Will it require increasing other taxes?
How can it be administered?
29,617 voting age North Dakotans signed petitions to place Initiated Constitutional Measure No. 2 on the June 12, 2012 Primary Election ballot. Measure No. 2 eliminates property taxes and requires replacement of the lost revenues with other state revenue sources, without restrictions on how the revenues may be spent by local political subdivisions.
Measure No. 2 Petition Title
“This initiated measure would amend sections 1, 4, 14, 15, and 16 of article X of the North Dakota Constitution and repeal sections 5, 6, 7, 9 and 10 of that same article, eliminating property taxes, poll taxes and acreage taxes, effective January 1, 2012. The measure would replace the lost revenues with allocations of various state-level taxes and other revenues, without restrictions on how these revenues may be spent.”
Measure No. 2 Excerpts:
“The state cannot condition the expenditure of this portion of elementary and secondary education funding in any manner and school boards have sole discretion in how to allocate the expenditure of this portion of the elementary and secondary funding provided.”
“How counties, cities, townships, and other political subdivisions choose to allocate the expenditures of this revenue is at the sole direction of the governing bodies of counties, cities, townships, and other political subdivisions.”
“The legislative assembly shall pass such laws as are appropriate to implement this amendment.”
To address some of the questions concerning Measure 2, a determined effort has been made within this document to explain why the rates of other forms of taxation would not need to be raised. A “historic population based” implementation formula has been developed that would fairly replace property taxes, allowing annually for inflation.
Additionally, the implementation formula provides compensatory revenue to restore rural infrastructure (water, sewer, pavement, fire & police service, etc.) to meet expected re-population as our state grows economically.
The following pages list a multitude of current property tax limitations, exemptions & reduction allocations, revealing what has been an ongoing fiscal interference by the State of North Dakota with the economic affairs of local political entities:
NDCC Property Tax Limitations
The 32 page North Dakota Century Code Chapter 57-15 TAX LEVIES AND LIMITATIONS, is referenced.
NDCC Property Tax Exemptions:
NDCC Ref. Summary of Property exempted from local discretion or charitable status
Mill Levy Reduction Allocations & Grants
NDCC Ref. Local Entity, Purpose Limitation (vote, mills, yrs)
57-64-02 School district 110 mills --
A mill levy reduction grant may not exceed 75 mills… and also may not exceed the smaller of the allocation under the “per student payment rate” determined by fifteen page section 15.1-27, State Aid… or the year 2008 school district mill levy less one hundred mills. A vote (simple majority) is required for a school district to exceed the 110 mills limitation for a period of up to ten years.
For a complete schedule of levy limitations for 2011, view/print the following 27 page document found on the North Dakota Tax Commissioner web site:
Q: Wouldn’t more property tax “relief” be better for North Dakota than eliminating property taxes entirely?
A: Property Tax Relief has only “kicked the can down the road” while greatly increasing already bloated K-12 administration costs.
Q: Are annual increases in property taxation expected to continue?
A: For the remainder of this decade, annual local spending is on an unsustainable upward trajectory”
And North Dakota’s surplus is reaching scandalous proportions!
Excerpts from the State of North Dakota Comprehensive Annual Financial Report for fiscal year ended June 30, 2011.
The biennium ended with a General Fund balance of $996.8 million. The unassigned fund balance for the General Fund was $712 million.
The actual ending balance of $996.8 million is the highest end-of-biennium balance in North Dakota history, both in nominal terms and as a percent of the appropriated budget. The chart on the previous page shows the history of end-of-biennium general fund balances.
Q: Can Lucrative Sales Tax Revenues alone replace property taxes?
Actual and Projected Annual North Dakota Sales Tax Reenue
A: Calendar year 2012 and 2013 sales tax revenues alone are likely to exceed 2011 by $465 Million and $1,295 Million respectively, an average of $880 Million each year. The expected property tax revenues which were to be collected in 2012 total $857 Million! So don’t for a minute believe that any tax rates will need to be raised!
Q: Don’t the 30% of Oil & Gas Revenues placed in the Legacy Fund prohibit the elimination of property taxes?
A: The “Legacy Fund” Balance at the end of calendar year 2011 was $136 Million and represented only 3.67% of total spending for 2011.
