In Fiscal Year (FY) 2015, North Dakota collected $6.9 billion in state and local taxes. While this is an impressive sum of money, it tells us little about whether or not the average North Dakota taxpayer can afford this level of taxation.
As shown in Chart 1, North Dakota’s state and local tax burden (tax collections divided by private sector personal income) was the second highest in the nation for FY 2015 at 21.3 percent—or 48 percent above the national average of 14.4 percent.
As shown in Chart 2, North Dakota's tax burden has increased over time by a whopping 109 percent to 21.3 percent in FY 2015 from 10.2 percent in FY 1950.
As shown in Chart 3, North Dakota’s 21.3 percent tax burden is greater than these combined industries: mining, quarrying, and oil and gas extraction (10.9 percent), manufacturing (5.6 percent), real estate and rental and leasing (3 percent), and utilities (1.5 percent).
North Dakota’s high tax burden is driven by severance taxes on oil and gas extraction, especially over the last decade with the advent of Hydraulic Fracturing, or fracking, in the Bakken Shale formation.
Within the last decade severance tax collections have grown ten-fold to $2.8 billion in FY 2015 from $262 million in FY 2005. More impressively, in just seven years, between FY 2009 and 2015, severance tax collections more than tripled to $2.8 billion from $827 million. As a consequence, along with the surging severance tax collections so has North Dakota’s tax burden moving to the 2nd highest in the country in FY 2015 from the 12th highest in FY 2005.
Following in Alaska’s footsteps, in 2010 North Dakota approved a Constitutional Legacy Fund that will put away 30 percent of severance taxes. The Legacy Fund has already topped 4 billion in assets as of July 1, 2014 and policymakers can’t even touch the money until July 1,2017. So far it has not been determined what will happen to the Fund once disbursements are allowed—will they simply spend it or return it to the taxpayer?
Two options policymakers should definitely consider is reducing other taxes with the Legacy Fund or simply cutting a check to taxpayers.
First, North Dakota is particularly uncompetitive with their sales tax burden of 5 percent (9th highest in the country) and should start there. I’m no fan of the sales tax as much of it is, contrary to popular opinion, a tax on business—see my plan for Rhode Island to eliminate their sales tax.
Second, Alaska cuts a check to every man, woman, and child in the state from the Permanent Fund. I have determined that Alaska’s dividend to be the equivalent to a tax reduction. This would be the most direct way for North Dakota to lower its high tax burden ranking.
The Tax Foundation shifts the severance tax burden onto other states in their estimates of state and local tax burdens. In their rankings, North Dakota ranks as only the 33rd highest tax burden in the country at 9 percent.
Of course, the tax burdens for local government can vary just as much as they do among the 50 states. As such, we have also calculated the local government tax burden for every county in North Dakota—this includes every taxing jurisdiction within the geographic county borders whether it is a city, a special district, or county government itself.
The top 10 North Dakota counties with the highest local government tax burden include:
The bottom 10 North Dakota counties with the lowest local government tax burden include:
Finally, don’t forget to watch our exclusive time-lapse video of state and local tax burdens over the last 65 years! See if your state has been above or below the national average?
Scott has nearly 20 years of experience as a public policy economist. He is the author, co-author and editor of over 180 studies and books. His professional experience also includes positions at the American Conservative Union Foundation, Granite Institute, Federalism In Action, Maine Heritage Policy Center, Tax Foundation, and Heritage Foundation.