Financial impact of Measure 2 debated

BISMARCK – About $812 million in property taxes for 2012 would be eliminated if North Dakota voters approve Measure 2 in June, a state research analyst said Monday.

Kathy Strombeck of the state Tax Commissioner’s Office gave legislators an estimate of the fiscal impact if voters decide to repeal property taxes effective Jan. 1, 2012.

The estimate assumes the effective date of the measure would be interpreted to initially repeal 2012 property taxes that would be due and payable in 2013, Strombeck said. It is assumed 2011 property taxes – due and payable in 2012 – would not be repealed, she said.

After Strombeck’s report, supporters and opponents of the measure debated its fiscal impact during a meeting of the Legislature’s Property Tax Measure Review Committee.

The public is being improperly informed about effects of the measure, said Bob Hale of Empower the Taxpayer, which supports Measure 2. There wasn’t information compiled for legislators about the economic impact of keeping $800 million a year in the private economy, he said.

“This allows those businesses to have that money to invest and that investment results in local sales, state sales, income tax and other tax revenues that more than make up for (the property) taxes abated,” Hale said. “That portion of the equation has not been addressed.”

He said the legislative committee also hasn’t fulfilled its responsibility to study what laws are needed to implement Measure 2.

Rep. Dan Ruby, R-Minot, said legislators should start to discuss a formula for funding local governments. Doing so would remove some of the opposition and fear of the unknown, he said.

Rep. David Drovdal, R-Arnegard, said the committee will address legal changes if the measure passes, but it was decided not to spend taxpayer money on creating legislation unless it’s needed.

Susan Beehler, a Mandan resident, also didn’t think legislators were looking fully at the fiscal impact and called it a disservice to taxpayers.

Instead of “whining about messes that this (measure) would create,” legislators need to “put on your big boy and your big girl pants and get on with it,” she said.

“If this is what we want, then it needs to be done,” Beehler said.

Property taxes are an “ineffective, inefficient way” to tax for local services, she said.

Drovdal said legislators do want to give people the right to vote and pointed to the Legislature’s support of allowing another measure – the Fighting Sioux nickname – go to a public vote.

McLean County State’s Attorney Ladd Erickson thought the fiscal impact didn’t reflect major cost items and said Measure 2 supporters are exaggerating the proposal’s benefits.

Sponsors are “constantly” saying legislators will pay local governments’ costs, he said.

“The public is being led to believe that this is a free ride,” including if anybody wants a new jail or school, Erickson said.

Drovdal said the Legislature would determine what proper funding is – including decisions on new buildings – not local governments. Erickson said the measure destroys local control.

By changing government from a diverse system to a centralized system, costs are going to “dramatically increase,” Erickson said. He also criticized claims that 12,000 government jobs could be cut and that money could make up the majority of revenue lost from eliminating property taxes.

“Problem is, we don’t have 12,000 state employees,” he said.

The state has 11,235 full-time equivalent positions, according to the Office of Management and Budget. Even if every state employee was fired, there’s still a shortage in funding the measure, Erickson said.

Sen. Dwight Cook, R-Mandan, said if Measure 2 passes, there would need to be a special session called to address local governments’ budgets. He said that cost would need to be added to the fiscal impact. The Legislative Council says a special session would cost an estimated $50,000 a day.

Drovdal said 28,000 people pushed the proposal forward. Legislators need to be aware of that and see what they can to do to continue to address tax concerns, he said.

13 thoughts on “Financial impact of Measure 2 debated

  1. If there were ever an arguement made from the position that “any tax is a bad tax” its coming from the supporters of Measure 2.

    All taxes distort the economics of the free market to one degree or another. It just so happens that taxes on the value of land distort the least. They cause much less deadweight loss than either income or sales taxes (the likely replacements should Measure 2 pass). When you tax consumption the result is less spending. When you tax income the result is less production. But when you tax land, you don’t get less land.

    The arguement that you’re putting $800 million back into the economy and that putting that money to work will pay for itself doesn’t hold water. You’re exchanging a less distortive tax for a more distortive one and as a result you’re going to experience more deadweight economic loss not less.

    • It is a myth that property taxes have no deadweight loss, a view most commonly held by those in favor of abolishing landownership altogether (e.g., proponents of the so-called “Land Value Tax”, wherein the State collects perpetual rents on ALL land).

