Minnesota taxes panel reviews proposal to tax utilities, railroads and pipelines on gross operating revenue

The Minnesota Senate Taxes Committee on Jan. 16 heard a Department of Revenue proposal to replace the state’s current property-valuation process for utilities, pipelines and railroads with a tax based on companies’ gross operating revenues.

Department of Revenue Property Tax Director John Kloxien told the committee the idea is “really, quite simple: it’s the gross operating revenues times an allocation factor times a rate,” and said the department would ask the Legislature to set the rate.

The idea is framed as a response to repeated appeals and litigation over state valuations of multi-jurisdictional utility property. Under current practice the department determines a statewide valuation, certifies parcel values to counties, and those values are subject to administrative appeal and often litigation. Kloxien and Commissioner Paul Marquardt said the volume of appeals and the discretionary inputs in the current rule-driven appraisal process make results unpredictable for local governments and taxpayers.

Kloxien described the existing appraisal steps: valuing the company as a system unit, apportioning value to Minnesota, removing locally assessed or nonoperating property, parceling and equalizing to local ratios, and certifying values to counties. He told senators that discretionary inputs — especially income inputs, capitalization rates and the weighting between cost and income models — produce frequent disagreements. “When I talk about discretion . . . I’m not talking about small amounts here,” he said, noting the scale of the valuations involved.

Kloxien provided several statistics about the current system: the department issues valuations for roughly 122 companies each year, about 29% of companies appeal their valuations but those appeals account for roughly 88% of the total value under review, and from 2008 through 2024 the affected companies paid roughly $6.4 billion in property taxes under the current system. He said litigation and settlements reduce certified values in some cases; the department’s analysis shows settlements reduced values by about 12% on average and tax-court decisions by about 15% where they occurred.

Under the department’s proposal, the three inputs would be: gross operating revenues (defined by the department as revenues before deductions for expenses, taxes, depreciation, capital expenditures and dividends), an allocation factor (the portion of those revenues assigned to Minnesota), and a legislated rate. Kloxien said those inputs could be simpler to administer and less subject to the discretionary appraisal judgments that drive appeals.

Committee members asked about practical issues: whether to use a lagged revenue year to accommodate company reporting timetables, whether gross revenues would disincentivize investment in safety or capital upgrades, and how distributions to counties would reflect existing parcel allocations. Kloxien said options being explored include a lag so valuations use a prior year’s revenues and retaining parts of the current allocation approach (for example, apportioning to parcels using company-reported original cost) to determine how revenue-based tax liability would be assigned to local taxing jurisdictions.

Kloxien said the department surveyed other states and noted that some states reduce discretionary inputs in their utility valuations; he emphasized the department’s process of stakeholder engagement and the publication of supporting materials and modeling. Stakeholder responses varied, he said: some criticized potential transition impacts or the risk of misreporting revenue; others praised the simplicity and predictability of a revenue-based approach. The department published a summary showing hypothetical, revenue-neutral rates and provided county-level estimates to illustrate local impacts.

Marquardt, the commissioner of revenue, framed the presentation as an early-stage idea for which the department seeks feedback rather than a finalized bill. He told members the department would continue stakeholder outreach and invited legislators to meet with department staff.

Next steps described to the committee included additional analysis of reporting definitions (gross revenues vs. cash flow or net income), options for transition aid to jurisdictions that might see large shifts, modeling of fiscal-disparities impacts, and possible invitations to affected companies, counties and local governments to a future hearing to present reactions directly.

Ending: The committee did not take formal action. Department staff said they will continue outreach and modeling; senators on the panel asked for more jurisdiction-level estimates and information about lag options and how the plan would interact with county-level apportionment rules.