Guest Post: Can North Dakota Survive Big Government?

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In September, the legislature’s interim Government Services Committee received a report from Governor Dalrymple’s office outlining “major executive budget proposals”. This document contains $1.827 billion in new spending proposals (including new so-called “one-time expenditures”). Assuming the $700 million worth of “one-time spending” items from the last budget really do go away, this would set the stage for a $5.3 billion general fund budget without any increases in spending in other areas.

According to the legislative council’s own numbers (as shown in the graphs in this report), the growth of the state budget has increased by over 28% each biennium. Even with so-called “one-time expenditures removed, this average is still at 18% growth each budget cycle. Thus, the chances of a freeze in state government spending outside of “one-time spending” are almost no existent with the shear amount of cash that will be available for the legislature to work with next session.

If we factor for the average 18% growth in on-going spending, on top of these new executive proposals, the State of North Dakota can easily be looking at a $6 billion overall General Fund Budget from the legislature.

Some legislators will justify these gains by pointing to increases in median personal income or the State’s GDP. But these excuses, while valid, are not accurate because these metrics have not increased nearly as fast as state spending.

North Dakota’s #1 Industry Is Government

In North Dakota, we consider ourselves still to be an agricultural state, and we are rapidly becoming an energy powerhouse. But the fact remains that the largest single industry in North Dakota is government. Government represents 13% of the Gross State Product when divided into Major Industries.

Since 2005, the number of state government employees has increase by 7% alone. This increase does not even count increases in the growth of employees on the state’s public college campuses.

When employment on college campuses is brought into the picture, the result is even worse because the number of non-teaching positions has increased by 40% while the number of teaching positions has stayed roughly the same.

Unfortunately, even with all the excessive revenue flowing into the state’s coffers, barely a dent has been made in reducing the tax burdens for North Dakotans. While individual income tax rates have been reduced by 28% and corporate income tax rates have been reduced by 22%, the amount of revenue from those taxes has not fallen as much as the rate. And it has not even come close to the increases in sales tax revenue.

State Funding of Local Government Is Ineffective

Since 2005, state assistance to local governments has increased 150% from just over $1 billion to almost $2.5 billion. While a good and needed chunk of these funds are being sent back to the counties and cities that are being impacted by oil development, a substantial amount of these dollars are part of the now proven ineffective Property Tax Relief Programs that has been in place since 2009.

According to the North Dakota Tax Department, prior to the establishment of the state-funded property tax buy-down program, the growth of property tax burdens has increased an averaged 4.8% (from 1984 to 2008), with annual growth ranging from 2.6% to 7.0%.

In 2009, the total statewide property tax burden was reduced by 12.1% due to the first batch of state spending designed to reduce property taxes. However, the property tax burden in 2010 increased by 5.9% and 5.0% in 2011. This means that in just two years, 10.9% of 2009’s 12.1% property tax relief had been erased.

For a cost of over $400 million over the three budgets in that time, almost all of the aggregate property tax relief has been backfilled.

This is why it is accurate to characterize this strategy as nothing more than “kicking the can down the road”.

Governor Dalrymple has proposed doubling the state funding for the property tax buy-down program, despite all the evidence point to the fact the approach can never work. Even worse, if the funding for the program were to dry up due to the EPA clamping down on fraking or a collapse of the European currency, local property taxes would nearly double overnight due to the lost state funding.

This proposed expansion of the Property Tax program would more than double the cost of the state’s shifting program. Just as with the existing $350 million property tax shifting scheme, expanding the program to $800 million will only kick the can down the road when it comes to much needed reform. The entire strategy of “buying-down” local property tax burden has always been designed as a way to hide the problem of excessive property taxation.

Using the results of the program to this point, it can be projected that this expansion will buy roughly five years before the total property tax burden is right back where it is today. At that point, in excess of $1.5 billion over nine years will have been used maintain this “property tax buy-down program” – with the end result being that the property tax burden on a dollar basis is right back where it started.

The real cause of rising property tax burdens is the lack connection between assessed property values and the property tax mill levy rates. Many property owners and voters do not seem to understand that it is their local commissioners and council members control their property taxes by not lowering the mill levy (tax rate) commiserate to the rate of growth in property values (tax base). Local officials are very good at finding new and creative ways to spend the additional revenue generated by the expanded tax base instead of lowering the mill rate. As a result, the average property owner sees no personal financial benefit to a growing community. The inability of local officials to recognize that a growing tax base should allow for systematic reductions of property tax burdens is what sparked the effort to abolish property taxes.

Make North Dakota’s Surplus Work For The State

No other state, with the exception of Alaska, has ever hit “life’s lottery” like North Dakota has with the convergence of technological innovation and the existence of untapped resources.

It is important to remember that the surpluses that Republican in our state now are managing would not even exist if it hadn’t been for the poor tax policies of Democrats in the 1980’s. In 1980, Measure #6, as promoted by then Tax Commissioner Byron Dorgan, increased the tax on oil from 5% to 11.5%. It is widely accepted that this increase played a considerable role in shortening the life of the oil boom at that time.
Today, North Dakota’s Republican leaders take credit for the revenue generated by that poor tax policy.

How long will it last this time?

With so much money flowing into the state’s coffers, it is simply too easy to waste and over-spend. Once that culture of spending is engrained in our state’s lawmakers, how easy will it be to go back to pinching pennies when times aren’t so good?

Our state is in danger of forgetting its own past.

Every economic boom goes bust eventually.

It’s not how things are managed when times are good that matters, it how our leaders prepare for when times aren’t so good that really counts.

Dustin Gawrylow is the director of the North Dakota Watchdog Network.

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