040617 Legislative Report for Week 14, Rep. Rick Holman

As we move in to the last days of the 2017 session, budget issues are a major concern. Over the past three sessions, there have been significant increases in state spending teamed with a lowering of taxes. Support of government comes from three sources. Sales tax of which the state takes 5%, or 3%. Personal and corporate Income tax and property tax which has been usually reserved for local entities such as cities, counties and schools. Finally, over the past several years every barrel of oil has been generating additional income.

This multi-pronged approach to taxation has been changed over the past few years. Many years ago, the ND legislature allowed the addition of sales tax as a way for local entities to generate funds. Many cities and counties have added this tax to generate funds for special projects so depending where you are the sales tax could be as high as 7 percent or more. Because of that it is difficult for the state to increase sales taxes.

Extra income from the oil boom allowed the state legislature to increase funding for agencies and operations while lowering the personal and corporate income tax. Now that the oil income is nearly cut in half from where it was a few years ago, the income tax cuts don’t seem to be such a good idea.

In 2009, the personal income tax rate for income over $50,000 was 6.4%. In 2011, the rate was dropped to 5.15%, in 2013 to 4.5% and now to 4.3%.  The recent slowdown in the state’s economy has caused corporate income tax collections to drop from $146 million in 2011 to $68 million in 2017. The oil tax which voters said to put 30% into the Legacy Fund, was supposed to support those cuts has also has dropped. Income from oil dropped from $1.28 billion in 2013 to $738 million in 2016. Adding to the problem, the legislators decided to increase funding for schools and counties by rebating a portion of local property taxes. This seemed like a good idea when the oil income was double what it is now, but it’s going to be difficult to continue funding at the level that has been established.

We all liked more road funding, more help for education, more new buildings, more help for those in need and more water projects. We also liked the tax cuts and tax rebates that kept property taxes in check in times of real estate inflation.

Sales tax and oil taxes can fluctuate widely, subject to changes in the economy. Income tax and property tax are more predictable.  A budget that relies on predictable sources of income is more stable requiring less in reserve funds to level off the curve during changes in economic activity.

A few weeks ago, economist Dan White from Moody’s gave us a crystal ball look in to the economic future of our state. He explained that one way to deal with fluctuations in state tax collections is to create more high paying jobs which, in turn, would increase both income tax and sales tax collections. He also said that the way to do that would be through higher education. Evidence shows that a better educated population earns more and pays more taxes. Instead of cutting higher education, we should be increasing our support.

Prudent management involves long term planning.  Our challenge is to balance the budget while trying to meet the basic needs of the people of our state. Priority must be given to funding those services that support life quality for seniors, veterans, and those who are most vulnerable. Our long history of supporting all levels of education must be continued.

In hindsight, had we left income tax and oil tax rates alone and not shifted more taxation toward less predictable areas, we would not be looking at painful ways to balance the state budget. House and Senate leadership needs to be asked; how did we get to this point?

Rick Holman