The official statistics regarding North Dakota’s 2020 tax revenues are now available from the U.S. Census Bureau, and the numbers should not come as a surprise. In short, North Dakota tax revenue was hit hard by the pandemic economy. However, it is worth digging into the details to see the full picture.
Tax revenue in the first quarter, at nearly $1.2 billion, was down half a percentage point from the end of 2019. Yet, this was the largest first quarter tax revenue received by the state since 2015. The signs were pointing to tax revenue holding steady or even slightly increasing throughout 2020. Then the pandemic hit.
Tax revenues for the second quarter fell by nearly 45%, dropping to the lowest quarterly tax collected since 2010. Tax revenue increased in the third quarter but remained down $230 million from the beginning of 2020. The end of the year (quarter four) saw tax collections decrease by another $45 million. If we assume that, without the pandemic, tax collections would have matched first quarter revenues, then North Dakota would have collected $5.796 billion in taxes in 2020. According to the U.S. Census Bureau, total tax collections in 2020 were actually $3.755 billion, leaving the state $1.041 billion short due to the pandemic economy. Looking back at 2019, when tax collections totaled $4.867 billion, this shows a one-year reduction of $1.112 billion, or a drop of 22.8%.
So where did the shortfall occur?
Property tax revenue is extremely reliable. North Dakota reported identical property tax collections in 2018, 2019 and 2020, so none of the pandemic shortfall can be attributed to lower property tax collections. Compared to 2019, individual income tax collections decreased by $11 million, which is about 1% of the tax collection shortfall. Sales tax revenues were down $3 million in 2020 compared to 2019, which is even less significant than the fall in individual income tax collections.
So where did revenue fall?
It should come as no surprise that the fall came from severance taxes. Severance taxes were $1.005 billion lower in 2020 than in 2019, accounting for more than 90% of North Dakota’s decline in total tax collections.
At a time when many sectors of the economy were at a standstill, our biggest hit came from the collapsing oil market. This demonstrates a really big problem for our state. Our tax collections, which fund the activities of the state, have become overly reliant on tax revenues collected from oil extraction. This source of revenue will not last forever. Someday the Bakken will go dry or the rest of the world will stop demanding our oil.
This is why we have a Legacy Fund — in recognition that this source of revenue is temporary. We should be careful not to squander it on pet projects or crony perks. We need to be sure the Legacy Fund is available for future generations when the spigot running into the coffers runs dry.
Jeremy Jackson is director of the North Dakota State University Center for the Study of Public Choice and Private Enterprise and a professor of economics at NDSU.