Minnesota Takeaways From the Payable 2018 50 State Property Tax Comparison Study

The 2019 edition (covering 2018 taxes payable) of the 50-State Property Tax Comparison Study – our joint effort with the Lincoln Institute of Land Policy, will be released shortly and available on the Lincoln Institute’s website in the near future.  As a preview, we offer a look at the latest Minnesota findings.

This year represents the 19^th edition of the report, which dates back to taxes payable 1995.  For readers who aren’t familiar with this flagship study of ours, the report examines property taxes on homestead, commercial, industrial and apartment properties with specific values located in the largest city in each state[1] (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: Homeowners Still Average; A Respite for Businesses

One major theme that remains unchanged since the mid-oughts continues to be the relative affordability of homeowners’ property taxes.  The 1.33% effective tax rate on a median-valued Minneapolis home is once again below average – for the 12^th time in the last 15 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 tax rate on the median-valued home that is near the national average.  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 and special refund program targeting homeowners with large year on year increases are not included in these results. Given their relative generosity state rankings would almost certainly be further reduced if they were.

However, another long-term trend – the relatively high burdens Minnesota’s property tax system places on business property -- especially commercial parcels – are finally seeing some change.  Commercial property tax burdens (i.e. office space) have been higher for years across Minnesota – both in our urban rankings, where a $1 million-valued property ranked in the top ten nationally between Payable 2010 and Payable 2017 – and in our rural rankings, where Glencoe’s $1 million commercial property ranked second for six consecutive years prior to this edition of the study.  However, the $100,000 exemption from the state general levy on businesses and cabins and the freeze in the levy itself seem to be yielding relative affordability benefits.  As the table indicates, the rankings for both Minneapolis and Glencoe have both dropped four spots for Payable 2018, with Minneapolis moving out of the top ten altogether.  Perhaps more importantly, Glencoe has moved from 89% above the study average for a $1 million commercial property – near if not at outlier status – to 52% above average.  It’s an indicator of the influential role the state general levy plays in Minnesota’s property tax competitiveness and affordability.

Industrial (i.e., manufacturing) property also received similar relief, although its competitive position has always been much better relative to commercial parcels.  The state’s rankings for industrial properties are lower than those for commercial parcels 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.  However, as our accompanying article in Fiscal Focus demonstrates, it’s important not to overstate the value this blanket exemption provides – even for manufacturers.

Minnesota was an early adopter of exempting business personal property and has reaped competitive benefits from it as reflected in past national “model firm” tax comparison studies which ranked Minnesota as having one of the lowest effective property tax rates in the nation for capital intensive manufacturing.  This edge, however, has eroded over time.  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 1995, 39 states taxed personal property in some form.  Since then, 9 of those states have either enacted an exemption for a fixed amount of personal property value or increased the amount of an existing exemption; six states or locations have exempted at least one type of personal property (usually manufacturing machinery and equipment), and Ohio has exempted personal property completely.  Assuming this trend continues, any competitive edge Minnesota’s personal property tax exemption offers will continue to erode, and other structural features like the state general levy will take on greater influence.

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 1.79 times higher than the property tax rate on a median-valued home.  Business subsidization of homeowner property taxes is not unique to Minnesota; In 42 of the 53 urban cities in the study the property tax system gives some sort of preferential treatment to homeowners.  Nationwide, the most common cause for preferential treatment is a homeowner-specific exemption or credit (29 locations), with differentials in assessment ratios and nominal tax rates creating preferential treatment in 16 and 14 locations, respectively.  In five locations that have parcel-specific provisions that limit growth in assessed value (such as California’s Prop 13), the assessment limitations have been structured in a way that advantages homeowners over businesses.

On average, effective tax rates (local taxes only) on commercial properties are 1.66 times higher nationwide than on median-valued homes – but Minnesota’s subsidies are above average and deliver significant benefits to homeowners.  Last year our partners at the Lincoln Institute 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.   We expect a similar result for payable 2018.

Regional competitiveness/affordability findings

Minnesota faces some challenges when it comes to regional competitiveness and affordability 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 are, at least for Payable 2018, rather competitive.  Burdens range from 9% below the regional average for a $1 million industrial property (60% personal property) to 1% above the average for a $25 million commercial property.  But Glencoe’s taxes range from 22% above the regional average for a $1 million industrial property (60% personal property) to 28% above for a $25 million industrial parcel (50% personal property).  Given Minnesota’s trademark instinct to install progressive taxation, with a 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 offers an 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) and has roughly equivalent taxes to those found in Milwaukee.  Glencoe has the second highest property taxes in the region at those values for both commercial and industrial properties, 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.

As we have mentioned already, for business and cabin properties Minnesota’s property tax is not purely a local issue.  The state general levy was set at $784.6 million for taxes payable in 2018 – a reduction from previous years since the state lowered the levy in 2017 in conjunction with the $100,000 exemption to prevent any burden shifting that would otherwise result.  The state’s encroachment into what is generally seen across the country as a revenue source belonging to local governments has competitiveness implications for Minnesota’s business property owners and their tenants.  Eliminating the state general levy and restoring the property tax to its historical local finance role would reduce burdens on commercial and industrial properties in Minneapolis and Glencoe by around 20% to 25%.   The table 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 3% below the regional average to 24% below and the tax in Glencoe falling from 23% above the regional average to 1% below average.

The enactment of another $50 million reduction in the state general levy this session will further reduce the relative affordability and competitive property tax disadvantages Minnesota’s businesses – particularly commercial enterprises -- face.  In debates about the state general levy, it’s often overlooked that the ability to lower it was an intended policy design feature.  Architects wanted to make future policy discussions on interstate business property tax competitiveness and affordability a state policy (and budget) issue rather than a local government issue.  The idea was if this was a concern the governor and legislators could use the state general tax as a “relief valve” and dial down the levy accordingly rather than adjust classification rates with all the accompanying local burden shifting and political stress this creates.

In considering the fate of the state general levy, that policy purpose needs to be weighed against other policy considerations like the impacts of the state’s intrusion into local government’s primary tax base and the stability of the state tax system.  As general fund competition for Local Government Aid and County Program Aid dollars only increases, the protection and preservation of a tax base that local governments can call their own will likely become ever more important.  It’s a tension that will influence property tax debates for many years to come.