Decision time on property taxes

Ever-escalating property taxes is a problem that has vexed North Dakota homeowners for a generation. There are many factors which have led to it and, in this election cycle, voters are being asked whether they want to simply eliminate them and rely upon other means of paying for the services they currently fund. 

This isn’t a new idea. A similar ballot measure failed several years ago amidst charges that it was a half-baked idea which didn’t have a plan for specifically how to fund the local government services which property taxes currently cover. Opponents of this year’s effort claim it has the same flaws. Proponents of Measure 4 on this year’s North Dakota general election ballot claim that this proposal is more carefully crafted and that it will work.

It’s interesting to take a look at the players. Both groups are running ad campaigns to attempt to convince voters to vote their way. 

Those favoring measure 4 are largely made up of grassroots North Dakotans, organized by a small group which has crafted the measure and funded by those who support it. They believe that property taxes are out of control, that the Legislature and others have made failed efforts to control them, for years, and that the best solution is to simply force their elimination and force alternate means of funding government services which would not pose crippling tax burdens for homeowners.

Those opposing the measure are largely made up of what most would refer to as “special interests” — groups representing those whose “ox is being gored” as one longtime legislator often put it. Their reasonable contention, however, is that property taxes pay for important services on the local level, such as schools, city and county government including law enforcement, parks, libraries, and more, and that the proposal is dangerous because it offers no specific formula for replacing this funding and any other available funding could fall short. 

Opponents argue that the proposal has no specific plan for replacing lost funding and, therefore, should be rejected. Proponents argue that this is by design—that such specifics don’t belong in the Constitution and, since Measure 4 is a proposed Constitutional amendment, that those solutions should be implemented by the Legislature into state law. 

It’s evident that there is great interest but also a fair amount of confusion and indecision surrounding the issue, for most voters. Taking a big picture look may be the best way to get a handle on the problem, what’s been tried in the past to fix it, and whether this proposal is the best solution.

What’s the problem, how did we get here, and how do we solve it?

The Problem:

Property taxes have been increasing exponentially for many years — at rates much higher than inflation and incomes. It’s understandable, then, why they’re so painful and why they’re the number one complaint of the state’s taxpayers and the number one worry of many approaching retirement. 

Even those in their prime earning years often struggle to keep up, particularly if they own a nice home with a high and growing valuation. It doesn’t end there, however, and those who own modest homes struggle, perhaps even more, because tax assessors continually value their home at ever-increasing levels and because these taxes are based upon property valuations, the longer people stay in the same home, in some ways, the worse the problem gets.

Simply stated, just because someone bought a $60,000 home 40 years ago doesn’t mean that they can afford the taxes on a $400,000 home today…and it’s the same home! This is the struggle of the long-time, stable North Dakota homeowner.

At the other end of the housing market, many first and second-time home buyers are taking advantage of what many growing communities in the state offer — property tax abatements. These are significant discounts in property taxes, funded by local governments (read taxpayers) to spur growth in those communities. They’re typically offered on new housing for the first two years of home ownership in them. 

Predictably, when the two years is up, and the incentives expire, and the homeowners realize what the taxes will be on their homes, many “For Sale” signs go up. This, of course, is good for realtors and increasing sales in the real estate market but may not be the fairest formula for taxpayers. In fact, one could conclude that stable, long-term homeowners are also funding this program, while paying ever-increasing taxes, themselves. Some would call that “adding insult to injury”.

How did we get here?

Property taxes weren’t always the painful burden for taxpayers that they are today. Older North Dakotans will recall reasonable taxation of property. “What changed?”, you might ask.

Many years ago, when communities were careful about the valuation, for tax purposes, of their local taxpayers’ property (those are also local voters, of course), local elected leaders were careful to keep their taxes low. They saw other opportunities to raise revenues, however. 

One example was railroad property, which was richly valued for tax purposes. The railroads cried foul and sued. The court agreed and decreed that all property must be valued at true and full value. That started the spiral of ever-increasing property taxes.

