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Tuesday, June 15, 2010

LYNN BERGMAN: MISLED… THE “MYTHOLOGY IN STATE LED ECONOMIC DEVELOPMENT”

Misled… the “Mythology In State Led Economic Development”

(Part One of a Two Part Series)

By Lynn Bergman

 

Personal Background and Preconceptions

 

Working on a lignite coal mine for fifteen years caused me to become extremely proud of the environmentally responsible way in which North Dakotans efficiently mine coal while reclaiming the land to a condition better than that which existed prior to mining. All North Dakotans should be equally proud of efforts, over the last three decades, of North Dakota’s coal-fired power plants to reduce pollutants through the implementation of a quite regular series of newly discovered and extremely expensive pollutant reduction technologies.

 

Preparing oil “spill prevention, control, and countermeasures” (SPCC) plans throughout North Dakota for five years also made me aware of efforts of the oil and gas industry to efficiently extract oil and gas while avoiding damage to the environment. 


From this personal background of knowledge and experience was borne a healthy skepticism regarding any “politician” claiming responsibility for “creating” a vibrant North Dakota economy. We all understand that the Real American Heroes are those that perform the work and exhibit the courage required to actually produce a needed product or a valued service while respecting our natural environment.

 

Where Have the “New Jobs Come From; the Search for Data

 

The first task was to find out where the “new jobs” of the first decade of this new millennium arose. The “income source code”, as presented in North Dakota individual income tax form instructions, is presented below. The sectors are listed in order of each sector’s total of individual adjusted gross income reported. It is important to note that “corporate income” is NOT included or considered in this analysis of the origin of “jobs”.

 

Code Number

Source of Individual Income

Percent of Total Federal AGI

5

Accounting, legal, health, motel, and other personal/professional services

35.80%

12

Retirement (Pensions, annuities, IRSs, etc.)

11.40%

2

Retail, wholesale trade, and eating and drinking places

9.20%

1

Farming, ranching, or agricultural production

9.10%

6

Construction

6.60%

9

Exploration, development, and extraction of coal, oil, and natural gas

5.30%

10

Banking, insurance, real estate, and other financial services

5.00%

3

Federal, state, county, or city government service

4.60%

8

Transportation, communication, and public utilities

4.20%

7

Manufacturing

4.00%

4

Public or private education

3.60%

11

Military service

1.20%

 

The North Dakota Tax Commissioner’s office provided individual income tax information for tax data years 2000 and 2008. Information included the number of filers, total tax liability, and total federal adjusted gross income (AGI) for each source of income.

 

The growth in the average federal adjusted gross income (2000 to 2008) for twelve economic sectors is recounted below. The sectors are presented in the order of their size as determined by percent increase in average federal Adjusted Gross Income:

 

 

AGI Rank/Sector of

% Increase in

North Dakota's

Average AGI

Economy

2000 to 2008

6 Exploration, development, and extraction of coal, oil, and natural gas

100%

4 Farming, ranching, or agricultural production

90%

5 Construction

61%

12 Military Service

53%

3 Retail, wholesale trade, and eating and drinking places

52%

1 Accounting, legal, health, motel, other personal/professional services

49%

7 Banking, insurance, real estate, and other financial services

42%

9 Transportation, communication, and public utilities

42%

8 Federal, state, county, or city government service

39%

11 Public or private education

36%

10 Manufacturing

36%

2 Retirement

29%

Total Economy

61%

 

Ranked Growth in North Dakota Personal Income by Sector of the Economy:

 

1) The energy sector, representing 5.3% of North Dakota’s personal income, grew 100%. Energy was the sector that drove the growth of all other sectors. Many, even in the second and third ranked growth sectors, agricultural and construction, have “energy” to at least partly thank for their economic health.

 

2) The agricultural sector, representing 9.1% of North Dakota’s personal income, grew 90% as compared to the 61% growth of the overall economy. As numbers dropped, those that remain are increasingly prosperous.

