North Dakota to Take Another Look at Tax Reforms

With the discovery of the Brakken Formation in 1951, North Dakota learned it was sitting atop an immense gold mine –  not the type of gold that lured many a prospector to our western shores, but rather a mine of “black gold.” This underground rock formation, stretching for 200,000 square miles, is one of the largest oil and natural gas formations ever discovered in the world.

Because of the limitations of oil drilling technology, the reserve remained mostly untapped for decades, and the oil revenues derived had little effect on the economy of the state. But in 2008, all of that changed with the development of horizontal hydraulic fracturing, or “fracking.” Suddenly pipelines were overflowing, and tax revenues were pouring into the state.  To give you some idea just how much: There are currently 8,500 wells, and each well pays about $4.4 million annually in taxes. So while many other states are struggling financially, North Dakota began 2013 with a budget surplus of $800 million, and that will grow year after year as oil production increases. The state’s overall growth rate stands as the highest in the US.

With huge cash surpluses like this, North Dakota can clearly afford to reevaluate its tax policies of the 1960s and pass some of its good fortune back to the taxpayers by way of further tax relief. Maintaining revenue neutrality in the process is certainly not an issue, but willingness on the part of the government to do it is. Case in point: Earlier this year, the efforts of State Representative Scott Louser (R – Minot) to place a two-year moratorium on state income taxes, with the intent of then abolishing them, was soundly defeated in the state house. Of the three major oil-producing states where all budgetary expenses are paid with energy dollars (North Dakota, Texas, and Alaska), only North Dakota still even has a state income tax.

North Dakota is one of only four remaining states whose legislatures convene every odd-numbered year, as opposed to annually. If State Senator Dwight Cook, Chairman of North Dakota’s Senate Finance and Taxation Committee, is correct, there will be a major push to examine the possible elimination of the personal income tax once again when the state legislature next convenes in 2015. There will also be pressure from the North Dakota Farm Bureau to eliminate property taxes, but repealing the personal income tax would be a far easier first step. With a current maximum personal income tax rate of only 3.99 percent on incomes over $398,350, that revenue loss would be largely offset by eliminating the bureaucracy associated with it.

Republican Governor Jack Dalrymple had previously signed a 20 percent income tax cut for individuals. The governor is now discussing the future of property taxes, and has announced the creation of a 14-member Task Force on Property Tax Reform, stating, “We’re going to need a consensus from a broad group of people to make a breakthrough on this.”

Calvin Coolidge once said, “Collecting more taxes than is absolutely necessary is legalized robbery.” The 30^th President of the United States was right on the mark. Should any government, in this case North Dakota’s, be earning interest on money that actually belongs to the taxpayers? The answer is clearly “no,” and fortunately for its citizenry, many state legislators and the governor agree.