Will the legislature raise business property tax?

September 19, 2010 at 12:32 pm

Published in Finance and Commerce, September 9, 2010

Business Property Tax Chart

Click here to view full chart

Why would legislators single out business owners and their buildings for a big tax hit as part of the budget fix?
The simple answer is that they are politically safe targets.  Businesses do not vote. Therefore, some legislators may be eager to turn to the easiest, and politically most safe, solution:  let the state’s businesses pick up a substantial portion of the budget shortfall by increasing the statewide “general” tax (a tax paid directly to the state only by businesses, public utilities, and cabin owners) or by upping the classification rate on commercial-industrial properties.

Since its inception in 2001, there have been continual calls at the Capitol to increase the statewide general tax (in one tax bill alone by as much as 35 percent) by changing the formula by which the annual levy is determined, based on the argument that businesses – and business properties – “don’t pay their fair share.” 

Less likely, perhaps, but also a topic of discussion among some legislators, is the possibility of raising the classification rate on business property from the current level of 3 percent to something higher. For such a move to have an impact on the fiscal shortfall, the increase would have to be substantially higher, sending employer-paid property taxes soaring.

Local property tax burdens have already begun to shift to homeowners, a fact that legislators are keenly aware of.  As residential values appear to begin to stabilize after years of decline, steep decreases in the value of business properties will begin hitting the property tax system next year and beyond. Legislators attempting to protect homeowners – their constituents – could very well override these natural market value shifts. They would simply shift the property tax burden to Minnesota’s already struggling businesses by jiggering the system. Increasing fixed costs on our job-creators in the middle of a steep recession would make a return to economic recovery and full employment even more difficult.

In the late nineties, DFL majorities in the House and Senate, aided by a Republican Governor, reduced property tax rates for business.  They recognized that both fairness and our ability to compete demanded a narrowing of the gap between businesses and other property types. To their credit, those legislators overcame their habit of overprotection for homeowners and, persuaded by a statewide coalition of business organizations, NAIOP among them, opted instead for sound tax policy.  The result – the bipartisan property tax reforms of 2001 – reduced the effective tax rate for all classes of property by increasing the state’s share of school funding.

But even after narrowing the gap between business and residential property, Minnesota businesses today still pay three times as much as homeowners on properties of equivalent value. (See chart.)

As the fall election draws near, it is clear that business property owners and their tenant companies must remain vigilant.  Candidates for governor and the legislature must be fully aware that adding to the fixed costs of doing business in Minnesota by increasing business property taxes (possible under the pressure of fixing our current fiscal jam) will be devastating for Minnesota’s unemployed workers, and a particularly painful blow for small and mid-sized business owners already coping with a stagnant economy, restricted credit, and increasing global competition.

Entry filed under: Featured Articles, Public Policy | Government Affairs.

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