Of course, local elected officials could solve the problem by simply lowering the amount property is taxed, based upon valuation (it’s a needlessly complicated formula — confusing by design, some believe), but it’s far easier just to let things take their course. Values of property go up. The level (think percentage) at which they’re taxed is fixed so, voila, the amount people pay in taxes go up…essentially automatically. Stealth tax increases, some have called them.

This creates a rather comfortable situation for local government officials. They can look their taxpayers in the eye, smile, and say “we didn’t raise your taxes” and, technically, they’re correct, because they didn’t increase the tax rate. The beleaguered taxpayer may look at the check they had to write this year, compare it with the check they wrote last year, note that it’s significantly higher, scratch their head and throw up their hands in frustration. 

Such is the plight of the North Dakota homeowner under today’s system.

How do we solve the problem?

As mentioned, local officials could solve the problem by simply lowering tax rates. The state Legislature could solve it by simply capping the level at which property can be taxed or at least the level at which those taxes can be increased. Neither group has risen to that challenge.

On the local level, officials have pointed to ever-increasing costs and contended that increased taxes are necessary to keep pace.

In the Legislature, proposals to cap property taxes have repeatedly failed, under fierce lobbying and pressure from local governments to defeat them. Several other attempts have been made by the Legislature to get at the problem, sometimes with convoluted unworkable formulas for taxpayers to navigate but in later years, usually via buy-downs of local taxes. These efforts have usually consisted of jackpotting money from the state coffers to local units of governments — typically school districts, which are often the highest taxers among local political subdivisions. With the funds have come requirements to lower taxes. 

The problem has been that taxpayers seldom see the actual savings, either because of the previously described ever-increasing valuations, or because local governments have used the legislative tax relief as an excuse to raise other taxes, claiming that local homeowners could now afford such increases because the Legislature had kindly lowered the level of taxes they were used to paying, previously. It’s often called “backfilling”

Perhaps the most recent example is the Legislature’s effort to create a meaningful homestead tax credit. The one which has long existed in North Dakota was designed to only slightly relieve property tax burdens for senior citizens who were of modest means. The recently passed one, on the other hand, offered a straight-up $500 reduction in taxes (read buy down, again) for every homeowner, for the property which is their domicile.

That sounds great but this year’s tax statements are revealing that the “backfilling” is happening again, on steroids, with many local governments promptly consuming the “tax relief” offered by the state, in increased taxes. Tax statements which have gone out recently reflect that, indeed, local governments propose to gobble up the $500 savings the Legislature gave them and homeowners hoped to enjoy — or at least most of it — again justifying it by pointing to the bottom line and assuring constituents that their taxes aren’t going up. “Yes”, homeowners might say, “but they’re not going down and that’s because you just spent my tax break”, and they’d be right.

The vexing question “how do we solve the problem” is precisely the one voters are being asked to grapple with.

Proponents of Measure 4 are essentially saying that it’s the solution, that the voters should take it into their hands — eliminate property taxes Constitutionally and force the Legislature and local government officials to deal with how to otherwise fund local government. They point to the large Legacy Fund and the proceeds from it which flow into the state’s general fund and, some contend, that would be enough to take up the slack. 

Opponents of Measure 4 warn that there is no plan to fund the budgetary void it would create, that Legacy Fund proceeds are not enough, that because the Measure allows for increases in “fees” at the local level (which, it should be noted, would typically require local voter approval) local taxpayers would soon be back in the same boat, paying these high fees. They contend that the Legislature and local officials can effectively deal with the problem.

Decision Time

It’s obvious that it’s decision time for North Dakota voters. The ads they’re seeing and hearing — on both sides of the issue — are, by definition, one-sided and only half of the story. It’s up to voters to sift through all of that, often without complete information. That’s why we, at American Experiment North Dakota, have attempted to put forth the big picture of the issue — so that you, the people, can better decide. We leave that choice up to you.