A ballot measure that would abolish property taxes in North Dakota is not only creating in-state discussion, but also drawing national attention.
Those in the academic community, economists and those in favor of property tax reform give mixed reviews to Measure 2, which goes before voters June 12.
The measure would eliminate property taxes in North Dakota retroactive to Jan. 1, 2012. The Legislature would then be required to create a formula to fund all legal obligations of counties, cities, townships and other political subdivisions. The text of Measure 2 can be found at www.nd.gov/sos.
In North Dakota, two groups have been steering the debate on Measure 2.
Empower the Taxpayer is the group that had Measure 2 placed on the ballot. It is based on a bill that was before the Legislature in 2009 but failed to pass. The group says the measure would eliminate what it calls an unfair form of taxation that makes homeowners “renters” of their own homes, even when they’re paid off.
Proponents of Measure 2 argue that abolishing property taxes would give local control to political subdivisions and would make North Dakota attractive to businesses.
In opposing Measure 2, a coalition called Keep it Local North Dakota counters that the opposite is true on the issue of local control. Opponents say to it would mean North Dakota would need to move to a full-time Legislature.
In addition, they point to the term “legally imposed obligations” in the measure’s language and say the definition of a legally imposed obligation is vague and could wind up in court. They also say the measure could cut funding to entities such as fire, police and park districts.
“This is an interesting ballot measure,” said Jeffrey Greene, political science professor at the University of Montana. “North Dakota would be the first state to eliminate property taxes, which is a very unpopular tax in most states.”
Greene said the most positive impact of passing Measure 2 would be getting rid of an unpopular tax.
“The most negative aspect that I can think of is the elimination of the primary source of funding for local governments. This sounds fine except the burden will be shifted to the state of North Dakota,” Greene said.
Property taxes bring a large sum of money to communities throughout the state.
Approximately $812 million in revenue would need to be replaced in 2012 collections, according to the state Tax Department. Revenue would need to be replaced In the two-year budget cycle beginning July 1, 2013.
Property tax dollars are split among the more than 2,100 local political subdivisions throughout the state.
North Dakota had approximately $5.028 billion in total fund balances, according to the state’s latest Comprehensive Annual Financial Report, written by the Office of Management and Budget. The numbers were as of June 30, 2011.
However, much of it is already placed in funds that can’t be touched due to constitutional or statutory limitations.
A total of $1.7 billion is sitting in the Common Schools Trust Fund. The Permanent Oil and Gas Trust Fund has $690 million and the Budget Stabilization Fund has
$326 million. The Property Tax Relief Fund has $299 million while the Land and Minerals Trust Fund has a balance of $158 million and the Foundation Aid Stabilization Fund has $141 million.
Unassigned state funds total approximately $712 million.
Greene said he could see the opponents of Measure 2 being correct on the need for increased government if it passes. Greene said he’d envision the need for a near full-time Legislature and a new state agency to handle local political subdivision budget requests.
“It also appears to be a budgetary nightmare for the state, unless the state can generate a large amount of revenue that it can adequately fund local governments and somehow not completely destroy local autonomy,” Greene said.
Fear of the unknown
David Sadler, founder of Minnesotans for a Fair Property Tax, said he found the ideas of Empower the Taxpayer to be eye-opening.
Sadler said property taxes are a regressive form of taxation. If property taxes can’t be abolished outright he’d be in favor of placing a cap on them based on household income, he said. Educating voters on the issue is a large task, he said.
“I see it as a fear of the unknown and a need for big changes more than anything else. People fear changes and see enormous risks,” Sadler said.
He said it’s hard to predict how other states might react if Measure 2 passes.
“Every other place is going to see the oil tax revenue as the really big difference with their own situation and won’t be able to get past that,” Sadler said.
Sadler pointed to another oil-producing state, Oklahoma, as a comparison. Oklahoma, according to the nonpartisan Tax Foundation in Washington, D.C., is one of 13 states that collect no state-level property taxes.
