influence business location decisions—and far from the most important one at that. To the extent that we do focus on taxes as a driver of business location decisions, the analysis of data from the EY report is sufficient to suggest policymakers rethink the claim that Minnesota’s business property taxes, specifically, and total state and local business taxes, in general, are high relative to other states.

 

*As noted in the preceding article, business property taxes as defined in the EY report include taxes on income-generating residential rental property. “Business property taxes” as used in Minnesota policy discussions typically focus on property taxes levied against commercial, industrial, utility, railroad, and mineral property and do not include taxes on residential rental property. Using EY data, it is not possible to calculate business property taxes per capita or per private sector employee for all fifty states excluding rental residential property. If the ratio of non-rental residential business property taxes to rental residential property taxes nationally is the same as it is in Minnesota (approximately 3 to 1, based on Minnesota Department of Revenue data), Minnesota’s business property taxes per capita and per private sector employee 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 business property taxes excluding residential rental property taxes would be 9.7 percent above the national average on a per capita basis and 7.9 percent below the national average per private sector employee.

Total state and local business taxes and business property taxes in each state as presented in the EY report are rounded to one-tenth of one billion dollars and total business taxes per private sector employee are rounded to one-tenth of a thousand dollars. Since the information in this article is calculated using this data, the rounding is a source of potential inaccuracy in the estimates presented herein. 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 these estimates. For example, Minnesota’s business property taxes per capita—represented as $784 in the first chart—could be as high as $793 or as low as $775, while Minnesota’s business property taxes per private sector employee—represented as $1,733 in the second chart—could be as high as $1,776 or as low as $1,691. Because of these potential rounding errors, Minnesota’s rank in terms of business property taxes per capita—represented as 22nd in the first chart—could be as high as 19th or as low as 23rd; meanwhile, Minnesota’s rank in terms of business property taxes per private sector employee—represented as 32nd in the second chart—could be as high as 28th or as low as 36th.

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.