      Causes of deadweight loss can include monopoly pricing (in the case of artificial scarcity), externalities, taxes or subsidies, and binding price ceilings or floors. The term deadweight loss may also be referred to as the “excess burden” of monopoly or taxation.

      The fact that a tax on land does not decrease the “quantity” of land is where the “no deadweight” fallacy lies. This can be seen clearly by taking land taxation to its extremes. If astronomical taxes were charged on lands, this would result in an artificial scarcity of ECONOMICALLY available land, given that land itself would not economically feasible to occupy – thus, artificial scarcity and PURE deadweight loss.

      In reality, deadweight loss is only a matter of degree, property taxes being arguably the WORST offender, as it represents an artificial cost of ownership that perpetually erodes owner equity, and provides a built-in DISincentive for investment and improvements, which distorts both buying and rental markets (i.e., seriously affects scarcity).

      For example, in the ABSENCE of a property tax (which, again, artificially siphons away ownership equity), there is enormous incentive to invest, given that the cost of ownership would only reflect reality. Such investments would result in an increase in property ownership as a haven from inflation, including a dramatic increase (now that the real estate market is UN-distorted) in property available for rent.

      That is the free market truly at work, as the increase in supply places downward pressure on all rents (more supply chasing fewer renters).

      • I say that property taxes had no deadweight loss. My contention, and what I actual said in my post, was that the deadweight loss is lower than it is for other taxes. I’ve subsequently provided some emperical support for that position.

        I won’t pretend to know your individual motivation but my broad impression of this Measure 2 initiative is that its being driven by a broad dislike for taxes and government of all kinds rather than a specific beef with property taxes. Further, its been my general experience that most people who favor less government prefer to have what little government they deem necessary to be a local a possible and I have great difficulty squaring that idea with the obvious effects of Measure 2.

        Perhaps I can be disabused of the notion but I find the entire thing deeply confused and mired in an ethic which also embraces cutting off one’s nose to spite one’s face.

        • Apologies, I stand corrected – you did not state that property taxes have no deadweight.

          My motivation is purely one of principle, and has nothing to do with a like or dislike for government or taxes, neither of which I have any problem with as a matter of principle.

          The principle for me is a basic question:

          a) Right of Ownership versus
          b) Rental of Conditional Title Privilege

          In other words, who ultimately owns what you pay for with the fruits of your labors – You or the State that you created and should have control over?

          When I pay income taxes, the tax is paid. In full. When I pay sales taxes, those taxes are paid. All part of the cycle, all debts fully known and discharged in the moment. Not so with property taxes.

          In essence, property taxes make the State the ultimate owner, to which you must pay rent. Perpetually. There is no full discharge of that debt, knowing or controlling how much it will increase or decrease over time, which happens, unlike the other taxes, without ANY regard to your circumstances.

          If you go to your local hardware store, buy a bunch of lumber, sheet rock, nails, paint, etc., you pay sales tax on that – using money that you paid income taxes on. In both cases a debt was incurred, known up front, and fully discharged. However, once you make those supplies – which you paid for with two taxes already – part of your property, the State automatically lays an effective ownership claim thereto — on things you already paid for, including the taxes on them, and supposedly “own”. If that becomes a part of your property, you can NEVER be said to actually own it – and that is a grave principle violation for me. You will have, in effect, donated your belongings to the State, which will then rent them back to you, holding it all as collateral ransom. Indefinitely.

          It is not the tax. It is rather how that tax is derived and applied, how maximally prone it is to abuse, and its ramifications as insulation for the State from any of your conditions and circumstances. But most of all, it is because it removes you, the one who paid for this property, as the ultimate owner.

          So while you THINK you paid $1,000 plus tax for some supplies, labor, etc., if those resources – which really do belong to you (rent free) prior to making any improvement – becomes part of your property, and that addition increased the assessed value of the property by several thousand, you will continue to pay rent for that for as long as you possess (not truly own) it. That is the problem I have – not with taxes, or government, but property taxes specifically.

          We got rid of personal property taxes (jewelry, appliances, etc.,) back in the 70’s, much to the chagrin of those (like NDU) who did studies that showed that the ND sky would fall, and local governments would dry up and starve – without them. It is time to make actual property ownership, and not conditional title rental privilege, an actual right. In at least one state.

