Measure 2, an initiative to eliminate property tax in North Dakota, will be up for a vote in June. Petitioned onto the summer ballot through eff orts spearheaded by the group “Empower the Taxpayers of North Dakota,” the measure, if passed, will constitutionally alter the state’s tax structure by eliminating property tax as a revenue source for local government entities.

While the prospect of eliminating property taxes is appealing on the surface, many in both the public and private sectors believe the proposal could be detrimental to state, county and local governments and businesses as lost revenue is drawn from other sources and control of local spending is shifted to the State Legislature.

“This is one of the most important issues voters in North Dakota will face in the coming year,” says State Tax Commissioner Cory Fong. He notes three main concerns arise when looking at the measure and its impact on the state. “This measure creates a tax shift, not a tax savings; it also creates a loss of local control; and it creates uncertainty for our state, tax payers and businesses at a time when North Dakota is prospering.”

A Tax Shift

“What this measure will do is turn upside down the balance the state has in gathering revenue through sales, income and property tax,” says Mark A. Johnson, executive director of the North Dakota Association of Counties.

According to the Office of the State Tax Commissioner, in 2010, North Dakota property taxes totaled $816.2 million and accounted for 37.6 percent of the total taxes collected in the state.

“The Legislature will need to make up that amount of money and they will make up this tax revenue from various other sources,” says Kelvin Hullet, president of the Bismarck-Mandan Chamber of Commerce.

The measure calls for the Legislature to direct revenues from other taxes,including oil and gas, tobacco, financial institutions, sales, individual and corporate, insurance premiums, and alcoholic beverage taxes, as well as lottery revenues “to fully and properly fund” entities currently supported by property tax revenue.

Proponents of the measure believe the bulk of the property tax revenue will get picked up by oil and gas taxes, but Fong cautions against depending on the oil and gas industry for longterm funding. “These taxes are phenomenal right now because production is strong, but this is a revenue source that can change quickly due to factors that we have no control over.

“You cannot remove over $800 million in tax revenue without raising other taxes,” Fong continues. “This measure is not so much of a savings for the taxpayers of the state, but a shift to other taxes.”

A Loss of Local Control

The measure also puts the Legislature in charge of the budgeting for all local entities across the state. “This takes away local control over local decisions,” says Connie Sprynczynatyk, executive director of the North Dakota League of Cities. “Local, elected leaders lose control over one of their most important functions – budgeting.”

Sprynczynatyk says the measure would impact 357 cities, 53 counties, 300 park districts, 180 school districts, over 1,000 townships and all other local entities that have levying authority; and the responsibility for the budgets of each of these entities would fall to the state’s biennial Legislature. “This extreme measure is going to create fiscal chaos, and it is also going to set up a tremendously competitive environment.”

School districts are just one of the local entities that would be impacted by Measure 2, says Dr. Jon Martinson, executive director of the North Dakota School Boards Association. With each school district vying for funding, this measure could create a lack of funding equity in schools across the state. “A commission has spent years working on a foundation aid formula to create equity in how school districts are funded,” he notes. “With Measure 2, this would go by the wayside.”

And school districts have already been impacted by Measure 2 just being on the ballot, adds Martinson. “The North Dakota Public Finance Authority will not allow political subdivisions to issue bonds after December 31, 2011, until the results of the June election,” he says, adding school districts previously had the authority to go to the public proposing bonds paid through local property taxes to fund specific projects. “If Measure 2 passes, it negates bonds.”

This could change the long-term planning strategies for many entities. “Without property taxes, it is going to be much more difficult for local entities to get future projects approved,” says Fong.

Currently, property taxes are set by local governments and citizens are able to participate in the decisionmaking process regarding projects the revenues fund, says Hullet. “The measure really reduces citizen participation and takes away decisions from a local level.”

A Measure of Uncertainty

“There are a lot of unanswered questions about what this measure does and means,” says Fong. “The passing of this measure could be very hard on North Dakota, especially at a time when things are going well. Why would we want to upset this with an uncertain tax code?”

Martinson says it also is expected the state will be drawn into litigation over the measure. “A number of lawsuits will likely be filed over the interpretation of the measure’s language,” he says. “It is vague in terms of how much funding goes to each area and where exactly the funding will be coming from.

“When people hear property tax will be going away, they don’t think of where the lost revenue will be coming from,” he continues. “It is important individuals read the measure so they realize the funding is going to have to come from someplace.”

Measure 2 is proposed as a constitutional amendment, meaning, if it should pass, the only way to change it in the future is to again put the measure to a public vote, adds Hullet. “This also takes away the ability of the Legislature to change this measure down the road,” he says.

The Impact on Business

“What will happen with local business is, while property tax is eliminated, there will be other taxes to take its place,” says Hullet. “This will create other costs to both businesses and consumers.”

Leslie Bakken-Oliver, a member of the Bismarck-Mandan Chamber board of directors and attorney with Vogel Law Firm, agrees local businesses will feel the impact of additional taxes as a result of Measure 2. “Local businesses will pay higher corporate taxes and local business owners will pay higher individual taxes,” she says. “An increased sales tax also will impact local businesses.”

The Bismarck-Mandan Chamber board of directors approved a reso lution opposing the measure, says Bakken-Oliver, noting the board’s continued focus on the need to keep decisions regarding local expenses at a local level and to prevent an increase in other taxes. “Property taxes serve a valid local function by providing funding for local governments,” she says. “It is unrealistic to believe that each level of local government can be efficiently managed and financed through the legislative process.”

The uncertainty of the measure’s language and its impact on the state also could make businesses think twice about investing in North Dakota, shared Fong.

“We would be the first state in the U.S. to eliminate property tax,” adds Johnson. “There is a reason why other states haven’t done this. We need to have balanced revenue sources.”

By Kylie Blanchard, Clearwater Communications