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From Governing’s
But the state’s tax policies are anything but ordinary. For one thing, the dependence on personal income tax receipts is unusually low — only 17 percent of the budget, less than in any state where an income tax exists. This makes for a fairly inelastic system, one that misses out on earnings and capital gains windfalls in good times but doesn’t suffer as much in economic downturns.
North Dakota experienced only a minor shortfall for the 2003 fiscal year and is now running $15 million ahead of initial projections for the upcoming biennium, with no projected shortfall at all. By contrast, neighboring Minnesota, which gets 43.6 percent of its revenues from an income tax, has a looming shortfall of 14 percent of its general fund. Until recently, North Dakota’s income tax was calculated simply by taking 14 percent of the federal income tax liability. But when the feds enacted their tax cut in 2001, North Dakota was faced with a huge decline in revenues. After lengthy deliberation, the state decided to sever direct ties to the federal system, and now has its own set of graduated tax rates based on taxable income. The new tax is slightly more complicated, but it frees the state of vulnerability to fiscal decisions made half a continent away. Sales taxes provide more than a quarter of North Dakota’s revenue, but a considerable amount of money leaks away because of the high number of exemptions — especially in comparison to South Dakota, which taxes virtually everything except the cold winter air. Because of the loopholes, North Dakota’s 5 percent general sales tax rate actually is less lucrative than the 4 percent rate south of the border. The sales tax rules also contain some practical eccentricities. For example, farm machinery is taxed at a reduced rate. This means that tractors are taxed at different rates, essentially dependent on their color. A green tractor is generally used for agricultural purposes. A yellow one is presumed to be industrial and is therefore taxable at a higher rate. Also, agricultural supplies are exempt. So when consumers buy fences for their property, they have to be asked whether or not they are farmers, because the tax rate will be affected. One more farm-related tax idiosyncrasy: For full-time farmers, agricultural property taxes are calculated using the so-called productivity formula. That means that only the value of the crops and livestock are taken into account when determining property taxes; the actual value of the home on the property isn’t considered. A mansion in the middle of a wheat field can be taxed at the same rate as a ramshackle hut on another field, as long as the fields are producing the same amount of wheat. Beneficiaries of this approach like to refer to it as “amber waves of gain.” North Dakota also stands out from the pack in that it has a couple of unusual — even slightly socialistic — revenue sources. As a vestige of the Progressive era early in the 20th century, the state owns a bank and a flour mill. Both do very well. Every year, some of the profits are transferred into the general fund, and in less prosperous times the state can reach in and take an extra large share. For the current biennium, the state is taking $82 million from the bank, rather than its allotted $60 million. Another unusual feature of North Dakota’s system is that the tax commissioner is elected by the citizens. The tax commissioner serves independently from other executive agencies and answers only to the voters. Alone among comparable positions in America, the job is also a stepping stone to higher office: Both of the state’s current U.S. senators are former tax commissioners. If the commissioner’s office has been politically potent, however, it has been technologically backward. When current Commissioner Rick Clayburgh was elected in 1996, he found an office horribly behind the times. “New technology,” Clayburgh jokes, “was an electric pencil sharpener.” Since that time, the department has done some significant catching up. All employees have e-mail and computers now, and the tax Web site was recently redesigned to allow for easy navigation. The state images almost every document, most taxpayers can file online, and new equipment and efficiencies have reduced the number of full-time employees from 153 to 136. On the negative side, the state had to delay a planned integrated tax information system because of budget cuts. The tax appeals process is admirably swift in North Dakota. Appeals go immediately to an Office of Administrative Hearings, an adjudicatory body that is outside the Tax Commission and maintains neutrality. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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f you take a map of the United States and fold it in the middle, eastern edge against western, and crease it sharply,” John Steinbeck wrote in Travels with Charley, “right in the crease will be Fargo.” North Dakota’s fiscal situation isn’t too different from its geography: The state likes to keep things right in the center. “We don’t have the highs and lows that you see on the coasts,” says Al Carlson, former chairman of the House Finance and Taxation Committee. “We never really boom, and we never really bust — we just stay in the middle.”