North Dakota Considers Eliminating Property Taxes

A constitutional initiative on North Dakota’s November ballot would prohibit all taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on real or personal property based on assessed value (except to pay for bonded indebtedness), which could make North Dakota the first state without property taxes. (Theoretically, lawmakers could adopt a new mechanism to tax property, such as a square footage model for real property, though such alternatives are flawed and unrealistic.) Repealing the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. is an idea with obvious appeal—but it’s a choice that could come back to haunt North Dakotans.

The ballot measure would not deliver on the economic benefits anticipated by its supporters and would undermine the state’s economic competitiveness. There’s a genuine need for property tax reform and relief, but outright repeal of the property tax is unsound and would ultimately force a shift to more economically harmful taxes and to state control of local revenues.

The constitutional initiative has three main weaknesses: (1) moving North Dakota further away from the benefit principle of taxation, which holds that those who receive or benefit from public services should pay for them; (2) shifting responsibility for local revenue from local to state government; and (3) creating a structural fiscal deficit, nearly $1.3 billion per year, which would need to be replaced with other more harmful taxes at the state and possibly local level. These three factors would destroy local governments’ ability to make independent funding choices and reduce North Dakota’s overall tax competitiveness relative to other states with more stable and pro-growth funding mechanisms.

Notably, this measure comes in the immediate aftermath of the largest tax cut in state history. In 2023, Governor Burgum (R) signed HB 1158, which provided a tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. of up to $500 for homeowners on their primary residence and $358 million in income tax relief. The bill also compressed the top four brackets into two and reduced rates.

Therefore, North Dakota residents are already benefitting from recent concrete legislative changes. The Tax Foundation publishes an annual index comparing the tax structures of each state and ranking them accordingly. In 2024, North Dakota ranked 17 overall, ahead of Minnesota (44), but behind both Montana (5) and South Dakota (2). North Dakota ranked in the top 25 states in all categories except sales taxes (32), with a property tax subindex ranking of 7. Notably, North Dakota collects less state and local property taxes per capita than neighboring states. Rather than upend an otherwise regionally competitive property tax, the state should build on recent reform efforts and seek ways to provide sound structural property tax relief.

The choice before North Dakotans is stark. Voters can continue with a stable and reliable property tax structure, through which those who benefit the most are responsible for paying their share of consumption, or they can opt to shift the responsibility for some local revenue to the state, effectively ending local control of spending decisions. Importantly, if the latter choice prevails, local governments could still be responsible for the provision of millions of dollars’ worth of public goods and services, as the state would only be responsible for replacing a small portion of lost property tax revenue. Local governments would inevitably experience a revenue shortfall without an obvious or efficient replacement.

Still, there would have to be some replacement, somewhere. Eliminating the property tax will likely be accompanied by increases to existing taxes at the state level and/or adoption of new taxes by local governments. For example, lawmakers may consider increasing the state income tax, potentially significantly, to replace even a modest share of local revenue. This would hurt North Dakotans and the state’s overall economic competitiveness. Local option sales taxes, while less economically harmful than income taxes, are less efficient than property taxes, so a shift from property to sales taxes would hurt the state’s economy.

North Dakotans are not alone in their search for property tax relief. Around the country, property valuations have been soaring, which can lead to significantly higher property tax bills if rates are not reduced. As a result, lawmakers have sought effective remedies. Unfortunately, in the haste to offer relief, some have chased after unsound solutions.

On the surface, it seems logical to counter rapidly increasing property valuations with caps on assessments. Unfortunately, this creates economic distortions by disincentivizing new construction and major home improvements, both of which could trigger a new and higher assessed value. Assessment limits also create a “lock-in” effect, through which homeowners opt against seeking a larger home when their purchasing power or family size grows, thereby constricting the supply of starter homes to the detriment of lower-income and younger homebuyers. Lastly, these limits could result in similar properties in the same neighborhood having dramatically different property tax obligations depending on purchase date—benefitting those with longer tenures in their homes and, effectively, penalizing more recent purchasers.

When taxpayers are saddled with the potential for increased property taxes, the idea of capping the property tax rate may appear to be an appealing relief option. However, here too, what may seem to be the logical choice is ineffective because a lower tax rate does nothing to counter rising property values—the source of most of the (valid) discontent.

A sounder way to provide property tax relief lies in a well-structured levy (or revenue) limit. Levy limits focus on the amount of revenue raised by government and can feature rollbacks or reductions to ensure that collections do not rise in the aggregate above a set amount. Lawmakers may also set a revenue growth rate and adjust for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . This means there could be variations in property taxes owed but all within the context of an established revenue limit. For example, as valuations rise, property tax payments may decrease to ensure that local government does not receive a windfall but remains adequately funded. North Dakota currently employs both rate and levy limits. Lawmakers would do well to reconsider the rate limit and find mechanisms to make the levy limit more effective.

The current constitutional initiative has many flaws. Chief among them is that local governments would be stripped of their ability to assess property taxes, the backbone of their tax revenue. North Dakotans desiring local control should rightly be concerned by the real prospect of losing it. Adding the likelihood of increased, and more harmful, taxes makes eliminating the property tax particularly expensive. Secondary effects include an unnecessary and reckless transfer of state funds to all other taxing districts to address the massive revenue shortfall associated with the passage of this constitutional initiative. North Dakotans are already benefitting from the largest tax cut in state history. Lawmakers should build on these recent reforms to promote economic growth and provide fiscal security to state and local governments. Eliminating the property tax will unfortunately set North Dakota back in significant ways, making the state a national outlier and eroding regional competitiveness.

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