Minnesota Results for the 50-State Property Tax Comparison Study for Taxes Payable in 2020

First published in 1995, this 2021 report (covering taxes payable in 2020) represents the 21^st edition of the 50-State Property Tax Comparison Study[1].  Published in conjunction with the Lincoln Institute of Land Policy, the 50-State Study examines property taxes on homestead, commercial, industrial and apartment properties with specific values located in the largest city in each state (i.e. “urban cities”).  The urban cities group assesses the structure of 53 cities.  In addition to 50 state systems, there are essentially three “city-states” – Washington DC, Chicago, and New York City – that have their own distinct property tax systems, spurring the additions of Aurora, Illinois and Buffalo, New York to the study to represent the Illinois and New York state systems.  The 50-State Study also offers a nonmetropolitan “rural city” from all 50 states (with population between 2,500 and 10,000), and a separate comparison of the most populous 50 cities in the U.S., which does not include 23 cities in the urban city group.  The Lincoln Institute provides additional analysis of all 73 of these “large cities” (ranging from Burlington VT at 43,000 to New York City at 8.4 million) in appendix tables 1a – 1d of the report.  That data is not discussed as part of MCFE’s Minnesota results.

The 50 State Study contributes to a better understanding of how state property tax system design affects property tax burdens.  Property tax systems’ structural features have major influences on tax rankings.  Such features include both technical issues like classification schemes and assessment practices and broader topics related to the fiscal system, such as the existence of any state levies, the relationship between state and local governments, and access (or lack thereof) to revenues outside of the property tax to support local government.  Importantly, these structural influences are usually not city-dependent but impact the property tax bills of every similar type of property across a state.   

Minnesota Urban Results

From 2019 to 2020, effective tax rates remained quite flat for all Minneapolis property types and values included in the study.  For median-value homes, the effective tax rate remained at 1.37% and 20^th highest nationally among the 53 urban cities in the study.  The average effective tax rate for urban cities went down slightly to 1.38% making Minneapolis almost exactly average.

Commercial effective tax rates declined slightly, but Minneapolis taxes remained 10^th highest on $1 million properties and 7^th highest on $25 million properties.  On the first $100,000 in value, Minneapolis’ effective tax rate increased slightly, moving the ranking up from 27^th to 26^th which was still below the urban city average by $137.  The $100,000 value essentially shows how Minneapolis property taxes rank without the state business tax (SBT) on commercial and industrial property since the state exempted the first $100,000 in value from that tax in 2017.  The 2020 commercial numbers also show the impact of the 2019 legislative action to reduce the SBT by $50 million by removing the inflator and freezing the levy.  The 2019 legislative action does not affect the $100,000 value since it is exempt, and the effective tax rate rose slightly from 1.73% to 1.76%.  For the higher value properties, the effective tax declined slightly, although the taxes remain substantially above average – by $9,432 on a $1 million property and $267,688 on a $25 million property.

The same effect can be seen in the industrial properties where Minneapolis moved up from 34^th to 33^rd in 2020 at $100,000 in value and stayed put at 19^th for a $1 million property and 18^th for a $25 million property.  The lower taxes and rankings in industrial property are due to the number of states that tax personal property.  Minnesota does not tax personal property and there is greater personal property value associated with industrial properties compared to commercial properties.  Despite that difference, Minneapolis still has industrial property tax bills of $4,601 above average on a $1 million industrial property and $143,488 on a $25 million industrial property.

Minnesota Rural Results

Glencoe’s effective tax rate on homesteads when up slightly from 2019 to 2020, resulting in a move up in the rankings from 22^nd to 20^th.  Glencoe is now slightly above average in homeowner property taxes compared to the group of 50 rural U.S. cities.  Effective tax rates on commercial and industrial property values increased significantly in Glencoe from 2019 to 2020, partly due to a local rate increase, but mainly due to assessments “catching up” after two years of undervaluation.  Glencoe moved up from 6^th to 2^nd out of 50 rural cities at both the $1 million and $25 million property value, and from 24^th to 9^th at the $100,000 value.

Comparisons of commercial and industrial property for rural cities can have wide variance from year to year.  This is due to the limited number of qualified sales in any one year, making it difficult for assessors to find examples of “like” properties needed to recalibrate market values.  In essence, a handful of sales in a given year can produce a wider swing in a rural city than would be expected in a large city – effectively resetting the assessed value.  For these property types (industrial in particular), it is much more informative to look at a rural city over a longer time period for a good sense of its relative position.

It’s easy to be misled when looking at property tax changes from just one year to the next in a ranked study like the 50-State Property Tax Comparison Study.  There are generally too many moving parts in what ultimately produces the effective tax rate and the tax bill to make a simple conclusion about what might have caused any changes.  The 2020 commercial and industrial property results for Glencoe are a case in point.  Anyone taking a cursory look might just assume that the local governments involved simply raised tax rates and leave it at that.  While it’s true that the local tax rate rose in Glencoe from 2019 to 2020, that was more than offset by a decline in the state tax rate on commercial property due to a decision by the 2019 Legislature (see state and local rate table).  In 2021, we will see the result of the 2020 legislature’s more recent action, which was to raise the exempted value from $100,000 to $150,000 of assessed value.