Oklahoma’s local governments do have the option of collecting property taxes. In 2009, the most recent year of available data, Oklahoma’s property tax collection per-capita was $597, ranking 48th in the country. North Dakota’s per-capita collections in 2009 were $1,169, which was 29th.
“States can be run successfully without a property tax. So all of that stuff against abolishing it is nonsense,” Sadler said.
Tax Foundation data places North Dakota in the middle of national rankings in other property tax burden statistics.
In 2009, North Dakota’s median real estate tax burden was $1,658, was ranked 25th in the U.S. The Tax Foundation, using U.S. Census data, put the national median real estate tax burden at $1,917.
North Dakota ranked 10th in the country when it comes to taxes paid as a percentage of median home value. The Tax Foundation’s 2009 numbers show that North Dakotans paid 1.42 percent. States bordering North Dakota ranked lower. South Dakota ranked 16th at 1.28 percent, Minnesota 19th at 1.05 percent and Montana ranked 29th at 0.83 percent.
When Tax Foundation information is broken down on a county level, what North Dakotans pay in property taxes varies across the state.
In 2009, the median real estate taxes paid by Burleigh County residents was $2,543. The five-year average for 2005-09 was $2,251. In Morton County, the three-year average for property taxes was $1,873 and the five-year average was $1,796. Morton County’s numbers only go to a three-year average because Tax Foundation data only allows single-year breakouts for counties with populations of more than 65,000.
By comparison, Grand Forks County residents paid a median of $2,644 in property taxes in 2009, while Cass County residents paid $2,728. The five-year averages for Grand Forks County and Cass County residents were $2,401 and $2,651, respectively.
One economist who said the negatives of Measure 2 likely outweigh its positives is Ed Lotterman, a syndicated columnist who is published in the Tribune. He’s also a professor at Augsberg College in Minneapolis. In the 1990s, he was a regional economist for the Federal Reserve Bank in Minneapolis.
Lotterman said an inherent problem with property taxes is that they’re tied to home values. He said property taxes’ ability to stay in line with people’s ability to pay is “spotty” at best.
Lotterman said eliminating property taxes would bring relief to elderly people because homes that were bought cheap by couples decades ago can be tough for retirees to pay taxes on today.
“It does help (in) the case of the retired couples on fixed incomes,” Lotterman said.
Lotterman is wary of other arguments made by Measure 2 proponents.
“The idea that property taxes are a real disincentive to businesses getting started, I’m skeptical of that,” he said.
Another factor that could be lost in the discussion is the law of unintended consequences, Lotterman said. Widely used by economists, the rule generally states that the purposeful actions of people always have unanticipated or unintentional effects.
“People ... structure their everyday decisions on the existing tax structures,” Lotterman said. “Suddenly, everyone adjusts.”
Lotterman said he could see other states following in North Dakota’s footsteps if Measure 2 were to pass.
“If North Dakota does this, I think people in dozens of other states would say ‘We need to do the same thing,’” Lotterman said. “The nation’s eyes would really be focused on North Dakota.”
Other states may want to be patient and observe how Measure 2 plays out in North Dakota if it passes, Lotterman said. It might be wise to wait a few years to see the long-term impacts, he said. He pointed to the Eurozone and its eventual fiscal crisis as an example of unintended consequences that were unforeseen by economists.
“It would be an interesting case study in public finance,” Lotterman said.
Lotterman said a shift from a system with property taxes to one without would create a one-time windfall for landowners but in the long run, it wouldn’t provide any major benefit. He named farmland as an example.
“It just gets built into the cost of farmland,” Lotterman said.
He said the increased cost of farming operations could also make it more difficult for young farmers to get started.
Candidate likes idea
Paul Wright of North Carolina said he agrees with the Empower the Taxpayer measure. Wright, a candidate for governor in his home state, purchased the group’s book three months ago.
“I enjoyed reading the general concepts,” Wright said. “Especially the part about renting the lands.”
Wright, in his gubernatorial campaign, has advocated for the elimination of property taxes.
“At a time when the middle class is paying upwards of 50 percent in taxes, it would give them at least one safe haven,” Wright said.
