State Business Property Tax Relief: What the Tax Incidence Study Really Says

The most effective way to sway public opinion against business tax relief has always been to invoke the “big tax breaks for big corporations” rhetoric.  The subliminal messages of great wealth and unchecked influence all wrapped in a Snidely Whiplash vibe is very powerful.  But it’s especially effective when discussing state tax relief as it relates to that special subspecies of Corporatus Maximus –companies that aren’t even headquartered here.

This is a prominent feature of the current debate around reducing or phasing out the statewide property tax on business.  95% of the total state property tax levy ($863.7 million in 2016) falls on businesses of every size in the state, and typically accounts for 30%-35% of a business’ property tax bill.  It’s the primary contributor to Minnesota’s persistently high business property tax rankings and also a problem for local governments whose reliance on property taxes is made more difficult by the state’s significant footprint in their property tax capacity.  Like the Old Testament story of David and Bathsheba, state government is not satisfied with its large and growing concubine of income, sales, and many other general fund revenues, it wants the little guy’s revenue source too.

This is why the bipartisan 2012 Property Tax Working Group, heavily comprised of local government officials, recommended phasing out the tax.  This is also why reducing or phasing out this tax is the number one tax relief priority of seemingly every business advocacy group.  Business owners of real property and business renters of real property; C-corps and pass-throughs; retailers, manufacturers, and service firms; businesses making a profit, businesses breaking even, and businesses losing money – most every type of Minnesota business would benefit.

But there is considerable resistance to this property tax relief based on concerns that most of the benefit would flow out of the state (to big non-resident corporations), and thus get “wasted.”  Opponents have cited the state’s Tax Incidence Study as definitive evidence of the legitimacy of this concern noting that by the state’s own modeling, 53% of the statewide business property tax is exported elsewhere.  Or as one advocacy organization has declared,  “for every $1 in revenue lost to the State of Minnesota from the repeal of the state business property tax, Minnesotans will receive a 47 cent net reduction in taxes.”

But as might be expected with a report of great authority but great complexity, it’s awfully easy to misrepresent or spin a finding to support a political argument.  Here are three essential “rest of the story” findings obtained from a Department of Revenue (DOR) memo on the incremental incidence of repealing the state property tax:

Tax incidence is not the same thing as property tax relief.  Incidence analysis examines how firms respond over the long run to tax changes given their competitive structures.  The state’s findings absolutely do not mean that 53% of the tax relief in year 1 (or 2 or 3 for that matter) would go to non-resident capital, labor and consumers.  As DOR notes, “if business property taxes are cut, the immediate benefit will go to the owners of that property.  With lower costs their profits will rise.”  And for the likely thousands of small businesses leasing office and retail space in Minnesota under commonly used net lease arrangements, any property tax savings will flow directly to their own bottom line – regardless of where the property’s owners might be.  Period.

The biggest long term “out of state” beneficiary of state property tax repeal isn’t Wal-Mart or any other giant corporation's shareholders.  It’s Government.  To quote the Incidence Study itself: “great care should be taken in applying the results reported here to a proposed change in a tax on business.”  The reason for this warning is that there is a fundamental difference between average incidence (which shows how the taxes being imposed flow to individuals) and incremental incidence (which evaluates where the dollars associated with tax cuts or tax increases would come from).

The Department’s analysis of the incremental incidence of repealing the statewide property tax suggests that 52% of the benefits would be exported out of state over the long run.  At first glance, that seems to mirror the average incidence of the tax – where 53% of the burden is exported.  But closer examination reveals that most of the exported tax relief goes to the federal government.  Why?  Because Minnesota tax relief reduces the deduction businesses and individuals – both those located in Minnesota and those outside the state – can claim related to state and local taxes.  This reduction eventually results in higher federal tax burdens.  Non-resident capital, consumers, and labor actually realize a fairly small level of tax relief over the long-term, ranging from 23% for commercial properties to a miniscule 4% for utility properties.

Repeal would have a progressive effect on Minnesota’s tax system.  Because the current conversation is no longer about raising revenues, the concept of “tax fairness” has morphed once more, and comment on the regressivity of the state property tax is nowhere to be found.  DOR notes full repeal “would be a small but significant reduction in regressivity” of the overall system.

All the fuss over exporting really reflects an inability to “target” the relief to businesses policymakers deem most worthy.  There is no denying the fact that on an absolute basis more of the relief from reducing or repealing the statewide business property tax would go to owners of higher-valued business property.  But as the incidence study points out, in the long run businesses don’t pay taxes, they pass them along.  And we don’t know that “big corporations” pass property taxes along in a substantially different way than smaller businesses do.

What we do know is that it’s preposterous to suggest that because most of the benefit accrues to owners of highly-valued properties, reducing or eliminating the statewide property tax does not classify as “small business tax relief.”  The benefit of tax relief to any business is relative to their costs, and a fixed cost like property taxation has special relevance to small business.  As just one example, a recent University of Minnesota report found rural areas are likely to have a shortage of grocery stores in a decade.  The researchers noted that 95 percent of rural grocers cited high operating costs and narrow profit margins as their biggest challenges.  Reducing their property tax bill of up to 35% would unquestionably produce a substantive, meaningful reduction in those operating costs – even if the dollar sum in question in a miniscule drop in the bucket of total relief provided.

A lot of time gets spent dwelling on the costs of providing statewide property tax relief.  We wish an equal amount of time were spent contemplating the benefits.