Property taxes on Minnesota businesses would be slashed by about 30 percent over the next six to 12 years under legislation the Republican-controlled Legislature is almost certain to pass this year.
That tax cut would be a "bigger job creator by far" than Gov. Mark Dayton's short-term proposals for putting unemployed Minnesotans back to work, said House Taxes Committee Chairman Greg Davids, R-Preston, last week.
While the Democratic-Farmer-Labor governor hasn't ruled out the GOP tax cut, he expressed deep reservations about the Republican plan.
"I don't know how they propose to pay for it," he said Friday, adding that the loss of property tax revenue "could result in more draconian cuts" in state programs.
Dayton, of course, prefers his own jobs program, which consists of a temporary tax credit to encourage businesses to hire new workers, plus borrowing more than $1 billion to fund a public works bonding bill and build a Vikings stadium that combined would create thousands of construction jobs.
The Republican plan would phase out a statewide property tax levy on businesses that was first imposed in 2001. Before then, the property tax was a local tax levied by cities, counties and school districts - but not the state.
But when the state took over a greater share of local education costs 11 years ago and provided double-digit tax relief to all classes of property, lawmakers from both parties and Gov. Jesse Ventura imposed the statewide property tax
levy on businesses and cabins to prevent them from receiving a tax-cut windfall.
Before that change, Minnesota business properties were taxed at about four times the rate of homes. Afterward, the ratio dropped to 2 to 1 - the current split.
But now, Republicans contend, the state property tax levy has become a big obstacle to creating jobs.
Davids voted for imposing the tax in 2001 because "it made sense then," he said. "But the time for a statewide commercial-industrial property tax has come and gone."
Why? The state property tax has increased 35 percent over the past decade, imposing a "huge burden for Minnesota businesses" and making the state uncompetitive with the rest of the nation, said Senate Taxes Committee Chairwoman Julianne Ortman, R-Chanhassen.
PHASEOUT IS PRIORITY
Minnesota is one of about a dozen states that levy a state property tax, said Mark Haveman, director of the Minnesota Taxpayers Association. Those taxes are much smaller in most other states, and several tie the revenue generated to education or debt reduction, rather than using it for general purposes as Minnesota does.
Ortman said Minnesota businesses are paying more than their fair share of property taxes. They own 13 percent of the taxable value of property in the state but pay 30 percent of the state and local taxes collected on those lands and buildings.
Davids has proposed phasing out the tax over 12 years. His plan would save businesses - and cost the state treasury - about $800 million a year.
His bill cleared its first legislative hurdle last week when a property-tax subcommittee passed it. The measure is scheduled for a hearing in the full Tax Committee this week.
Ortman said she is drafting legislation to phase out the tax even faster. She hopes to find a way to scrap it in six to eight years.
Last year, the House and Senate voted for a phaseout as part of a larger tax bill that Dayton vetoed. House Speaker Kurt Zellers, R-Maple Grove, predicted the House would pass Davids' bill this year.
Ortman said the phaseout is one of Senate Republicans' top three priorities of the year and "the most important thing the Tax Committee can do this year."
But DFLers argue it's the wrong priority.
"First, we don't have the money; we don't have $800 million a year to throw around," said Rep. Ann Lenczewski of Bloomington, the former DFL chairwoman of the House Taxes Committee. The state had to borrow $1.5 billion to balance its current budget, more budget deficits are forecast in future years, and lawmakers haven't yet figured out how to repay the money they withheld from K-12 schools.
Dayton said the Republican plan would reduce state revenues far into the future, which could result in funding cuts for schools and local property tax increases for homeowners.
Davids' bill would pay for the business tax cut primarily by reducing or eliminating state tax refunds for an estimated 300,000 low- and moderate-income renters. That's fair, he said, because the refund currently pays renters more than the portion of their rent that goes to their landlords' property taxes.
DFLers strongly objected. "It would take money from low-income renters to give to the gas station owner, the barber and the Mall of America. Is that fair?" Lenczewski asked.
She said a big chunk of the GOP tax cut would go to out-of-state business property owners, not the business operators who rent from them. In addition, the largest cuts would go to the biggest properties, such as the Mall of America and the hotels along the Bloomington strip in her district.
Ortman hasn't decided how she would fund the tax cut in the Senate bill, but she said, "We have spending programs that we can reprioritize."
In addition to cutting needed state revenue, Lenczewski said, the biggest flaw in the GOP plan is "it won't create jobs."
Some businesses might hire new employees with their tax savings, she said, "but nine out of 10 won't do it." The legislation wouldn't hold businesses accountable for creating jobs with their savings.
"If we're going to spend $800 million a year to create jobs, we should get $800 million worth of something in return," she said.
There are many more-efficient ways to use tax policy to create jobs, she continued, including reducing the state's high corporate income tax rates, exempting new business construction and capital equipment from sales taxes and - although she's not a fan - providing tax credits for new jobs, as Dayton proposed. "At least you have to hire someone to get it," she said.
Lenczewski doesn't think the GOP legislation is a serious proposal. She expects Dayton to veto it if it reaches his desk.
"I think it's totally political," she said. "We know it's popular, and they (Republicans) want to give their political base (business) the rewards of their majority."
Davids and Ortman argued that making Minnesota's commercial and industrial property taxes more competitive, particularly with surrounding states, would improve the state's business climate and create more jobs in the long run.
"It would send a message to business owners and entrepreneurs that we want you to stay in Minnesota," Davids said.
Ortman said their approach is fair because it provides relief to all businesses, instead of picking winners and losers.
Phasing out the state levy would lower Minnesota's business property tax ranking among the states from 10th-highest to 19th-highest in urban areas and from 13th-highest to 24th-highest in outstate Minnesota, said Haveman of the Taxpayers Association.
Minnesota business would still pay property taxes to cities, counties and school districts. Next year, businesses are forecast to pay $2.9 billion in property taxes - about $800 million to the state and $2.1 billion to local governments, according to the nonpartisan House Research Department.
While Dayton hasn't shut the door on the GOP tax-cut plan, his revenue commissioner, Myron Franz, threw some cold water on it.
First, he agreed the state couldn't afford it. "This bill would start creating a huge hole" in current and future budgets, he said.
And Dayton would like property-tax changes to be part of a larger reform package.
"The governor believes property taxes are too high, but he believes that the better approach is to make sure that any kind of property-tax relief is balanced, that it doesn't favor one class of property over another class, that it's paid for and doesn't increase deficits, and it's targeted to promote job creation," Franz said.
"We believe property-tax reform and property-tax relief are important, but it needs to be done comprehensively and as part of an overall tax-reform package."
Franz is conducting public hearings across the state to gather suggestions for a wide-ranging tax overhaul that he plans to draft for Dayton to propose to the 2013 Legislature.