Small business property tax break

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In an effort to reduce small business property taxes, a proposal in the Minnesota House would exempt the first $150,000 of taxable value of each business from the state business property tax. This provision is part of a second round of tax legislation, approved by the House Tax Committee yesterday, that was not part of the new tax law enacted last week; that law contained “rush” federal conformity provisions that needed to be enacted in advance of the April 15 tax filing deadline as well as other time-sensitive legislation. The second tax bill currently working its way through the House will contain other tax provisions that are less urgent, but still important.

Exempting the first $150,000 of business value would provide tax relief for all businesses in the state with a taxable value less than $1,172,000 and a tax increase for businesses with a taxable value in excess of this amount (based on 2014 data*). For example, the state tax on a business with a taxable value of $150,000 would drop from $1,174 under current law to zero under the House tax bill, while the state tax on a business with a value of $500,000 would drop from $4,825 to $4,053. Meanwhile, the state tax on a business with a taxable value of $2,000,000 would increase from $20,473 to $21,424, while the tax on a business with a value of $20,000,000 would increase from $208,249 to $229,879. The graph below illustrates the state business property tax under current law and under the House tax bill for businesses with taxable values up to $2,500,000.

Exempting the first $150,000 of taxable business value from the state tax would not affect the local share of property taxes paid by businesses. Even so, the typical total property tax reduction (including both state and local taxes) for a $150,000 business would be about 30%, while the total tax increase on a $20 million business would be only about 3%.†

The proposal to exempt the first $150,000 of taxable business value from the state business property tax would provide significant tax relief for tens of thousands of small and main street businesses—many of which are struggling—while not reducing state and local revenues by a nickel and imposing only modest tax increases on larger business. Only the largest of these businesses with extremely high values in extremely low tax rate areas would see total tax increases in excess of three or four percent. For these reasons, this provision of the House tax bill deserves serious consideration during the 2013 session.

*This provision would not take effect until tax payable year 2015; however, 2015 data is not yet available so the effects of this provision were simulated using 2014 data.

†This analysis is based on an average 2014 statewide average local tax capacity tax rate of 112.05% and referendum market value tax rate of 0.0019536%. Both rates are derived from House Research property tax simulation #14A2.