In Fiscal Year (FY) 2011, North Dakota collected $4.7 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 the charts below, North Dakota’s state and local tax burden (tax collections divided by personal income) was the second highest in the nation for FY 2011 at 15.3 percent—or 46.5 percent above the national average of 10.5 percent. Not surprisingly, one doesn't achieve such a high tax burden with a high rate of tax growth. North Dakota's tax burden grew by 77 percent to 15.2 percent in FY 2011 from 8.7 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 eleven-fold to $1.9 billion in FY 2011 from $164 million in FY 2001. More impressively, in just two years, between FY 2009 and 2011, severance tax collections more than doubled to $1.9 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 $1.3 billion in assets 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 0.52 percent (8th highest in the country) and their sales tax burden of 2.94 percent (12th 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 35th highest tax burden in the country at 8.9 percent.
J. Scott Moody has over 18 years 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 Federalism In Action, Tax Foundation, Heritage Foundation, and The Maine Heritage Policy Center.