  2. seaofstories: Well, you’d better tell the Keep It Local anti-measure 2 group of your position. As they have been telling everyone for decades that property tax cuts, abatements, forgiveness etc is paid for with economic stimulus raising all revenues without rate increases because of new business and new opportunities that grow the economy. You’re opinion is factually inept. Economics is driven by innovation, less regulations and less taxes than the next location. Measure 2 does two of the three – again – just as the opposition to the measure has been telling us for decades. Get rid of property tax – see the economy grow and pay for the cuts. Yes on Measure 2.

    • Well Freddy, I think you’re wrong, and their’s a significant body of economic theory and research which agrees with me. Example:

      First to paragraphs of the second section from the link above:

      In theory, expenditure taxes are better than income taxes, since they do not punish saving. Flat tax-rates on a broad base are less distortive than high marginal rates on a narrow base. By the same token, taxes on things that cannot be moved easily, such as property, are less distortive than taxes on mobile economic agents, particularly firms. Among expenditure taxes, a flat tax-rate on final goods is less distortive than a panoply of excise taxes since it affects spending decisions less. (That said, sometimes, such as with carbon taxes, the goal is to influence decisions.)

      An analysis of the relationship between tax structure and growth in 21 rich countries between 1970 and 2004 by Jens Arnold of the OECD bears out these theoretical insights. He found property taxes were the least damaging to growth, followed by consumption taxes. Income taxes were the least growth-friendly, especially those levied on firms. The study suggests that shifting tax revenues from income to consumption and property taxes could have a significant impact on GDP per head.

      Instead of trying to conflate my arguement with someone elses, please attempt to address my actual point. I didn’t say that property tax cuts or abatements or forgiveness pay for themselves, I said the opposite. Just because an arguement is a politically winning one doesn’t make it true.

      I agree with you that the economy is driven by innovation. I also agree with your premise that tax jurisdictions are in competition with one another to attract businesses which is what I think you were getting at with the “less taxes than the next location” statement. But businesses and their employees don’t just pay property taxes, they also pay income and sales taxes, and their employees and the firms consume public services like schools and emergency services and roads and sewer that are largely financed today with property tax dollars.

      If you eliminate the property tax, businesses and their employees are still going to demand those services and localities are going to have to find a way to pay for them in order to attract new firms. There’s no way to do that without collecting taxes of some kind, and property taxes are the least economicly distorting way to do so.

      It’s just simply untrue that this will pay for itself. If you takes $800 million away from the government and put it into the private economy your going to generate at most $40 million in sales tax revenue (5% * $800 million). So you’ve either got to cut $760 million in services or raise tax revenue from a less efficient source than the property tax. Note: I’m purposefully ignoring the velocity of money/economic multiplier because property taxes are less distorting than anything you’d replace them with and as a result the multiplier can’t make up the entire difference by definition.

  3. ND can’t even balance its budget. Running a surplus is overtaxing those of us in the private sector. I paid over five times more in state income taxes than federal income taxes last year. The greed of the public sector is disgusting!

  4. I think the politicians are scared that if Measure 2 passes, they’ll actually have to do some work. If taey hadn’t been lazy in the past, it might not have come down to this.

  5. As a former resident of ND, I’d say go for it. Already you have folks who live on “farms” and pay no property tax on that. Old ladies in small small towns pay more property tax than farmers.

  6. Who determines what the assessed value of that property should be? How is that determination made? The same people who have the power and authority to give the other guy an abatement or exemption.

    I am trying to absorb as much information as possible from the debate surrounding Measure 2 and I have to thank you Mr. Douglas, for offering one of the best analysis to date on the realities of property taxes.

    The government can tax me once on my income. It can tax me a second time on those same earnings when I purchase goods, but when it taxes perpetually taxes me for something I have paid for in full that is when I say enough if enough.

  7. Not everyone who opposes eliminating property taxes is “anti-government” or has a lack of trust in our government, especially since it is the people of our state who make the decisions on many things [through voting]. Many of us see the benefits that property taxes yield. Property taxes are much easier to deal with than sales tax, especially for those who are very budget-minded. It is impossible to determine just how much sales tax a household will pay in one year which is not the case with a fixed property tax amount. I don’t mind paying property taxes because of the areas that benefit from them. Granted, there are areas that benefit from sales tax, some of which are the same as those that benefit from property taxes, however, sales tax allocations are somewhat questionable.

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