Feb 11, 2015

In Fiscal Year (FY) 2016, North Dakota collected $5 billion in state and local taxes—or $6,599 for evey man, woman, and child. 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?

To better answer this question, this analysis will calculate North Dakota’s Tax Burden relative to the private sector. Ultimately, it is the private sector that creates new wealth and income. A high tax burden means a state is hobbling its private sector relative to other states and reducing their long-run economic growth potential.

Click here to view tax burden data by state, type of tax, and for years 1950 to 2016

Unfortunately for taxpayers, as shown in Chart 1, North Dakota’s state and local tax burden (tax collections divided by private sector personal income) was the eighth highest in the nation for FY 2016 at 16.2 percent—or 13 percent above the national average of 14.3 percent.

#NorthDakota state and local #taxburden in FY 2016 was the 8th highest in the nation at 16.2%— 13% above US average of 14.3% http://bit.ly/2FX9C8F @keypolicydata #NDpol #NDsen #PolicyData (click to tweet)

As shown in Chart 2, North Dakota’s tax burden has increased over time by 58 percent to 16.2 percent in FY 2016 from 10.2 percent in FY 1950. Note, however, that this is down significantly when the tax burden top 20 percent in FY 2013, 2014, and 2015—fueled by the fracking-boom which has since cooled off (more below).

#NorthDakota state and local #taxburden has grown 58% between FY 1950 (10.2%) to 2016 (16.2%) http://bit.ly/2FX9C8F @keypolicydata #NDpol #NDsen #PolicyData (click to tweet)

Click here to view tax burden data by state, type of tax, and for years 1950 to 2016

To put North Dakota’s tax burden into perspective, let’s compare it to size of major industries in the state (as a percent of private sector income). As shown in Chart 3, North Dakota’s 16.2 percent tax burden is greater than these combined industries: wholesale trade (6.9 percent), retail trade (6.7 percent), and utilities (1.6 percent).

#NorthDakota state and local tax burden > combined industries: wholesale trade, retail trade, and utilities http://bit.ly/2FX9C8F @keypolicydata #NDpol #NDsen #PolicyData (click to tweet)

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. 

Although the oil and gas industry has retrenched with falling oil prices, North Dakota still collected $1.5 billion in severance taxes in FY 2016. Overall, North Dakota’s all other tax burden (which includes severance taxes) moved to the 1st highest (7.2 percent) in the country in FY 2016 from the 5th highest (4.7 percent) 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 4.1 percent (14th highest in the country) in FY 2016 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 20 North Dakota counties with the highest local government tax burden include:

• Sheridan County, ND (13.9 percent)
• Nelson County, ND (8.3 percent)
• Benson County, ND (8.0 percent)
• Pembina County, ND (7.9 percent)
• Renville County, ND (7.6 percent)
• Griggs County, ND (7.5 percent)
• Hettinger County, ND (7.2 percent)
• Logan County, ND (7.2 percent)
• LaMoure County, ND (7.1 percent)
• Towner County, ND (7.1 percent)
• Richland County, ND (7.0 percent)
• Emmons County, ND (6.9 percent)
• Oliver County, ND (6.8 percent)
• Grant County, ND (6.4 percent)
• Steele County, ND (6.4 percent)
• Wells County, ND (5.7 percent)
• Grand Forks County, ND (5.7 percent)
• Barnes County, ND (5.6 percent)
• Golden Valley County, ND (5.6 percent)
• McIntosh County, ND (5.6 percent)

The bottom 10 North Dakota counties with the lowest local government tax burden include:

• Cavalier County, ND (4.8 percent)
• Divide County, ND (4.6 percent)
• Bottineau County, ND (4.5 percent)
• Bowman County, ND (4.5 percent)
• McLean County, ND (4.4 percent)
• Cass County, ND (4.3 percent)
• McHenry County, ND (4.2 percent)
• Foster County, ND (4.1 percent)
• Ward County, ND (3.9 percent)
• Morton County, ND (3.8 percent)
• Billings County, ND (3.5 percent)
• Burleigh County, ND (3.4 percent)
• Slope County, ND (3.3 percent)
• Mercer County, ND (3.0 percent)
• Mountrail County, ND (2.9 percent)
• Williams County, ND (2.8 percent)
• Stark County, ND (2.0 percent)
• Dunn County, ND (1.8 percent)
• McKenzie County, ND (1.4 percent)
• Sioux County, ND (-16.2 percent, see note)

Tribal governments are classified as local governments. As a result, counties with significant tribal activities can result in low or negative private sector income since the private sector is defined as personal income minus government employment and government transfers (Social Security, Medicaid, Welfare, etc.). In this case, Sioux County, ND lies entirely within the Sioux Rock Indian Reservation.

Click here to view tax burden data by state, type of tax, and for years 1950 to 2016

Finally, don’t forget to watch our exclusive time-lapse video of state and local tax burdens over the last 66 years! See if your state has been above or below the national average?