Even After the Sticks and Stones, Minnesota Commercial Property Tax Burdens Rank High

Trying to disparage our research won't change the fact that Minnesota's commercial property tax burdens are among the highest in the nation

For the past two decades, we have issued our 50 State Property Tax Comparison Study, with the appreciation of fiscal scholars and tax-minded legislators across the country.  Why?  Because the study has been described as the “gold standard” for property tax comparison studies by the Rockefeller Institute of Government.  It is now a collaborative effort with the Lincoln Institute of Land Policy of Cambridge, MA – the nation’s leading research authority on land policy and its taxation.  Its findings and data have been incorporated into numerous academic and fiscal studies including the Department of Revenue’s own Tax Incidence Study, and is now being used by the Organization for Economic Cooperation and Development (OECD). 

In contrast, the progressive North Star Policy Institute (NSPI) is a self-acknowledged proponent of bigger state government funded by higher business taxation, and therefore wants to scuttle current attempts to provide property tax relief for business.  It is no crime to hold that opinion.  But as part of their state business property tax protection effort, they have called into question the legitimacy of our 50 State Study findings whose findings are frequently cited by the Minnesota business community as evidence of an uncompetitive property tax system.

NSPI claims the 50 State Study suffers from a couple of methodological flaws -- specifically our treatment of commercial business’ “personal property” (i.e, the things a business owns that aren’t land or buildings) and our choice of Minnesota cities (Minneapolis and Glencoe) in the report.  They claim these flaws overstate Minnesota business property tax burdens and rankings and imply we do this purposefully.

Of course, the only thing more tedious than reading methodological criticism is reading detailed counterpoints to methodological criticism.  So let’s cut to the chase and examine the real question:  If MCFE adopted everything that NSPI suggests is necessary for an “accurate” study would our findings look materially different?

The answer is “no.”  Minnesota would absolutely remain a high business property tax state.

Using NSPI’s using own numbers regarding the treatment of commercial personal property, our rankings barely budge.  Taxes on $1 million of commercial property in Minneapolis would rank 8th rather than 6th.  Glencoe’s $1 million ranking (2nd) wouldn’t move at all.

Would choosing different Minnesota cities for national comparison purposes make a difference?  At face value, using different cities or creating a “regional average” seems like it could potentially have a huge impact on the study’s rankings.  And that would be the case if local levies were the only force driving the size of commercial property tax bills and resulting rankings.  But they’re most assuredly not.

Property tax systems’ structural features have huge influences on tax rankings.  Such features include both technical issues like classification schemes and assessment practices and broader topics related to the fiscal system — the relationship between state and local governments – such as access (or lack thereof) to revenues outside of the property tax to support local government.

The purpose of the 50 State Study has always been to understand how state property tax system design affects property tax burdens.  Our property tax study captures these influences, and the rankings reflect those influences.

It’s not a coincidence that Minnesota’s largest city and a much smaller rural city are both in the top ten nationally for commercial property taxation (and it’s certainly not the result of some conspiratorial choice to pre-select cities).  Our relatively high business property tax rankings reflect the effects of policy decisions like limitations on local sales tax authority, higher relative business subsidization of residential property taxes directly through class rates and indirectly through the homestead exclusion, and no radical assessment or levy limit provisions. 

It also reflects, of course, the state property tax which — by comprising 30-35% of a commercial property’s total tax bill — functions like a roughly 50% state surcharge on all local property tax levies on business property. 

Most importantly, these powerful structural influences are not city-dependent but impact the property tax bills of every business across Minnesota – from Roseau to Rushford.  Ironically, if we did “regional analyses” here and around the country as NSPI suggests is necessary, it would neutralize the inherent variability associated with the levy decisions affecting a particular city and allow Minnesota’s comparative structural influences to be even more pronounced.  In other words, a more complicated regional comparison could result in higher business rankings.

We can understand the motivation behind this effort to call the legitimacy of our findings into question.  NSPI will do whatever they feel they have to do to help assure the approximately $860 million in state business property tax revenues continue to flow into the general fund unabated.

But creating doubt about our study and suspicion about our organization in the process doesn’t change several facts:

  • It doesn’t change the fact that, whether you think it matters or not, Minnesota remains a high business property tax state.
  • It doesn’t change the fact that, as a fixed cost that must be paid whether a business makes a profit or not, the state property tax has special relevance to small business.
  • It doesn’t change the fact the incidence of this tax is regressive, which conflicts with progressives’ own tax ideals.
  • And it doesn’t change the fact that a bipartisan group of officials with a strong local government representation has called for the statewide business property tax’s elimination based on principles of good tax policy.

NSPI’s energies and efforts would be far better spent explaining to Minnesotans why none of these facts should matter and why the highest and best use of those dollars remains with state government.