North Dakota is no stranger to tax revolts. In recent years, the state has weathered ill-conceived property tax relief programs and a citizen ballot initiative to ban property taxes. As talk of abolishing property taxes has subsided (but not gone away), rumors of a new tax relief strategy have emerged.
According to a tweet by political reporter John Hageman, the North Dakota legislative committee heard arguments on "the long-term benefits of eliminating state income taxes". Hageman later reported North Dakota legislative leaders “showed little appetite for lowering or eliminating the state’s income taxes.” Citing the current budget strain and other factors, these sentiments appeared consistent across parties, chambers, and government branches.
Underlying this caution is the assumption that income taxes are needed to help stabilize the state’s volatile revenue streams. But how does the income tax stack up against other taxes – such as the despised property tax – as a budget-stabilizing and growth-inducing force?
Let’s look at the most recent crisis.
North Dakota’s economy (and tax revenue stream) relies heavily on commodities. While the state economy may look diverse on paper, many industries indirectly depend on activity by the agricultural and oil extraction sectors. For example, industries such as transportation and storage, manufacturing, land rentals/leasing, and finance were all impacted by the commodity market collapse in 2015. This led to a ripple affect across North Dakota’s tax portfolio.
A quick look at North Dakota’s net tax collections from 2014-2016 illustrates this domino effect. The state’s net individual income tax collections fell 31 percent, down $161 million. The state’s net corporate income tax collections fell 59 percent, down $141.8 million. However, during this same period, local property tax revenue grew 22 percent, up 1$73 million. Likewise, local sales and use tax revenue grew 10 percent, up $20.7 million. As high-income oil jobs were lost and extraction firms left the state, the effect on the state’s individual and corporate income tax was dramatic, calling into question the stabilizing influence of these taxes. In contrast, local property and sales tax revenues remained fairly stable and, in some instances, even grew.
This outcome is supported by economic research. A 2009 OECD analysis on taxation and growth concluded that “a revenue-neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption.”
This view is also echoed in a literature review by the conservative-leaning Tax Foundation, stating that “[a] review of empirical studies of taxes and economic growth indicates that there are not a lot of dissenting opinions coming from peer-reviewed academic journals. More and more, the consensus among experts is that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. This is because economic growth ultimately comes from production, innovation, and risk-taking.”
It should be clear that different types of taxes impact the economy and are impacted by the economy in different ways. The optimal tax mix – or how a state should tax to achieve both growth and stable revenue – may vary widely based on industry development, equity concerns, and government efficiency. There is no one-size-fits-all approach to taxation. Nonetheless, it is worth examining the success and fiscal solvency of other states who do not levy individual and/or corporate income taxes. We only have to look to our neighbor South Dakota to see an example of this approach. On the other hand, we’d be hard pressed to find a single state or locality that demonstrates fiscal solvency without levying property taxes.