As the previous information illustrates, the portion of North Dakota’s sales tax revenue in excess of 2011 alone could replace property tax revenues without raising any existing taxes. But if revenue replacement is easily possible, could a replacement revenue stream include elements that compensate rural North Dakota for almost a century of discrimination under the property tax system while still being very lucrative for North Dakota Cities, Counties, Schools, Parks, and other entities?
Imagine a property tax replacement method that requires much less administration than the current one and that would meet Measure No 2’s mandate of 100% local control of how the revenues are spent.
The first thing to do before considering a replacement system is to review North Dakota history, the current property taxation system, and its revenues. For a complete discussion of the history of property taxation in America and North Dakota, the following website is an excellent source:
In 1889, North Dakota became the 27th state to adopt the uniformity clause, a provision that land be taxed according to its value (ad valorem). By the end of the century thirty-three states had included uniformity clauses in new constitutions or had amended old ones to include the requirement that all property be taxed equally by value.
By the beginning of the 20th century, criticism of the uniform, universal (general) property tax was widespread. The tax fails to deal with the problems resulting from differences between “property” as a legal term and “wealth” as an economic concept. In a simple rural economy, the tax was fair because wealth and property were the same things.
However, in a modern commercial economy, ownership and control of wealth is represented by far more than property. Accordingly, the importance of property taxes as a source of revenue has been diminished, as shown in the Table below:
Property Taxes as a Percentage of Own-Source General Revenue, Selected Years
Source: U. S. Census of Governments, Historical Statistics of State and Local Finance, 1902-1953; U. S. Census of Governments, Governments Finances for (various years); and http://www.census.gov.
The decline in property tax importance has coincided with the expansion of exemptions through various schemes such as are identified earlier in this document. The more entities that are exempted, raising the tax on those not exempted, the greater the pressure to rely more on other revenue sources.
The table on the next page reveals population history & recent property tax, by county:
The “lucky seven” counties in bold black type enjoy populations that were at their maximums in year 2010. They include three of seventeen oil producing counties, Stark (Dickinson), Ward (Minot), and Williams (Williston); two at the center of political power, Burleigh (Bismarck) and Morton (Mandan), “Imperial” Cass (Fargo, West Fargo), the winner of the “geographic lottery” at the intersection of Highways I-29 and I-94, and rural Rolette, with a population sustained significantly by federal funding of the Turtle Mountain Reservation and its Community College.
Two counties in bold green type, Grand Forks (94.59% of maximum population) and Mercer (85.89% of maximum population), were set back after maximum populations in 1990 for two unrelated reasons, a major flood event and a “maturation” of coal field development activities.
Four addition counties in bold green type, Ramsey (Spirit Lake Reservation), Richland (Wahpeton), Sioux (Standing Rock Reservation), and Stutsman (Jamestown), have benefited from unique circumstances that have resulted in their retention of an average 80% of their maximum population. In the case of the reservations, large amounts of federal funding have reduced population losses. In the case of Richland and Stutsman counties, institutions of higher education have served to retain population.
Three of the remaining thirteen oil producing counties, McKenzie, McLean (an oil & gas and coal producing country), and Mountrail, retain 65.51%, 49.81%, and 56.65% of their maximum populations.
The “dozen” counties in bold blue type (including four oil producing counties Dunn, Golden Valley, McHenry, and Renville) have suffered, retaining between 30% and 40% of their maximum populations.
The “unlucky thirteen” counties in bold red type (including five oil producing counties Billings, Burke, Divide, Hettinger and Slope) represent those counties that languish at under 30% of their maximum population.
Twelve of the remaining sixteen counties (including oil producing Bowman County) achieved their highest populations in year 1940 or earlier and average 50% of their maximum populations.
The disparity of population loss for the 53 counties of North Dakota is caused by many factors. But a single factor, the property tax, represents perhaps the most important impediment to economic growth, especially in rural areas of North Dakota that have not enjoyed the economic benefits of large cities, institutions of higher education, geographic advantages, natural resources, or large amounts of state and/or federal aid. The economic affect of “annual rent” paid to local government by both individuals and small businesses in the form of property taxation has been, perhaps, the last nail in the economic coffin of many rural North Dakota areas.
So what must a property tax replacement system include to be successful?
- It must not reduce the annual per capita property tax revenues that were received from the property tax system for years 2010 and 2011.
