Replacing Property Tax Revenue
Tuesday, May 01, 2012
Standard Article by Brett Narloch
Issue: Budget & Spending

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If North Dakotans vote to eliminate property taxes on June 12th, the state will be required to replace revenue to local governments. Obviously, the exact dollar figure is important and could very well sway how people vote on the ballot measure.

The North Dakota Tax Department released a document entitled “Estimated Fiscal Impact of Initiated Measure No. 2” which states that if Measure 2 passes the state would be required to replace $812 million in property tax revenue for 2012. This analysis is static, meaning that it does not take into account dynamic changes that will occur to North Dakota’s economy if $812 million were left in the hands of taxpayers.

A dynamic analysis takes into account what would happen to North Dakota’s economy if that $812 million was left in the private sector. Individuals would spend more money on services (i.e. restaurants, movies) and would make more capital investments. All of that increased economic activity generates more state and local tax revenue.

The North Dakota Policy Council commissioned the Beacon Hill Institute at Suffolk University (Boston, MA) to perform such an economic analysis. The entire study can be viewed here. Among other things, they estimated the increase in state and local tax revenue. According to their model, the state would generate about $96 million in new state revenue, with local governments generating another $4 million, for a combined increase in $100 million.

In 2011, the state legislature extended then-Governor John Hoeven’s so-called property tax relief plan for two more years. HB1047 appropriated $342 million for the 2011-13 biennium – or $171 million each year. Obviously, that relief plan would not be needed anymore and there would be savings of $171 million.

In their study, the Beacon Hill Institute also estimated the cost of administering the property tax system to be somewhere between $25 million and $50 million per year – for this article I will use $37 million. In addition, the Homestead Tax Credit program would not be needed anymore saving another $5 million. And much – if not all – of the property tax staff at the Tax Department could be eliminated as well, saving an additional $5 million per year (estimate).

The total of those figures - $100 million in increased tax revenue, $171 million in savings from the property tax relief plan, and $47 million simply for administering the system – is $318 million, cutting $812 million down to $494 million. And that figure is without making cuts to any spending or increasing taxes one cent. It does not touch any potential budget surpluses or limit funding to any political subdivision.

While this is still a large amount of money, it is not nearly as much as the North Dakota Tax Department states as the fiscal impact.