In Fiscal Year (FY) 2013, North Dakota collected $6.3 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 personal income) was the second highest in the nation for 2013 at 16.3 percent—or 58 percent above the national average of 10.3 percent. Not surprisingly, as shown in Chart 2, the tax burden has grown over time by a whopping 89 percent to 16.3 percent in FY 2013 from 8.6 percent in FY 1950.
Similar to Alaska’s high tax burden, North Dakota’s 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 fourteen-fold to $2.5 billion in FY 2013 from $164 million in FY 2001. More impressively, in just two years, between FY 2009 and 2013, severance tax collections more than tripled to $2.5 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 2011 from the 16th highest in FY 2001.
Again 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 2.2 billion in assets as of July, 2014 and policymakers can’t even touch the money until 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?
One option policymakers should definitely consider is reducing other taxes with the Legacy Fund. North Dakota is particularly uncompetitive with their corporate income tax burden of 0.58 percent (6th highest in the country) and their sales tax burden of 3.7 percent (4th highest in the country).
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 36th highest tax burden in the country at 8.8 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 North Dakota counties with the highest local government tax burden include: Hettinger County, ND (4.7 percent), Golden Valley County, ND (4.6 percent), and Sheridan County, ND (4.5 percent). The North Dakota counties with the lowest local government tax burden include: McKenzie County, ND (1 percent), Dunn County, ND (1.1 percent), and Rolette County, ND (1.1 percent).
J. Scott Moody has nearly 20 years experience as a public policy economist with a specialty in tax policy and has over 180 publications. He has worked for numerous national and state-based think tanks such as the American Conservative Union Foundation, Federalism In Action, Tax Foundation, Heritage Foundation, and The Maine Heritage Policy Center.