Two and half cheers for North Dakota’s legislators

Across the Red River in Minnesota, the state government saw a forecast surplus of $18 billion as an opportunity to actually raise taxes in the last legislative session. North Dakota, happily, moved in the other direction.

Among other things, H.B. 1158 which was passed by the legislature and signed into law by Governor Burgum, reduces North Dakota’s individual income tax rates, converting the previous five-bracket structure with a top rate of 2.9 percent into a more consolidated schedule with a top rate of 2.5 percent, a lower intermediate rate of 1.95 percent, and a sizeable zero bracket. And there is more to come: Burgum said the legislation “moves us further down the path toward becoming a zero-income-tax state.”

There are currently seven states which do not tax individual income at all – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming – and these are soon to be joined by New Hampshire. Iowa’s Governor Kim Reynolds wants to add her state to that list as does Mississippi’s Governor, Tate Reeves.

If you can’t abolish your income tax, a flat rate is the next best thing. In the past two years, five states – Iowa, Mississippi, Georgia, Arizona, and Idaho – have passed laws to implement a flat tax.

This is part of a tax cutting revolution sweeping across the United States. “The past three years have seen the largest wave of state-tax cuts in the modern era, certainly since income taxes were created over a century ago at the state level,” the Tax Foundation’s Jared Walczak told National Review recently. “We have seen more than half of the states with income taxes cut their top rates. We’ve seen trimming of rates in other taxes, including 13 states with corporate-income-tax cuts, a couple of states with sales-tax cuts, and trimming other taxes as well.”

Even policymakers in ‘Blue’ states are getting in on the act. Faced with an exodus of residents to other parts of the United States, Connecticut’s Democratic Governor Ned Lamont wants to cut his state’s income-tax rate on households earning between $20,000 and $100,000 from 5 percent to 4.5 percent, and from 3 percent to 2 percent on incomes below that. In Massachusetts, his fellow Democrat, Maura Healey, is pushing for a reduction in the short-term capital gains tax rate from 12 percent to 5 percent and a hike in the threshold of the estate tax from $1 million to $3 million. “I want people to stay in Massachusetts; I want businesses to stay in Massachusetts,” she said recently.

The healthy state of state budgets which is creating the environment for these cuts is often attributed to vast infusions of federal cash during the COVID-19 pandemic, and it is argued that permanent tax cuts based on such a transitory phenomenon are unwise.

But that isn’t the cause of state’s rude fiscal health. The 2017 Tax Cuts and Jobs Act broadened the federal tax base which most states conform to, so there can be lower rates without commensurate reductions in revenues. The Supreme Court’s 2018 decision in South Dakota v. Wayfair also boosted state revenues by clarifying the laws covering sales taxes on online purchases, with sales-tax revenue increasing as a result.

North Dakota’s policymakers still have work to do. They should eliminate the “marriage penalty” in the individual income tax and enact a range of reforms to corporate taxation: Index the corporate income tax for inflation, repeal the “throwback rule,” and exempt business inputs from the sales tax. More importantly, they should press on with elimination of the state’s income tax. Hence, only two and a half cheers for this session.

But, while Minnesota embarks on a doom loop of higher taxes and government spending, lower economic growth, and higher rates of net domestic out-migration, North Dakota has joined a growing number of states with leaders from both parties seeking to reap the rewards of lower taxes.