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Minnesota Takeaways From Our Latest 50 State Property Tax Comparison Study

Results from the newly-released Payable 2016 report and a look to the future

MCFE is pleased to announce the 2017 edition (covering 2016 taxes payable) of the 50-State Property Tax Comparison Study – our joint effort with the Lincoln Institute of Land Policy – has now been published and is available on the Lincoln Institute’s website at http://www.lincolninst.edu/publications/other/50-state-property-tax-comparison-study-1.  For the uninitiated, the report examines property taxes on homestead, commercial, industrial and apartment properties with specific values located in the largest city in each state1 (i.e. “urban cities”), in a comparable rural city in each state, and in the largest 50 cities in the country.  States and localities often treat different types of property differently: with variations in tax rates, exemptions, or assessment ratios, for example.  Our study controls for these and other effects to compare effective tax rates – taxes relative to property values – to provide the most meaningful comparison of property taxes between these cities.

Minnesota Results: The Trends, They Aren’t a-Changin’

With seventeen editions of this study now under our belt, some longer-term trends jump out as we look at our Minnesota results.  One major theme continues to be the relative affordability of homeowners’ taxes.  The 1.39% tax rate on a median-valued Minneapolis home is once again below average – for the 10th time in the last 13 years.  Good data on median home values in rural areas doesn’t go back quite as far, but Glencoe checks in once again this year with a below-average tax rate on the median-valued home.  Complaints about property tax burdens notwithstanding, these results should not be surprising given the combined effects of Minnesota’s property tax classification scheme and the homestead value exclusion.  It’s important to recognize the state’s income tested property tax refund program is not included in these results, and given its relative generosity would likely further reduce state rankings if it was.

Table 1

Selected Property Tax Study Results, Payable 2016

The other long-term trend continues to be the high burdens Minnesota’s property tax system places on commercial – and to a lesser extent, industrial – property.  Commercial property tax burdens have been higher for years across Minnesota – both in our urban rankings, where Minneapolis’ seventh-place ranking for a $1 million-valued commercial property represents the seventh top ten finish in a row – and in our rural rankings, where Glencoe’s $1 million commercial property ranks second for the fifth consecutive year.  The state’s rankings for industrial (i.e., manufacturing) properties fare somewhat better, because these types of properties with their higher levels of personal property (mainly machinery and equipment, inventories, and fixtures/office furniture) benefit much more from Minnesota’s blanket exemption of personal property than commercial properties do.

Minnesota was an early adopter of exempting business personal property and has reaped competitive benefits from it.  The edge that it gives industrial properties, however, is starting to erode.  Another theme we have tracked over the years is the nationwide movement toward exempting personal property from taxation –through either a blanket exemption or a local option.  In 2004, 40 states allowed property tax exemptions for manufacturers’ inventories, 14 allowed them for manufacturing machinery and equipment, and 11 allowed them for fixtures.  Twenty-one years later, 5 more states exempt machinery and equipment, 2 additional states exempt machinery and equipment, and 1 additional state allows inventory exemptions.  Add to this the substantial partial personal property tax exemptions that Arizona, the District of Columbia, and Idaho have all enacted since then, and Minnesota’s competitive position with respect to business property taxation is now more dependent than ever on levy amounts rather than structural advantages.

Minnesota’s business property owners continue to subsidize homeowner and renter property taxes in a meaningful way.  The local-only property tax rate on $1 million commercial land and buildings in Minneapolis (without the state general levy) is about 2 times higher than the property tax rate on a median-valued home.  Business subsidization of homeowner property taxes is not unique to Minnesota; 45 of the 53 urban cities in the study give some sort of preferential treatment to homeowners.  On average, effective tax rates on commercial properties are 1.67 times higher nationwide than on median-valued homes – but Minnesota’s subsidies are above average and deliver significant benefits to homeowners.  Our partners at the Lincoln Institute have calculated that, if the tax base in Minneapolis were changed so that the differential in homestead and commercial rates was at the national average, taxes on the median valued home would be $455 – or 14% – higher.

Sidebar - Why City Choices Don’t Significantly Impact Minnesota Rankings

Our use of Minneapolis and Glencoe to represent “urban” and rural” categories in the study often raises the question: would choosing different Minnesota cities for national comparison purposes would make a meaningful difference in the state’s rankings?  If local levies were the only force driving the relative size of tax bills and resulting rankings that would be the case.  But they’re not.

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 not city-dependent but impact the property tax bills of every similar type of property across a state.

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.

To illustrate the influence of state structural features consider our rural commercial rankings.  Our selection process for rural cities narrows the field considerably to improve comparability.  Generally, we use cities that fall in one of two categories in the U.S. Department of Agriculture’s rural-urban continuum, which classifies cities based on size and geographic location.  All of our rural cities are county seats with populations between 2,500 and 10,000 to ensure as much as possible a set of cities that provide similar public services (especially in the public safety and public works areas) and to eliminate regional centers.  Whenever possible, the cities are located in counties located outside of metropolitan areas, with the exceptions being where such counties do not exist – largely in northeastern states (think “rural Rhode Island”).