 

3) The construction sector, representing 6.6% of North Dakota’s personal income, grew 61%, the same growth rate as the overall economy. This makes sense as both the overall economy and construction, the “canary in the cage”, have suffered some since the second quarter of 2009. North Dakota typically lags a national recession by about 1 ½ years, so we can expect the “percent change in taxable sales from the same quarter in the previous year” to continue to rebound from the low in the third quarter of 2009 back to positive territory by mid-2010.

 

AGI Rank/Sector of

% Increase in

North Dakota's

Average AGI

Economy

2000 to 2008

6 - Exploration, development, and extraction of coal, oil, and natural gas

100%

4 - Farming, ranching, or agricultural production

90%

5 - Construction

61%

12 - Military Service

53%

3 - Retail, wholesale trade, and eating and drinking places

52%

1 - Accounting, legal, health, motel, other personal/professional services

49%

7 - Banking, insurance, real estate, and other financial services

42%

9 - Transportation, communication, and public utilities

42%

8 - Federal, state, county, or city government service

39%

11 - Public or private education

36%

10 - Manufacturing

36%

2 - Retirement

29%

Total Economy

61%

 

 

 

4) The military service sector, representing 1.2% of North Dakota’s personal income and 100% of the support of our freedoms, grew 53%. The size of this smallest sector of North Dakota’s economy belies its unquestionably highest importance to our freedom and security. These, the best of the best, are highly visible both locally (flood fighting) and over seas (peace keeping), allowing us to live and prosper without fear or oppression.

 

5) The retail/wholesale trade sector, representing 9.2% of North Dakota’s personal income, grew 52% in line with the personal/professional services sector.

 

6) The personal/professional services sector, representing 35.8% of North Dakota’s personal income, grew 49% as compared to the 61% growth of the overall economy.

 

7) The financial sector, representing 5% of North Dakota’s personal income, grew 42% or about 2/3 the growth of the overall economy. This growth merits considerable further discussion (to be presented in “Part Two” in the next issue of the Dakota Beacon).

 

8) The transportation/communication/utilities sector, representing 4.2% of North Dakota’s personal income, grew 42%.

 

9) The government sector, representing 4.6% of North Dakota’s personal income, grew 39%, far exceeding both the population growth of less than 1% and the growth in the number of government employees of 5.47%. Most of us are aware of individuals that have migrated from private jobs to government jobs for the increased pay and perceived economic security.

 

What about the Initiated Measure to Abolish Property Taxes?

 

Actual revenues from the 1999-2001 biennium from the state sales tax ($722,181,696), individual income tax ($409,331,437), corporate income tax ($99,134,868), oil and gas taxes ($75,179,298) and other taxes ($303,972,969) totaled $1,609,800,268. Statewide property tax revenues for 1999 and 2000 were $465,203,396 and $486,194,264 respectively, and totaled $951,397,660. The total of state revenues plus locally assessed property tax revenues was $2,561,197,928. Property tax revenues represented 37.15% of the total.

 

Legislative revenue projections for the 2009-2011 biennium from the state sales tax ($1,109,974,800), individual income tax ($665,508,000), corporate income tax ($239,110,000), oil and gas taxes* ($394,100,000) and other taxes ($882,210,322) total $3,290,903,122. Property tax revenues for 2009 and 2011 are projected to total $775 M and $835 M respectively, totaling $1.61 Billion. The total of projected state revenues and projected locally assessed property tax revenue is $4,900,903,122. The Property tax revenue projection represents 33% of the total.    *Ignores the diversion of $321.1 Million to the permanent oil tax trust fund, leaving $71 million in the general fund.

 

Multiplying the 1999-2001 total of state revenues plus local property tax revenues by 1.25 to express them in today’s dollars tells us the inflation adjusted 1999-2001 revenues were $3,201,497,410. In equivalent inflation adjusted dollars, all state revenues plus property tax revenues have increased by $1,699,405,712 ($4,900,903,122 less $3,201,497,410) during the last decade, an amount that exceeds the projected property tax revenues for 2009 and 2010 by $89.4 Million. Even when allowing for government growth of 25% (equivalent to inflation that occurred over the last decade), projected total state revenues for the 2009-2010 biennium (property taxes are NOT state revenue so are NOT included) exceed projected property tax revenues for years 2009 and 2010 by $89.4 Million.

