Property Tax

Issue

What changes to the state's property tax system are needed to improve its competitiveness, understandability and administration?

Policy

Minnesota's property tax system should be based solely on the estimated market value of property. Artificial mechanisms like the classification system and limited market value, among others, should be eliminated. Moving to a market value-based property tax system is the Minnesota Chamber's long-term goal. In the short term, the Legislature should avoid system changes that increase business property taxes.

Competitiveness: The property tax remains a competitive problem for Minnesota businesses. For taxes payable in 2010, Minnesota ranked 10th highest in the nation for a $1 million commercial property in the largest urban city of each state and eighth highest for a $25 million commercial property. Similar valued industrial properties ranked slightly lower at 14th and 15th highest, respectively. To address the competitiveness of the state's property tax, the Chamber supports the following:

• Statewide property tax. The Chamber supports eliminating or phasing-out the statewide property tax. The statewide property tax is the most direct way the state can provide property tax relief to businesses. Eliminating the tax would reduce commercial/industrial property taxes by about 30 percent and return Minnesota's property tax to a purely local tax. While the statewide property tax exists, the Chamber continues to oppose changing the structure of the tax to a fixed tax rate.
• Classification system. The Chamber opposes any change to the classification system that increases commercial/industrial (CI) properties' share of the tax burden. If the Legislature considers reducing the class rates for agricultural, cabin or homestead properties – or changing the breakpoint between the tiers of homestead property – the class rates for CI property must be reduced proportionately. Few states separate classes of property into tiers.

Understandability: In 1988, Minnesota changed its property tax system in a way that is unique nationally. It eliminated the traditional mill rate system and adopted the current tax capacity/class rate system. There is no compelling reason for Minnesota's system to be different than the rest of the country. It leads to confusion and a lack of understanding of the property tax system. Accordingly, the Chamber recommends that Minnesota return to a mill rate system. This change should be implemented in a way that does not shift property tax burden among classes of property.

Administration: The state should avoid past mistakes like limited market value that make the administration of the property tax system more difficult. In 2009, the limited market value law was completely phased out. The Chamber opposes re-enacting a limited market value law. It complicated the administration of the property tax and shifted tax burden from protected to unprotected properties and from properties with growing valuations to those that are stagnant or declining.

Business Impact

Despite the 2001 property tax reforms, commercial/industrial (CI) property continues to pay a disproportionate share of the property tax. For taxes payable in 2012, CI property represents about 12.6 percent of the market value of property, is 22.8 percent of tax capacity (the tax base on which most property taxes are assessed) and pays 30.5 percent of all property taxes. On the other hand, residential property represents 51.4 percent of market value, is only 44.4 percent of tax capacity and pays 43.5 percent of all property taxes.

The reason CI property's share of the tax capacity is less than its share of taxes paid is the statewide property tax. This tax is only assessed on CI, utility, cabin and resort property. Eliminating the statewide property tax would reduce CI property taxes by about 30 percent. If the tax were eliminated for taxes payable in 2012, the effective tax rate for CI property would fall from 3.76 percent to 2.62 percent.