- It must compensate for the damage done to rural North Dakota from a century of discrimination under the property tax system.
- It must include an allowance for inflation.
- It must be as affordable as possible.
- It must be reset immediately following each decennial census.
While there may well be many other considerations, let’s look at a system that meets all of the above requirements:
2012 Infrastructure Based Replacement Method Discussion
The property tax replacement method shown on the previous two pages took about a week to develop. Various other methods were considered but did not meet the criteria set forth. The Infrastructure Based Method accomplishes the following:
- An adjustment was mathematically determined to provide a “remedial factor” to account for almost a century of property taxation discrimination between urban and rural areas of North Dakota . The first trial added the maximum population (from historic decennial census data) for each county to the current population and divided by two. The first trial resulted in a replacement for the entire state of $1,138,211,287.95, too far in excess of 2011’s $733,810,485.45 so the formula was revised by trial and error to arrive at that shown on the previous two pages. The final formula is:
Maximum Population + 1.4 (2010 Population) / 2.4 x $1167.57 x 220 / 209.27
- The constant, $1167.56, represents the establishment of a minimum per capita replacement for 2010. The largest and presumably the most efficiently run county (due to economy of scale), Cass County, was used to set this minimum.
- The replacement formula includes an inflation adjustment that divides the projected consumer price index (Midwest CPI-U) for tax year 2012 by the actual figure for year 2010. The CPI-U for December 2010 was 209.27 and the CPI=U for year 2012 was projected at 220. The projection was developed from a graph employing data from the chart below:
4. The highest county per capita property taxes in years 2010 and 2011 were those of agriculturally bountiful Steel County, $2,629.82 and $2,657.12 respectively. The successful formula resulted in the $2,688.19 proposed replacement for year 2012, meeting the requirement that no single entity receive less per capita than in the current property tax method.
Graphical representations of 2011 per capita county property tax revenues and proposed 2012 per capita replacement revenues are shown below.
Notice the correction of the disparity in the per capita revenues by implementation of the replacement formula. Also note the increased per capita revenues for North Dakota counties with fewer than 25,000 population, just compensation for those rural counties most negatively affected by almost a century of the discriminatory property tax system.
The formula would be employed until the 2020 census data becomes available to allow the population inputs to be revised to reflect 2020 population along with the appropriate maximum population figures and an updated formula constant.
It is anticipated that by 2020, most rural counties will have increased their populations significantly due to the opportunity provided by the elimination of property tax levies that instead remain in the pockets of local individuals and businesses, as well as the increased compensatory replacement revenues that local government entities receive under the formula between years 2012 and 2020.
Additional “Replacement Method” Implementation Suggestions
Measure No. 2 requires total local control of local budgets. It will be important that the state of North Dakota disperse property tax replacement funds to the counties with no interference. The County and all of the various elements of government within each county will need to honor the 2011 revenue ratios between them, adding up to 100%.
Any change to the revenue ratios of year 2011 must, of necessity, be approved by all of the entities within the county for the change to be implemented. This will insure that no additional benefit or detriment is bestowed on local entities by the legislature.
Should state revenues other than the property tax continue to ramp up as expected, the formula could be revised by adjusting the inflation factor. For example, (CPI-U 2012 / CPI-U 2010 x 1.005), (CPI-U 2013 / CPI-U 2010 x 1.010), (CPI-U 2014 / CPI-U 2010 x 1.015), etc. would raise the inflation factor by ½% each year until the decennial census adjustment at the end of the decade.
Additionally, nothing should prevent the legislature from separately funding major flood control or other public infrastructure related projects individually as it currently does, to supplement the property tax revenue replacement formula. Just as in the past, such projects will require critical executive and legislative review of both justification and design.
For over eleven decades, criticism of the property tax has been expressed. Past state legislatures and legislative “white knights in shining armor” have “come to the rescue” with revisions to the property tax system over 130 times. These revisions have “rescued” almost every element of North Dakota “society” at one time or another. Each time “relief” has been applied, legislators have looked in the mirror and seen themselves as “saviors of the people”. It is perhaps this “white knight in shining armor” self-image of elected officials that precipitates their utter contempt for the bold “revolutionary” step of actually eliminating an entire taxation venue such as the property tax. In its place, they likewise cannot seem to imagine a replacement system that would require no annual conflict and resulting legislative intervention. Such a replacement system would, to the legislator, seem to lessen their importance to “society”. Of course, the root of the problem, as so eloquently stated by Thomas Paine, is that “government” and “society” are NOT the same. If one truly wishes to make a difference to “society”, one should do so with one’s own resources, not revenues derived from the hard work and subsequent earnings of taxpayers.
