Bonus holiday edition Ask Your Government

Dear Teri,

If North Dakota is the No. 2 producing oil state in the United States, then why don’t we do what Alaska does and give the citizen a percentage of the money from the oil that the state produces?

Todd Gonser

Dickinson

Thanks for writing! I hear this question often lately, so it’s a good time to do a refresher on this issue. I’ll give a short answer and then a longer one about why the state doesn’t do this.

The simple answer: The state Constitution doesn’t allow it. North Dakota has a complex system for how it distributes oil tax money that doesn’t leave a lot of “free” money left over. It would require state law and constitutional changes to change this system. Plus, Alaska has much more money.

Now, here’s the longer explanation, starting with Tax Commissioner Cory Fong’s response:

“Many have suggested that the state of North Dakota make direct payments back to North Dakota’s residents using the surplus oil/gas tax revenues, similar to the state of Alaska’s program. 

“In order for North Dakota to do something similar, our state Constitution would likely need to be changed. Currently, the North Dakota Constitution prohibits the state from ‘gifting’ state money unless it is given in support of the needy or some other public good.

“Even if the state Constitution allowed for direct payments back to our state residents, those payments would be spread among all qualifying recipients. Depending on the requirements of the program, the payment per person may not amount to that much.”

The reason Fong says this is because the state has a complex formula for how it distributes/spends oil tax money, which I explained in two columns several months ago.

Total oil tax collections for this biennium – through May – are $714.1 million in production tax and $787.7 million in extraction tax, or about $1.5 billion, according to the state Tax Department.

A chunk of the oil tax revenue benefits the oil and gas counties. From July 1, 2011, through this May, oil and gas producing counties (and cities/schools/townships) received a combined total of $93.7 million through the distribution formula, said Kathy Strombeck of the Tax Department.

There was also $100 million in oil tax money set aside to provide energy impact grants to the oil and gas counties, as well as $4 million for oil and gas research.

Several western North Dakota officials have told legislators they need to send more money back to the oil counties, so these numbers could go up in the future.

Other oil tax money goes into accounts that support property tax relief ($261.8 million worth so far and growing), K-12 education, infrastructure and flood projects across the state.

Plus, 30 percent of oil tax revenue is locked up in the Legacy Fund until 2017. The fund has rules for how money can be spent after that. As of June, there was nearly $397 million in the fund.

One could point to the oil tax revenue that goes into the general fund as money that could go back to North Dakota residents. Right now, there’s a cap of $300 million in oil revenue that can go into the general fund.

Legislators will more than likely use surplus general fund money for further tax relief and infrastructure needs during the next session.

But, for fun, let’s say the $300 million was slated to go back to North Dakota residents instead. If there are 684,000 North Dakota residents, that would come up to $438 per person.

But, keep in mind there would also need to be additional state employees hired to accept and review applications and to manage and distribute this money like there is in Alaska.

Alaska, which has a population of about 723,000, has a dividend division with 81 employees. The division’s operating budget for fiscal year 2013 is $8.4 million, said Jerry Burnett of the Alaska Department of Revenue. Since North Dakota makes budgets in two-year periods, that would be $16.8 million.

Alaska also has a Permanent Fund Corp., which manages the now $40.5 billion fund. The corporation has an operating budget of approximately $11 million for fiscal year 2013 with about 40 positions, Burnett said. They are authorized to spend a little more than $100 million in external custody and management fees in fiscal year 2013, he said.

The Alaska Permanent Fund Corp. is self-supporting. All expenses are paid out of the revenue generated by the fund’s investments, said spokeswoman Laura Achee.

The expenses of the Permanent Fund Dividend Division are also paid out of fund earnings (subtracted from the dividend lump sum before it is divided into individual dividend payments) and not from the general fund, she said.

So, once all of that is taken into account (plus paying for North Dakota office space for these employees), each North Dakota check would likely be worth less than $75. And the Legislature wouldn’t have that money for state projects.

Granted, the Legislature could look at raising the cap on how much oil tax revenue the general fund receives (as it has in the past), but that would mean taking money away from the infrastructure and the disaster relief funds.

North Dakota taxpayer advocate Dustin Gawrylow of Bismarck-Mandan doesn’t think there should be a direct payment of funds to residents.

“First off, those funds are not always going to be there,” he said. “What we should do with this oil revenue is look at our entire tax structure and rebalance it … while it is a populist idea to start cutting checks to everybody, the better thing would be to take that (money) and use it to prevent taxes from ever having to go up again in the state.”

One could point to the interest and earnings of the Legacy Fund as a potential for returning money to residents in the future. Now at almost $400 million, it’s in the beginning stages compared to Alaska’s $40.5 billion permanent fund.

Here’s more on Alaska’s system from my past and recent discussions with Burnett from the Alaska Department of Revenue:

“It is a common misperception outside of Alaska that the state is paying out a portion of its oil royalties, or even oil taxes, to residents … the dividends that are paid to residents come from the earnings on royalties that are invested in a range of assets including stocks, bonds and real estate.” 

In 1976, there was a constitutional amendment in Alaska that set up the permanent fund, which receives 25 to 50 percent of the rents and royalties from minerals – which are almost entirely oil.

The principal of the fund cannot be spent, but the earnings can be appropriated by the Legislature.

In the early 1980s, the Legislature set up a program where half of the average of the previous five years’ earnings on the permanent fund would be returned to state residents each year—a permanent fund dividend.

Dividend amounts have varied from hundreds of dollars to more than $2,000. Last year’s dividend was $1,174, Burnett said.

In years when there’s a need for additional money, there’s been pressure to use the fund for other things. “But people become very bought into the idea of getting money every year, so it does make it very difficult once you start doing this to use the money for anything else,” Burnett told me a few years ago.

Do you have a question for a North Dakota state government official or agency? Send us your question, and we’ll do our best to find an answer.

E-mail politics@wday.com (Subject: Ask your government).

You may also write to Teri Finneman c/o Forum Communications, Press Room, State Capitol, Bismarck, ND 58505.

Please include your name, town and a phone number to reach you for verification.

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