 

The abolition of property taxes in North Dakota is not only possible…indeed, the argument can easily be made that abolition of property taxes is “essential” in throttling the excessive state spending that has become particularly evident since 2005, as shown below:


 

 

Imagine, if your eyes can stand the brightness of such a future, what the impact of $1.6 Billion dollars left in the pockets of property owners could do to stimulate North Dakota’s economy and how much the revenues from remaining taxation vehicles would grow! Imagine the positive impact on the most marginal of our citizens such as the elderly and disabled! Lastly, imagine the savings to be realized from the elimination of a completely unproductive (no goods or services of value) aspect of local government, the property tax assessment and collection bureaucracy.

 

10) The education sector, representing 3.6% of North Dakota’s personal income, grew 36% in the face of declining k-12 enrollments and a steady population. The prospects for continuation of this level of growth, in light of declining K-12 enrollments and undue growth in K-12 administration, merits considerable further discussion (to be presented in “Part Two” in the next issue of the Dakota Beacon).

 

11) The manufacturing sector, representing 4% of North Dakota’s personal income, grew 36%. Growth in this sector has likely been dampened by imported manufactured goods, particularly in the oilfields.  Is our “fiscal conservative” nature hurting us in this area? This question is also pertinent in the retail/wholesale sector.

 

12) The retirement sector, representing 11.4% of North Dakota’s personal income, grew 29%, barely above the cost of living (about 25%). Expected increases in inflation over coming years may begin to erode retirees’ standard of living. The property tax elimination measure proposed for the November ballot is very timely for retirees.

 

Growth in the Number of New Employees

 

The second source of data was Job Service North Dakota. Non-agricultural employment by industry was provided for years 1999 and 2008, as presented below:

 

 

Non-Agricultural North Dakota

 

 

 

 

Employment by Industry

Employees

Employees

Increase

Percent

 

1999

2008

1999-2008

Increase

Natural Resources & Mining

3,150

6,700

3,550

112.70%

1 Professional & Business Services

23,950

30,300

6,350

26.51%

Transportation, Warehousing, Utilities

12,000

15,000

3,000

25.00%

Financial Activities

16,250

20,300

4,050

24.92%

Construction

16,800

20,800

4,000

23.81%

Education & Health Services

44,550

52,000

7,450

16.72%

Manufacturing

22,800

26,400

3,600

15.79%

Leisure & Hospitality

29,050

33,500

4,450

15.32%

Wholesale Trade

18,500

19,900

1,400

7.57%

Government

72,150

76,100

3,950

5.47%

Retail Trade

41,050

43,200

2,150

5.24%

Other Services

15,400

15,400

0

0.00%

Information

8,200

7,400

-800

-9.76%

Total

323,850

367,000

43,150

13.32%

 

Natural Resources and Mining Jobs Up 112.7%, Income Up 100%!

 

Natural Resources & Mining jobs increased by 3,550 from 3,150 in 1999 to 6,700 in 2008, an astounding increase of 112.7%. Average federal adjusted gross income for this sector increased 100%. It is extremely gratifying to see this sector prospering, especially considering the virtual fact that it is largely responsible for North Dakotans, almost ignoring the national recession! Hard work still pays well in our free market economy!

 

Agricultural Income up 90%!

 

Of immediate secondary interest is the almost comparable 90% increase in federal adjusted gross income for the agriculture sector. While the number of jobs fell in the agricultural sector, those remaining prospered nearly as much as those in the energy sector. The hard working agricultural entrepreneurs in North Dakota deserve to prosper!

 

See Part Two of “Misled” in the next issue of the Dakota Beacon

 

Detailed discussions revealing the reasons behind the relative prosperity of the remaining sectors of North Dakota’s economy will follow in Part Two of “Misled”.

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