North Dakota should break the link between property valuations and property tax burdens

Last week I explained why abolishing property taxes is a bad idea. I concluded by saying:

That is not to say that there are not grave problems with local property taxes as they stand, particularly in an environment like the last couple of years where property values rise faster than people’s incomes. But there are more practical fixes for those problems which I’ll write about next week.

So what should be done about the property tax?

The essential point is that the burden of the property tax — how much someone is required to pay — should not be driven by the valuation of the property.

The problem

Data from Zillow show that the Typical Home Value in North Dakota rose by 20% between December 2018 and May 2024, as Figure 1 shows.

Figure 1: Typical Home Value in North Dakota

Source: Zillow

The City of Bismarck provides a useful guide to how this increase in property values has driven an increase in property tax burdens:

To calculate annual taxes for a property, the taxable value is multiplied by the Mill Levy. 

Market Value 100,000 

Assessed Value (50% of Market Value) 50,000 

Taxable Value (Assessed Value Multiplied by 9% residential tax rate) 4,500

Annual Tax (Taxable Value multiplied by the *Mill Levy) 1,169.55

*Note: 2023 Mill Levy – .25990 (259.90 divided by 1,000) 

The mill levy is subject to change annually. 

The tax rates are 9% for residential property and 10% for commercial property.

Table 1 applies this process to the Typical Home Value in North Dakota: As we’d expect, we see that the property tax burden has risen by 20% in less than six years.

Table 1: Property tax for the Typical Home Value in North Dakota

Source: Zillow and City of Bismarck

The problem here, as I’ve written before, is that the fact that property valuations are up 20% over the period does not necessarily mean that the people in those properties have 20% more cash, and it is with cash, not assets, that we are required to pay our taxes. Raising someone’s taxes because the value of an asset they hold has increased – whether it be stocks or property – is a tax on an unrealized capital gain, and that is a bad thing.

Data from the Bureau of Labor Statistics show that, in fact, Average Annual Pay in North Dakota increased by 20.9% over the period 2018 to 2023. Of course, the Consumer Price Index (CPI) rose by 21.3% over the same period so that nominal increase of $10,964 in Average Annual Pay was a fall of $212 in real terms. But we must do the same calculation to the property tax burden for the Typical Home Value, calculated as above: As Figure 2 shows, in real terms, using annual averages, it increased by 18.1% in nominal terms but fell by 2.7% in real terms between 2018 and 2023.

Figure 2: Nominal and real increases in Average Annual Pay and Property tax burdens in North Dakota, 2018 to 2023

Source: Zillow, Bureau of Labor Statistics, Federal Reserve Bank of Richmond

But this isn’t the whole story. First, these are data for Average Annual Pay. If you were below the average — and half of people are by definition — you will have been squeezed. Second, this is data for pay, and if you’re income is derived from some other source such as Social Security, this might not apply to you. Finally, these are averages over a five year span. As property prices surged, the ratio of property tax burdens to Average Annual Pay rose to a peak in 2022 before moderating slightly as the Federal Reserve cranked up interest rates and property prices cooled.

So the problem of the burden of the property tax being linked to the valuation of the property remains to be solved. How do we do that?

The solution

Bear in mind that property taxes are payments for goods and services provided by local government, like schools, parks, and roads. If the cost of providing those goods and services changes the property tax will need to change also if you want to maintain a constant level of provision. It seems clear, then, that changes in the property tax should be linked with changes in the cost of providing goods and services.

Changes in such prices in an economy are generally measured by changes in the CPI. For this reason, we propose capping all local government spending growth at the annual rate of inflation.

This isn’t as straightforward as one might think. Government budgets have to be planned in advance over one or two years and we do not know for certain what the inflation rate will be over that period. So, we may want to use a forecast of inflation, although this might turn out to be off the mark. Alternatively, we might decide to use the Federal Reserve’s target of 2% growth, banking on the Fed to do their job. Again, they have failed at this in recent years, and a government which budgeted for a 2% increase in spending in 2020 might have been stumped. However, in many cases, the contracts that local governments sign with provider — staff and contractors, for example — are signed some time in advance.

In practical terms, a local taxing authority with a budget of, say, $100 million this year would see a budget of $102 million next year, $104 million the year after… It would then apportion this budget by its tax base however it wished.

Crucially, our proposal makes an allowance for an increase in the local taxing authority’s budget above the rate of inflation if the voters approve it by referendum.

This proposal breaks the link between the valuation of the property and the burden of the property tax. Changes in the cost of provision of goods and services will drive changes of property tax burdens, not changes in property valuations.

Crush and Cap

Over the last week, we have made a few proposals:

Together, these proposals would help North Dakota weather the hit to its economy from the Biden administration’s war on the extractives industry and get its economy growing again.