Small Business Tax Relief? Not So Much

In recent years conservatives have talked about phasing-out and ultimately eliminating the state business property tax. This is the first of a series of articles that will examine various aspects of this plan. This article will examine the distribution of tax relief between large and small businesses. Just how much of the tax relief from the elimination of the state business property tax will go to “small businesses”? The short answer: not so much.

First, some background. The state business property tax was enacted in 2001 and first imposed in 2002 as part of a package of changes that dramatically reduced the share of local property taxes borne by businesses. The combination of property tax changes enacted in 2001—including the new state business tax and the reduction in local business taxes—produced not only upfront business tax relief, but helped to hold down the rate of future growth in business property taxes relative to that of homeowners and other property taxpayers.

From the outset, the phase-out of the state business property tax has been billed as tax relief for “small businesses.” But is this accurate? The following analysis will focus on Minnesota’s approximately 104,000 commercial and industrial (C/I) properties, which will receive approximately 85 percent of statewide tax relief as a result of eliminating the state business property tax. (The remaining 15 percent goes primarily to utilities.) These C/I properties will be grouped based on taxable value and the portion of tax relief resulting from the elimination of the state business property tax going to each group estimated.*

The lowest value range consists of C/I properties with taxable values less than $494,700. Despite the fact that these properties comprise 75 percent of all C/I properties in Minnesota, they will receive only 14 percent of the total C/I property tax relief resulting from the elimination of the state business property tax. Meanwhile, the 25 percent of properties with the highest value will receive an estimated 86 percent of all relief. In fact, over half (55.9 percent) of all C/I tax relief resulting from the repeal of the state business property tax will flow to properties with taxable values of $2,536,000 or greater, which comprise only five percent of all C/I properties in the state. Nearly one-third (30.5 percent) of the C/I tax relief will go to the top one percent with taxable values of $8.7 million or greater.

CI Tax Relief

It is worth noting that the assumptions used in this analysis result in the likely overstatement of the portion of tax relief going to the lowest value properties and the understatement of the relief received by all other groups of property. If anything, the disparity between the lowest value properties and the higher valued properties is even greater than that indicated in the graph above.

In the first year of the state business property tax phase-out—when only the first $500,000 of value is excluded from the tax—lower value businesses will receive a share of the total tax relief much closer to that received by high value businesses. However, by the time the phase-out of the tax is complete, lower valued businesses will be receiving a thin sliver of the total tax relief relative to their numbers.

It is true that the value of a business is not a foolproof way for determining whether a business is small or large. In addition, some of the tax relief received by malls or office parks could conceivably be passed on to tenants in the form of reduced rents. However, most owners of high value business properties—Walmart, Target, Best Buy, Supervalu, Home Depot—are large businesses. And large businesses like these will be receiving the lion’s share of the tax relief resulting from the elimination of the state business property tax. Meanwhile, relatively low value Main Street businesses around Minnesota will be getting a small slice of the total tax relief pie.

In short, it is a misnomer to portray the elimination of the state business property tax as “small business” tax relief, as there is nothing in it that is particularly targeted to small businesses. In fact, the state business property tax elimination resembles other conservative tax cut plans in recent years in that a disproportionate share of the money goes to the top one percent.

Next week, North Star will continue to examine various aspects of the proposal to eliminate the state business property tax. The next installment in this series will examine whether Minnesota can afford to eliminate the state business property tax, given the size of the projected state budget surplus.

 

*Specifically, this analysis is based on C/I parcel and property information from Minnesota Department of Revenue (DOR) sources for assessment year 2015, corresponding to tax payable year 2016. (Utility properties are excluded from this analysis because it is not possible to determine which parcels consist of electrical generation machinery and hence are already exempt from the state business property tax.) Many business properties consist of more than one parcel; for the purposes of this analysis, it is assumed that all multiple-parcel files occur among properties in the lowest value group. This assumption has the effect of overstating the amount of tax relief received by properties in the lowest value group and understating the tax relief received by other property groups. For the purposes of this analysis, a business property is defined as a parcel or combination of parcels that are grouped together for purposes of determining the portion of property value eligible for the preferential business class rate; in DOR parlance, these are referred to as “preferential eligibilities.”