Why abolishing property taxes is a bad idea

Nobody — or almost nobody — enjoys paying taxes. If they did, we wouldn’t have to threaten people with jail to make them pay. They are, at best, a necessary evil.

That is not to say that all the tax we pay is “necessary.” We could very well pay some lower amount without noticing. Government is in the business of spending other people’s money and money spent that way is rarely spent as well as when someone spends their own.

But neither does it mean that none of it is necessary. Stuff needs to be paid for, like schools, parks, and roads. At present, local property taxes go towards these costs. Census Bureau data show that, in 2021, local governments in North Dakota collected about $1.2 billion in property taxes, accounting for 28.6% of total local government revenues in the state.

If, as some have suggested, these local property taxes are abolished, the question has to be asked: “How will we pay for those schools, parks, and roads?”

The simplest course would be to cut spending accordingly. There are, even among supporters of property tax abolition, few takers for a near 30% cut to local government spending.

Local governments could raise the revenue by increasing other taxes. The second biggest source of revenue for North Dakota’s local governments are sales and gross receipts taxes, which brought in $301.3 million in 2021. If we assume an average local sales tax rate of 1.96%, that implies a sales tax base of $15.4 billion (($301,278,000 / 1.96) * 100). To fill that $1.2 billion gap from abolishing local property taxes, the average local sales tax would need to rise to 7.9% ($1.2 billion / $15.4 billion *100), easily the highest in the United States and on top of the state sales tax of 5.0%. Research shows that the most notable impact of state marijuana legalization is a boost to tax revenues, so supporters of property tax abolition might want to support the current push to legalize the Devil’s Lettuce in North Dakota.

Some of the proponents of local property tax abolition have argued that the state government should make up the shortfall. Rob Port notes for the Fargo Forum:

And then there’s the Legacy Fund. It’s a big pot of money — the principal is currently over $8.6 billion — and in the last full budget cycle, it produced nearly $436 million per year in revenue. It’s expected to have produced about $486 million by the current fiscal year’s end.

Given annual property tax revenues of about $1.4 billion at present, this still leaves us with a $1 billion hole to fill. Indeed, its about twice what the state government collects in individual income taxes.

There are political concerns about making North Dakota more fiscally centralized like its eastern neighbor. But aside from that, the simple numbers make the abolition of local property taxes a fiscal bridge too far.

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.