Wright noted that he’s actually touted North Dakota numerous times in campaign speeches. He called the group’s idea of developing a formula to eliminate property taxes visionary and said he sees the overall debate on property taxes as an important one.
“It is one of the few ways states can counteract the centralizing power of the federal government,” Wright said.
Wright said in North Carolina, he’s advocated for allowing the individual counties to determine if any replacement tax is necessary, and he takes a more populist stance on the property tax issue on the campaign trail.
“I do not concentrate on the economic boom that may result in real estate, but rather on the empowerment it would give to middle-class landowners,” Wright said.
Empower the Taxpayer has cited Alaska as one state that has areas that don’t assess property taxes.
According to the Alaska State Assessor’s Office, four of the state’s 18 boroughs don’t levy property taxes. Alaska’s boroughs are the equivalent of a county.
The cities of Wasilla and Eagle both have enacted property taxes but haven’t levied them in several years. Wasilla uses a sales tax to offset property tax revenue. Eagle chooses to have a mill rate of zero due to the revenue gathered from property taxes being very small.
Northwest Arctic Borough, the largest of the four boroughs without property taxes, has a population of 7,523. The other three boroughs are smaller in population: the Aleutians East Borough (3,141), Denali Borough (1,826) and the Lake and Peninsula Borough (1,631). Population figures come from the 2010 Census.
Alaska State Assessor Steve Van Sant explained how the four boroughs without property taxes are able to generate revenues.
Van Sant said the Red Dog Mine is located in the Northwest Arctic Borough. The Red Dog Mine produces approximately 10 percent of the world’s supply of zinc.
The company that operates Red Dog Mine is charged a payment in lieu of taxes that is nearly identical to what would be paid if property taxes were assessed, Van Sant said.
The Aleutians East Borough has a 2 percent raw fish tax. The Lake and Peninsula Borough has a 6 percent bed tax, 2 percent raw fish tax and a $3 day guide tax.
Van Sant said “the tourism industry” supports Denali Borough, with a 7 percent bed tax that generates about $3 million per year. Denali Borough also has a severance tax and a gravel tax.
In three of the four boroughs without property taxes, “they don’t have the tax base,” Van Sant said.
A large majority of the land in the boroughs is Native American land, which is exempt, he said, and with the special taxes replacing property tax revenue, the impact is minor.
Alaska tax information shows that 80 percent of the $1.52 billion in local tax revenue collected last year was via property taxes. He said the taxes are a critically important source of revenue.
“They’re necessary for the 14 boroughs that have them,” Van Sant said.
Jerry Johnson, head of the political science department at Montana State University, sees little positive impact in eliminating property taxes.
“How does cutting taxes and the services that go with them result in (a) positive business climate?” Johnson asked. “It doesn’t. The myth perpetuated by anti-government, anti-tax people is that business wants lower taxes. They don’t necessarily. Business wants predictability in regulation, a high quality workforce and quality infrastructure. That takes tax revenue and creative public management.”
Johnson said North Dakota has a fairly average balance in forms of taxes. He compared the state to Montana, where there is no sales tax. Johnson said Montana relies heavily on property and income taxes to offset this. He said most of the rural states in the Upper Midwest are actually fairly well managed. Johnson called the cost of living fairly reasonable.
Johnson said the debate on taxes ultimately comes down to a philosophical point.
“The anti-tax groups often simply refuse to understand, or admit, that government matters. Regulatory frameworks are good for business and the citizenry and, in my research, are not the primary reason for losing businesses,” Johnson said.
Johnson said there are a number of factors states look at for businesses they’re trying to attract. Desirable businesses bring a quality workforce with them, which means workers with families, he said. It requires communities with amenities that will attract workers and their families.
“I know of no place in this region that attracts business because of low taxes and poor quality public services,” Johnson said.
Sadler said whether or not Measure 2 passes, it’s good to see the property tax issue getting more attention.
“I’m very hopeful that the property tax debate and vote in North Dakota will serve all of us in identifying and understanding the problems with the property tax,” Sadler said.