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Budget Cuts Likely to Cause More Business Property Tax Hikes

October 12, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Part 2 of 2 - Read part 1

Gubernatorial candidate Tom Emmer emphasizes the tax relief that he will provide Minnesota businesses. However, when it comes to property taxes, Minnesota businesses would likely see a net tax increase under Rep. Emmer’s proposals.

As noted in yesterday’s analysis of residential homestead property taxes, Rep. Emmer’s proposed $1.15 billion cut to property tax aids and credits is problematic because he provides no specifics. Minnesota 2020 has simulated a reasonable interpretation of this proposal based on Rep. Emmer’s own comments as well as some educated guesses. Yesterday’s article summarizes what that could mean for homeowners. Based on this analysis, statewide homestead property tax increases would average $215 a year, with greater Minnesota property homeowners shelling out about $330 more, and Minneapolis and St. Paul homeowners paying an additional $360.


Today, we'll look at Rep. Emmer’s budget proposal touting the business property tax relief that he will provide by reducing the state tax on commercial and industrial property by $100 million in the next biennium.

In reality, this promised tax break is tenuous, since it rests on the assumption that Emmer will be able to cut 17 percent from the state general fund in the next biennium.  Given that real per capita state general fund spending--properly adjusted for shifts and takeovers--is projected to decline by seven percent from FY 2002-03 to FY 2012-13, it is unlikely that the legislature and the public will tolerate the additional 17 percent cut that Emmer envisions. Without these cuts, Rep. Emmer will not be able to afford his business tax breaks.

Nonetheless, Minnesota 2020 has incorporated Rep. Emmer’s proposed cut to the state commercial/industrial property tax in its simulation of statewide business property taxes under the Emmer proposal. As it turns out, the relief provided by the cut in the state property tax will be more than offset by local property tax increases resulting from Emmer’s aid cuts. This is based on Minnesota 2020’s assumptions in the simulation of Emmer’s proposal to cut property tax aids and credits. The end result is an aggregate increase of 1.4 percent in commercial and industrial property taxes statewide.

However, business property tax increases are not spread uniformly around the state. In fact, businesses in some communities should see some property tax relief.  Because Minnesota townships do not receive Local Government Aid (LGA), they will be unaffected by cuts to LGA. As a result, commercial/industrial property taxes in townships will generally decline, while in cities they will generally increase, as illustrated in figure 1.

While business property taxes in townships will generally drop under this interpretation of the Emmer proposal, it should be noted that only about 3.6 percent of statewide commercial and industrial value is located in townships. 


Not surprisingly, there is significant variation among cities in terms of the change in business property taxes resulting from this interpretation of the Emmer aid cut and state business property tax reduction. Most metropolitan cities--excluding Saint Paul and Minneapolis--generally see modest business property tax reductions largely because most (though not all) of these cities have relatively low dependence on LGA and thus are less affected by LGA cuts. 

Businesses in the two core central cities see modest tax increases, while greater Minnesota cities generally see more significant property tax increases.  These patterns are illustrated in figure 2.

A table that accompanies this article shows the change in commercial and industrial property taxes for each Minnesota city based on this interpretation of the Emmer proposal.

About 80 cities will see business property tax reductions in excess of one percent; among these 80 cities are several large metro communities, including Bloomington, Brooklyn Park, Burnsville, Edina, Eden Prairie, Eagan, Lakeville, Maple Grove, Plymouth, Minnetonka, and Woodbury, as well as a few small greater Minnesota cities that receive no LGA.

At the other end of the spectrum, businesses in more than 300 cities would experience business tax increases in excess of 10 percent; most, though not all, of these cities are small.  Among the larger cities that would experience business property tax increases in excess of ten percent are Austin, Brainerd, Duluth, Fairmont, Hibbing, New Ulm, Saint Peter, Winona, and Worthington.

Businesses in a handful of cities, including International Falls, would experience business property tax increases in excess of 30 percent.

The cities with the largest business property tax increases under this interpretation of the Emmer proposal are predominantly cities that are highly dependent on LGA. 

Even though this analysis assumes that cities will levy-back just two-thirds of any aid cut, many cities nonetheless see large business property tax increases.  Furthermore, the cities that experience the largest property tax increases are also the cities that will have to make the deepest budget cuts based on this interpretation of the Emmer proposal.

Neither today’s analysis of business property tax increases nor yesterday’s analysis of homeowner property tax increases take into account the additional property tax hikes that would likely occur as a result of Rep. Emmer’s proposed health and human services cuts--which is likely to shift more HHS costs on to county property taxes--or Rep. Emmer’s proposed school aid freeze

The school aid freeze, which provides no new state revenue to deal with inflation or school enrollment growth, will create pressure for even more property tax increases above and beyond what is considered in this analysis.

Rep. Emmer might argue that he would not make aid and credit cuts in manner prescribed in this analysis. If so, he should tell the public more specifically how he would make the cuts. After all, Minnesotans have the right to know how Emmer’s $1.15 billion aid and credit cut will affect them. In the absence of meaningful information regarding his proposal, Rep. Emmer leaves us with no alternative other than reasonable speculation.

Regardless of the specifics of the Emmer proposal, one thing is clear: another massive cut in property tax aids and credits will have the same result as previous cuts. As demonstrated in the recent Minnesota 2020 Property Tax Report: 2002-2010, real per capita property taxes in Minnesota have increased by 26 percent since 2002, despite a real per capita and per pupil decline in county, city, school district budgets.  The primary cause of statewide property tax increases over the last eight years is large reductions in the revenue that state government shares with local government.

Rather than making “hard choices” as he claims, Rep. Emmer’s budget proposal is making the same easy choices that Governor Pawlenty has been making for the last eight years: pass the state’s budget problems off to local governments and property taxpayers so that state policymakers can continue to posture as champions of “no new taxes.”

Minnesotans do not want another round of the “no new taxes” shell game--with its corresponding homeowner and business property tax increases. State policymakers should embrace a balanced approach to the state’s budget problems that involves not only cuts and re-prioritization of state expenditures, but reasonable increases in progressive state taxes.


Download Property Tax Impact Table  (pdf)

photo credit: Mark Schindler, creative commons

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