So my most urgent plea is for legislators to consider the possibility that government, at least once in a while, IS THE PROBLEM, and not the solution. The most important thing for legislators to accept is not something that they must do, but rather something they must NOT do; they must NOT assume that replacement of property tax revenue need be complicated or require much more than a few hours of their time in session.
What are the economics of property tax replacement?
Earlier in this document, we revealed that the portions of sales tax revenues projected for 2012 and 2013, in excess of those for 2011, are $465 Million and $1,295 million respectively.
The following graph reveals projected oil & gas revenues for years 2011, 2012 and 2013 at $760 M, $980 M, and $1,220 M. So oil & gas revenues, in excess of those for 2011, are $220 M and $460 M. And look where property taxes are headed!!!!!
Finally, let’s summarize the replacement revenue requirements and compare them with projected revenues from the sales tax and from the oil & gas production and extraction taxes:
2012 Property Tax Relief (included in current budget) $177,268,960.00*
2012 Property Tax Replacement Requirement $967,380,377.48
2012 Projected Excess Sales Tax Revenue $465,000,000.00
2012 Projected Excess Oil & Gas Revenue $220,000,000.00
2012 Additional revenue required from other sources… $282,380,377.00
Property tax replacement revenues cannot be issued until February 15, 2013, the date upon which property tax replacement revenues are expected by the counties, and the December, 2012 Midwest CPI-U (consumer price index) will be required to apply the replacement formula. The 2013 first quarter revenues from oil & gas are projected at $400 Million. So the “one time only” financial pinch due to voter approval of Measure No. 2 could occur between February 15, 2013 and April 1st, 2013. Because the legislature will be in session, this should not be a problem, given the $386,351,110 contained within the “budget stabilization fund” and the availability of the legislature and Governor to act decisively.
2013 Property Tax Relief (included in current budget) $187,973,540.00*
2013 Property Tax Replacement Requirement $989,366,295.15
2013 Projected Excess Sales Tax Revenue $1,295,000,000.00
2013 Projected Excess Oil & Gas Revenue $460,000,000.00
2013 Excess revenue available… $765,633,704.85
So, by the last quarter of the 2011-13 biennium, excess sales tax and oil & gas tax revenues alone will amount to $0.765 billion!
* Projected calendar year property tax relief dedicated to K-12 education. State’s budget for 2011-13 biennium (fiscal years) is $341.79 Million, which is $23,452,500 less than author’s $365,242,500 projected total relief for calendar years 2012 and 2013. Note that the passage of Measure No. 2 need not require any change to the current funding for K-12 education except that state revenues will replace the final 30% of K-12 funding…and local schools would have 100% control over how the final 30% of K-12 funding is spent; unless, of course, the legislature decides to provide their “property tax relief for K-12” with 100% local control as well…don’t hold your breath for that to happen!
But what happens if the oil and agriculture booms goes bust?
First, such a scenario is unlikely for many years due to the current worldwide (especially China and India) demand for oil and food. But the question deserves a critical discussion.
When would be the best “window of time” to diversify North Dakota’s economy? Certainly not during a state economic slowdown such as we experienced far too many times during the last century due to the cyclic nature of agriculture and oil. When will the opportunity to diversify North Dakota’s economy be better than today when our economy is at a zenith?
If we act now to leave $857,012,658 Million in the pockets of North Dakota individuals and businesses on February 15, 2013 and $970 Million in the pockets of North Dakotans on February 15, 2014, the likely rapid diversification of our economy and associated economic benefits to North Dakota residents will be unparalleled! And as the years go by, all areas of our great state are likely to prosper, not just agriculture, oil and their support sectors. We can look forward to a future economy that is diverse enough to weather almost any “economic storm” placed before us; and hopefully without the taxpayer supported “economic development” schemes that “pick winners and losers”!
Vote YES on Measure No. 2 this June 12, 2012
© 2012 Lynn A. Bergman