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Studies question North Dakota’s business climate

By Staff | Aug 12, 2011

Two recent studies by the Council on State Taxation have raised serious doubts about North Dakota’s business climate and warrant the concern of the state legislature and economic development leaders.

The Council (COST) is a nonprofit trade association consisting of over 600 multistate corporations engaged in interstate business with the goal of promoting “equitable and nondiscriminatory state and local taxation.”

No doubt, the studies will be widely circulated among major corporations throughout the United States, thereby creating an image problem for North Dakota among executives in the national business community who decide where new expansions will be located.

One study, completed by Ernst & Young, calculated business taxes as a proportion of gross state product.With the exception of Alaska, the calculations ranked North Dakota as the state with the greatest burden 8.5 percent. South Dakota came in with 4.2; Montana scored six, and Minnesota around 4.3.

The criteria used for making the calculations includedstate corporate taxes, income and unemployment taxes, municipal property levies, taxes and fees tied to unemployment, public utilities, corporate licensingand insurance.

This rating runs counter to our perception of North Dakota’s revenue system which many believe to be pro-business. However, the findings cannot be dismissed out-of-hand because Ernst & Young is a creditable research organization.

In a second study done by a COST task force, the North Dakota property tax system was given a “C”. This may be a passing grade in school, but it does nothing for the state’s national image when we are trying to attract industry. We need an “A”. The task force looked at standardized procedures, fair tax appeal procedures, assessment equity and a category of “other issues”.

North Dakota was given a “B-” for standardized procedures, a “D” for tax appeal procedures and a “B” for assessment equity. The issues involved with standardized procedures and tax appeals are too detailed to cover in a short column but the issues relating to assessment equity are more relevant and easy to grasp.

The task force complained about the difference between the assessment levels of residential and commercial properties, noting that lower levies on residences must be offset by higher taxes on commercial property.North Dakota places the taxable value of residential property at nine percent of the assessed value and 10 percent on commercial property. The starting base for both residential and commercial is market value.

Farmland also is 10 percent but it doesn’t start with market value. It starts with a productivity formula that puts farmland well below market value and results in wide ranges in assessments from county to county.

When it comes to farmland assessments, the real question COST should have asked is “10 percent of what?”

They would have discovered this wide discrepancy between farmland and commercial properties and given North Dakota an “F”. It is not likely that the state can do much about this discrepancy because low farm taxes constitute a part of our goal of keeping farmers on the land.

It will be interesting to see what happens to farmland assessments with the skyrocketing land prices. The average value of farmland rose 15 percent in the last year alone.It is doubtful that the productivity assessment formula will justify these high prices so we should expect assessments to fall below the present statewide average of 35 percent of market value.

Contrary to public opinion, taxes are not a decisive factor in attracting new businesses. High tax states do pretty well at attracting economic development.Even so, North Dakota doesn’t need a negative tax image in addition to other disadvantages.

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

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