There’s Nothing “Reckless” About Using the Legacy Fund to Lower and Eliminate Income Taxes

“Don’t give away Legacy earnings,” reads the headline over Mike Jacobs’ most recent column in which he warns that North Dakota’s multi-billion dollar Legacy Fund ought not be used to reduce tax burdens.

“One of the reckless ideas that’s been bandied about is to eliminate the state income tax. This has proven to be a bad idea,” he wrote, referencing a proposal from state Rep. Craig Headland which was defeated by the Legislature earlier this year.

“A tax cutting frenzy seized lawmakers when the oil boom began, and the state income tax was cut drastically. When oil production slowed down, budgets were cut,” Jacobs claims.

This speaks to a pretty loose understanding of what actually happened with North Dakota’s finances during the oil boom, though it’s a popular bit of mythology from the state’s Democrats.

The problem in recent budget cycles wasn’t income tax cuts but rather the Republican-led Legislature building massive general fund spending increases on oil boom revenues which simply weren’t sustainable.

The oil boom was never going to last forever, but our state’s leaders spent as though it were.

The chart below, prepared by Legislative Council, shows the trend for general fund spending. As you can see it boomed, and then it busted, and yet even after the cuts of recent budget cycles the state has still seen a nearly 50 percent increase in general fund spending from the 2009-11 cycle through 2017-19 (it’s worth noting that the Legislature began a series of income tax cuts in their 2009 session):

Jacobs argues that indiscriminate income tax cutting is to blame for the state’s budget woes, but yet somehow despite those cuts the state’s tax base is supporting general fund spending that’s significantly higher than before the cuts happened.

The problem was spending increases, not tax cuts.

Jacobs also compares the idea of leveraging the Legacy Fund to lower and eliminate state income taxes to the budget woes in Alaska.

[mks_pullquote align=”right” width=”300″ size=”24″ bg_color=”#ffffff” txt_color=”#000000″]What better thing to do than to lower and eventually eliminate a tax every working, business-owning North Dakotan pays? Why not make North Dakota a cheaper place to live, and an easier place to do business?[/mks_pullquote]

“The state of Alaska, which grew so wealthy that it began giving money back to residents, now faces a budget crisis that makes the one North Dakota had to deal with look relatively minor – except that cuts did real damage to important programs,” he wrote.

This, again, is an extremely problematic comparison.

For one thing, the Legacy Fund is not at all like Alaska’s Permanent Fund. The money in Alaska’s fund comes from royalties paid to the state by the oil and gas industry for development on state land. In North Dakota those sort of revenues go to the Common Schools Trust Fund. North Dakota’s Legacy Fund owes its principal to a share of the state’s tax on oil extraction.

Where it might be ethical to redistribute earnings from state-owned lands to the public, it is an abhorrent idea to tax one group of people (the oil industry) and then redistribute the proceeds to other people. The government ought not be in the business of wealth redistribution, and besides North Dakota’s constitution prohibits such a thing.

The other problem with Jacobs’ comparison is his supposition that using the Legacy Fund to lower/eliminate income taxes would put our state further in the thrall of the always volatile oil markets.

This isn’t true. While the Legacy Fund’s principal comes from taxes on the industry, it’s the earnings from that principal’s investments in things like bonds which could be used to ease the burden of income taxes. That revenue stream is far more reliable.

Finally, Jacobs describes lowering income taxes as giving away the Legacy Fund. That’s wrong. Tax relief isn’t giving away anything. It’s not a gift. It’s letting North Dakotans keep more of their own money.

The Legacy Fund has a balance of well over $6 billion now, and counting. There are going to be a lot of proposals for how to spend that money, and I’m afraid we’re going to end up doing something very stupid with it.

I was opposed to creating the Legacy Fund in the first place – I’m not in favor of the government stockpiling other people’s money toward no defined purpose – but since it exists we should use it to do something which benefits the entire state.

What better thing to do than to lower and eventually eliminate a tax every working, business-owning North Dakotan pays?

Why not make North Dakota a cheaper place to live, and an easier place to do business?