Using this typology, 25 Minnesota cities could qualify for inclusion as a “rural” representative of our property tax comparison study.   We calculated the taxes for the $1 million commercial property for each of these 25 cities.  Our report incorporates assessment error using sales ratio data from the Minnesota Department of Revenue, however, that data does not exist for commercial properties in several of these cities given the small number of sales that occurred.  If we – conservatively – substitute the median sales ratio for the cities we do have data for, then in 16 of these 25 cities the $1 million commercial property would rank in the top 5 nationally.  In 22 of the 25 cities the property would rank in the top seven.  If, instead, we assumed a sales ratio of 100% (the standard procedure for our report), then 21 of the 25 rural cities would be in the top 5.  Such findings indicate that all cities share in the influence of the structural design of the Minnesota property tax system and that influence has the predominant effect on state rankings.

Regional competitiveness findings

Minnesota faces some serious challenges when it comes to regional competitiveness, especially with respect to rural business taxes.  If we look at medium-and higher-valued properties at locations across the upper Midwest (Illinois, Iowa, Michigan, Minnesota, North Dakota, South Dakota, and Wisconsin), Minneapolis’ property taxes range from roughly equivalent to the regional average for a $1 million industrial property to 8% above the average for a $25 million commercial property.  But Glencoe’s taxes range from 24% above the regional average for a $1 million industrial property to 31% above for a $25 million commercial.  Given Minnesota’s trademark instinct to install progressive taxation wherever it can, with Minnesota’s two-tier property tax structure for commercial and industrial property taxes it should not be surprising that higher valued properties are at the greatest disadvantage when compared to other states. 

Minneapolis has a competitive advantage over four upper Midwestern locations at the $1 million and $25 million level for commercial and industrial properties: Detroit, Des Moines, Chicago, and Aurora (IL).  Glencoe has the highest commercial property taxes in the region at those values, and fares only slightly better for industrial taxes, ranking second behind Manistique, Michigan.  But the differences between Minnesota and both Dakotas are stark, in no small part because they, along with Iowa and Illinois, also fully exempt personal property from taxation.

For business and cabin properties, Minnesota’s property tax is not purely a local issue.  The state imposes its own property tax on those kinds of properties, which was set at $864 million for taxes payable in 2016.  The state’s encroachment into what is generally seen across the country as a revenue source for local governments has competitiveness implications for Minnesota’s business property owners and their tenants.  Eliminating the tax would reduce burdens on commercial and industrial properties in Minneapolis and Glencoe by around 20% to 25%.  Table 2 demonstrates the effects of eliminating the tax on a $1 million commercial property.  In both cases competitiveness improves markedly, with the tax in Minneapolis falling from 6% above the regional average to 17% below and the tax in Glencoe falling from 29% above the regional average to just 4% above average.

Table 2

Effects of State General Levy on Minnesota Regional Competitiveness for $1 Million-Valued Commercial Property, Payable 2016

A look to the future

So what does the future hold for Minnesota’s property tax rankings and tax competitiveness?  Some of that will be determined by other states as changes in Minnesota’s rankings often depend as much on what policies other states pursue. However, three ideas stem from state and national developments.

First, the state general tax exemption lawmakers enacted last month for the first $100,000 of a parcel’s value will significantly improve business tax competitiveness for some but not all Minnesota businesses.  The exemption would reduce the taxes on the $100,000-valued commercial property in Glencoe by almost 22% – dropping the ranking from 6th to 25th.  At higher values, though, the effect is largely negligible; with taxes falling by about 2% for each of the $1 million commercial examples and by about 0.1% at the $25 million level – with no change at all in rankings.

Second, without a freeze of the state general levy, future levy increases will fall disproportionately onto higher valued business properties in metropolitan areas, in turn putting pressure on urban rankings.  This brings into sharp relief the horizontal equity problems created by trying to make business property tax relief dependent on real estate ownership and its value.  Small businesses who happen to own their own low-valued space will find this change very beneficial.  Those small businesses who happen to rent space instead in higher valued buildings – largely in metropolitan areas – won’t notice a thing and instead will likely see their burdens increase over time.

Finally, we expect to see Minnesota’s exemption for personal property become less of a competitive advantage as the trend toward exempting personal property from taxation continues.  Of course, this exemption is already relatively immaterial for commercial properties considering the high number of states and localities that exempt commercial inventories.  But as more states move toward exemptions of manufacturing machinery and equipment or increase their existing partial exemptions, it would not be surprising to Minnesota’s industrial property tax burdens climb over the long run relative to the national average as structural advantages diminish while levy disadvantages – like the existence of the state general tax levy – continue.

Footnotes
  • 1 Since property tax systems in Chicago and New York City differ substantially from the systems applying to other cities in their states, the study also includes Aurora, IL and Buffalo, NY for a total of 53 urban cities.