A taxing question: As Legacy Fund grows, some wish North Dakota's income tax would go away
Dennis Hanson, 82, a retired railroad worker, lives just outside Grand Forks. He and his wife live on Social Security, a pension and a stake in a motel. They’re comfortable.
But Hanson notices the state income taxes taken out of his Social Security check. And he wonders what it must be like for blue-collar workers to know the state Legacy Fund, valued at more than $6 billion, could wipe away those taxes for good.
“This isn’t right. It just isn’t right,” he said. “I had an easy job, but these guys working in these garages, and they’re on a cement floor all day, and there’s no cheating on their income tax.”
But as the saying goes, taxes, like death, are one of life’s unavoidable burdens — unless you live in North Dakota, where some state leaders are keen to do away with at least part of that old adage.
Lawmakers considered ending North Dakota’s income tax during this last legislative session, though they eventually rejected a plan that would have used Legacy Fund dollars to gradually decrease and eliminate the tax across the next decade. If state leaders had done so, North Dakota would have joined seven other states — Wyoming and South Dakota among them — without such a tax.
After clearing the North Dakota House 61-31, the bill was killed in the Senate in an overwhelming 41-4 vote. But the episode shone a spotlight on still-unanswered questions about the future of North Dakota’s taxes — and the role the Legacy Fund plays in a state moving toward a future with a growing unmanned aircraft industry and awash in oil.
North Dakota’s income tax levels are lower than most states, topping out at 2.9% for households with $433,200 or more in income. According to the Tax Foundation, that’s a world away from places like Minnesota, where the maximum rate is nearly 10%, or even Montana, where it comes in just below 7%.
According to state Tax Auditor Ryan Rauschenberger’s office, total individual income tax collections in 2018 were about $366 million — not counting corporate income taxes that the legislative proposal from earlier this year also sought to eliminate. Based on U.S. Census data, that makes the estimated per-capita collection about $482 — a rate that’s descended sharply from 2013, when it was nearly $856.
The income tax question also hits on a far more philosophical debate about the future of the Legacy Fund — the investment portfolio created by referendum in 2010 to capture the fruits of state oil revenues. It’s since grown to more than $6 billion and presents an ever-tantalizing source of funding for a range of projects.
Sen. Jim Dotzenrod, D-Wyndmere, argued for another alternative: whipping “public support” for the fund by linking it to property taxes.
“From my reading of the public, there’s growing concern that property taxes are … higher and higher all the time,” he said. “For most folks, it’s a bill that comes late in the year, and it’s a growing concern.”
During the most recent legislative session, the state peeled back small parts of the tax code. One bill passed this session exempted some social security income from the state income tax. Another exempted military retirement pay.
But, for Gov. Doug Burgum, there are limits on how far the state should go in its pursuit of leaner taxes. Earlier this year, Burgum said the income tax bill that would draw on the fund wasn’t “good policy.”
In a widely distributed op-ed, he laid out his position for how the Legacy fund should be used — only on spending with a wide-ranging impact, never as a sole source of funding, and always as a means of building the economy for future generations.
“Perhaps someday, when oil revenues slow, it may become necessary to rely on Legacy Fund earnings to balance the budget and fund general government operations,” the governor wrote. “But now is not that time.”
The debate about income taxes also runs up against questions about how the state should manage other financial concerns. State Rep. Rick Becker, R-Bismarck, voted to tap the Legacy Fund for income tax relief — but, if it were all up to him, he said he’d prefer to cut spending. North Dakota’s 2019-21 spending was budgeted at $14.7 billion — including federal dollars — of which $4.9 billion is allocated for the state’s general fund.
The future of the debate is uncertain. Becker previously said he’s frustrated with the rate of Bismarck’s spending, and said he’d even welcome a primary challenge to the governor from Burgum’s small-government right flank.
“We should be decreasing the tax burden. Property tax and income tax are the two obvious ways to try and hit at that,” Becker said. “I wouldn’t even look at the Legacy Fund. From my standpoint, we don’t need to.”