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Money to replace property tax hard to find

By Staff | May 13, 2011

The North Dakota treasury may be brimming with windfall revenue but financing the total repeal of all property taxes will be virtually impossible.Oil production may have a favorable prognosis but agricultural prosperity will still depend on the whims of the federal government.

Measure No. 2 on the 2012 primary election ballot proposes a sudden and total abolition of the property tax,a move that would take $750 million away from local governments.

To replace the $750 million, the measure requires that the property taxes lost by school districts be replaced by higher taxes on oil and gas, oil extraction, tobacco, the state lottery and financial institutions.

Since tobacco, the state lottery and financial institutions are minor sources of state revenue, the bulk of this new money would have to come from oil and gas and oil extraction taxes. Around $375 million of the $750 million would have to be raised from these sources since school districts get almost half of the property tax revenue at present.

Measure No. 2 provides that the $375 million lost by counties,cities, townships and other local governments, would be made up from a variety of the other state levied taxes, in addition to more taxes on oil and gas, oil extraction, tobacco, the lottery and financial institutions.

When the personal property tax was repealed 40 years ago, the Legislature tried to recoup the loss by imposing new taxes on those benefitting from the abolition. However, Measure No. 2 dictates which specific taxes are to be used for replacement, making any new varieties of taxes of dubious validity. For example, the state-assessed utilities, accounting for $35 million annually, could not be taxed with some new gross receipts levy.

Outside of the oil and gas taxes, the only state taxes that could produce large sums are the sales and use taxes and the income taxes.For each additional one per cent sales tax, the state collects around $140 million, meaning that the state sales tax would have to be increased from five to eight per cent to raise $375 million. Income taxes would have to be more than doubled.

Since such increases would be politically intolerable, the more acceptable oil and gas taxes would have to bear the burden. Unfortunately, North Dakota already has the highest oil taxes in the United States outside of Alaska. Whether or not this can be done without impairing the industry would depend on the unpredictable oil market.

How the Legislature would be able to deal with existing special assessments and the outstanding bonds of school districts would be problematic. Both of these encumbrances on property were imposed for the benefit of those residing within the special assessment or school districts and not the state as a whole.

Without local property taxes available to pay these obligations, the state would be required to assume financial responsibility for their amortization.Special assessment run around $80 million; the total for the bonded indebtedness of school districts and other local governments would be much more than that.

While abolishing the property tax in one swoop may seem simple, raising new revenue and returning it to local governments requires more deliberation than was done by the initiators of Measure No. 2.

Omdahl is a UND professor emeritus in political science and a former lieutenant governor of North Dakota.

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