Therefore, due to Minnesota’s unique state property tax on commercial property, even the idea that it was simply local decisions responsible for a change in taxes might immediately be wrong even if the property was valued at 100%.  And, of course, these local and state rates on commercial properties don’t easily give you an accurate picture of what a “typical” property owner is experiencing (if there is such a thing), because most commercial property owners in most years will experience changes in the assessed value of the property that we cannot represent in the 50-State Study.  Unlike homes – where there is data on median market value for cities – no such data exists for commercial property (i.e. last year’s $1 million property isn’t worth $1 million this year).  This is why effective tax rates are used throughout the study, because they allow comparison that can represent the effect of a tax system at different levels of assessed value.

As it turns, the big tax increase in 2020 for Glencoe commercial and industrial property is the sales ratio, which is one element in determining the effective tax rate.  Sales ratio studies are conducted throughout the country to give assessors a measure of how close the assessed values used for property taxes are to actual values based on recent sales of similar properties in the area.  In Glencoe’s case, the sales ratios are for all of McLeod County, and the median sales ratio rose from 87% of market value for taxes levied in 2019 to 106% of market value for taxes levied in 2020, which is a very substantial swing (see rate and sales ratio table).  What the sales ratios tell us is that in 2018 and 2019 when Glencoe ranked 6^th nationally in property taxes on a $1 million commercial property, commercial and industrial properties (represented by the ones that were sold) were paying lower property taxes than what turned out to be 100% of the market value.  That has now been corrected, but rather than being less under-assessed, those properties are somewhat over-assessed for our 2020 calculations. 

What the numbers don’t tell you is that Glencoe (McLeod County) is not alone in the challenges faced when assessing commercial properties in more rural areas where there are not a lot of sales to base assessments on in a given year.  This is a difficulty faced by assessors throughout the country in trying to determine the proper market value for levying taxes.  In general, assessors like to be between 90% and 105% of market value and there are often state laws that require correction if that type of threshold is not met.  In the case of Minneapolis, it is easy to see that the sales ratio swings are much less – even though they did slip below 90% one year.  This stability is a product of having many more sales each year on which to base their estimates, which is also generally true throughout the country.

The point of the 50-State Study is to find out the actual taxes paid in each jurisdiction as closely as we are able, and the sales ratio is an important part of that equation – although we usually don’t see the impact that we see for Glencoe this year.  As the tables spanning 2015-2020 show, the return to 2^nd highest is actually where Glencoe has historically been and is not due to decisions by local governments in a single year.  For more on sales ratios, see the working paper that MCFE produced for the Lincoln Institute of Land Policy in 2020[2].

Regional Comparisons on the Impact of the State Business Tax

Minnesota’s unique state business tax (SBT) continues to have a large effect on how Minneapolis and Glencoe rank regionally.  A look at the Upper Midwest Region reveals that for urban cities, the region has high taxes nationally for commercial property valued at $1 million, accounting for 6 of the top 14 cities in the urban city group of the 50-State Study.  Minneapolis has a higher tax than Milwaukee but is lower than Chicago, Aurora, Des Moines and Detroit.  Because of the radically lower taxes in Fargo and Sioux Falls, Minneapolis is still 1.9% above the regional average.  Without the state business tax, Minneapolis would drop below Milwaukee down to 18^th place at 20% below the regional average.  (For more on the state business tax, see this MCFE blog from February 25, 2020.)[3]

The Upper Midwest Region does not quite rank as high in commercial taxes for rural cities (with 4 out of the top 12 in the study).  As discussed, this year’s changes put Glencoe up to 2^nd nationally and highest in the region on $1 million and $25 million commercial property.  Without the SBT, Glencoe would rank 5^th highest, between Manistique MI and Hampton IA in national rankings.

The same impact can be seen in the regional comparison on industrial taxes, where Glencoe ranks 6^th on a $1 million industrial property and would rank 11^th without the SBT.  It is important to note here that – with a few exceptions – most personal property is also not taxed in the other states in our region (see page 94-95 of the study), so the advantage Minnesota has nationally from that feature of our tax system is not in evidence in regional comparisons. 

Concern has been raised over the years about whether Glencoe is representative of Minnesota rural cities for the purposes of this study, and inaccurate assertions have been made that Glencoe is an outlier compared to other Minnesota cities.  We found that was not true when we ran all other Minnesota cities that qualify for the “rural” definition through the model for taxes payable in 2016.  The result[4] was that 11 of the 25 cities would have ranked 2^nd that year, and 18 of the 25 cities would have ranked in the top five, so Glencoe is clearly not an outlier and serves the purpose of representing Minnesota’s property tax system for the 50-State Study.