When Winning Big Isn’t Enough

In 2001, business lobbyists worked overtime not only to reduce business property taxes, but also to change to whom businesses pay those property taxes. They argued that local governments were too dependent on business tax base and not enough on homestead tax base. This, they claimed, made it too easy for local governments to increase spending, since homeowners—that is to say, voters—were overly protected from the impact of local spending decisions. They proposed reducing the business share of the local tax base and increasing the homeowner share.

Whether this premise is correct is disputable, but in the end, the business lobby won. With the signing of the 2001 tax act, the size of the business tax base subject to local property taxes fell by 40 percent. In addition, the general education property tax was largely eliminated—a move which reduced property taxes not only for businesses, but for all property taxpayers. Part of the quid pro quo for this deal was that a new state property tax would be imposed on businesses—one that would never grow faster than the rate of inflation and that would not increase even as the state’s population grew. Business groups happily endorsed this deal.

And happy they very well should have been. With enactment of the state business property tax, a large share of the property taxes paid by businesses became exempt from most of the forces that have been pushing local government levies higher, including population growth, the aging population, an increased concentration of special needs students in public schools, and—perhaps most importantly—large reductions in real per capita state aid to local governments. As a result, business property taxes have grown much less rapidly than those of homesteads and other classes of property. The graph below shows that rate of growth in homestead and business property taxes since 2002—the year the state business property tax was enacted—relative to the combined rate of inflation* and population growth.

From 2002 to 2016, statewide homestead property taxes increased by 105 percent, compared to 69 percent growth for businesses, despite the fact that business taxable market value increased more than that of homesteads. Over this period, business property taxes grew at a rate approximately equal to the combined inflation and population growth rate, while homestead property taxes grew far more rapidly. Furthermore, the rate of homestead property tax growth in Minnesota indicated in this analysis does not adjust for the statewide decline in the number of homesteads, which has suppressed growth in homestead property taxes. A typical Minnesotan who remained in an owner-occupied home throughout this period probably saw property tax increases in excess of the 105 percent growth indicated above.

The success of the 2001 tax act in holding down business property taxes can be demonstrated by examining what taxes would be today if we remove the features of the 2001 act that most directly affected business property taxes: (1) the reduction in business class rates which reduced the size of business tax base subject to local government levies, (2) the virtual elimination of the general education property tax, and (3) the state business property tax. The following analysis shows the change in business property taxes payable in 2016 by region, assuming that these three provisions had never been enacted, a statewide general education levy is imposed at an amount equal to the eliminated state business levy, all other local levies remain at the current 2016 levels, and all other features of current law remain the same.†

On a statewide basis, business property taxes would have been an estimated 11.5 percent greater today, but for these three provisions of the 2001 tax act. The estimated increase in business taxes in Greater Minnesota (13.7 percent) is somewhat greater than in the seven-county metropolitan area. The smallest (2.6 percent) increase occurs among southwest Minnesota towns, while the largest (19.5 percent) occurs among east central Minnesota cities.

The largest business property tax increases resulting from the elimination of the three major provisions of the 2001 tax act tend to occur within those regions that currently have the highest business effective property tax rates. This effect is primarily due to the elimination of the state general levy, which helps to equalize (i.e., reduce disparities) between business property taxes across the state by taxing businesses at a uniform statewide rate.

The increases in business property taxes indicated in the above analysis would have been offset by property tax reductions for homeowners and owners of other classes of property. Under the conditions used in this analysis, the disparity in homestead property tax growth and business property tax growth indicated in the first chart would have been significantly less if these three provisions of the 2001 tax act—the state general levy, the elimination of the general education property tax, and the business class rate reductions—had never been enacted into law.

So the provisions of the 2001 tax act—which include the state business property tax—have worked out well for Minnesota businesses, reducing the rate of total business property tax growth to the combined rate of inflation and population growth and below the level seen by homeowners and owners of other classes of property.

However, sometimes winning a lot isn’t enough. Sometimes people want to win even more. Today, business lobbyists want to repeal the state business property tax—the one provision of the 2001 tax act that partially offset the windfall of property tax relief they received in the 2001 tax act and that was the quid pro quo for enacting the other provisions in the first place. The affordability of reducing or repealing the state business property tax will be considered in the second part of this series.

 

*As measured by the implicit price deflator for state and local government purchases, which is the appropriate measure for adjusting state and local government revenues and expenditures for the effects of inflation.

 In this analysis, the general education tax rate is applied to adjusted net tax capacity. The regions used in this analysis are based on a regional division developed by the Minnesota House Research Department. The Minnesota House Research Department separates some regions into cities and township, resulting in 28 regions in the state.