MINOT — I've been covering North Dakota politics for 23 years now, and during that time the Legislature has had two priorities regarding the state's income tax.
The first is cutting rates. During the 2023 session, lawmakers passed, at the behest of then-Gov. Doug Burgum, a reform which reduced the state's individual income tax brackets from five to three, with the bottom bracket paying a 0% rate and the top bracket paying only 2.25%.
The second is doling out tax credits for just about everything you can imagine. Reviewing the history of income tax reforms
assembled by Tax Commissioner Brian Kroshus' office,
lawmakers have created or expanded tax credits in every legislative session for the last couple of decades. During their 2023 session alone, lawmakers:
- Expanded a tax credit for equipment purchased to automate manufacturing
- Initiated a tax credit for adoptions
- Initiated tax credits for donations made to organizations such as child-placing agencies and pregnancy help centers
- Made permanent a tax credit for employing individuals with developmental disabilities or severe mental illness
- Initiated a new tax credit for employing apprentices
- Created a new income tax deduction for law enforcement retirement benefits
- Created a new income tax deduction for military pay
- Expanded the income tax incentive period for the Renaissance Zone program
The thing is, these two priorities are at odds with one another. The various credits and deductions lawmakers push are intended to achieve certain social or policy outcomes. For instance, we give a tax credit for employing people with disabilities because we want more of those people employed.
However, the utility of these initiatives is diminished every time the income tax is reduced.
What use is a tax credit for someone who pays nothing, or next to nothing, in income taxes?
![North Dakota Rep. Craig Headland, R-Montpelier, speaks at press conference flanked by Gov. Doug Burgum on Thursday, April 27, 2023.](https://cdn.forumcomm.com/dims4/default/0f109a5/2147483647/strip/true/crop/2492x3323+674+0/resize/330x440!/quality/90/?url=https%3A%2F%2Fforum-communications-production-web.s3.us-west-2.amazonaws.com%2Fbrightspot%2F3d%2Fbe%2F030988774939a341362b0c1e7d85%2Fheadland-gov.jpg)
Many of these credits and deductions still have an impact because businesses and people with large incomes still have significant income tax burdens. North Dakota's personal income tax is very, very low, but per the most recent monthly revenue report from the Office of Management and Budget, it has still produced more than $505 million in revenue so far this biennium.
But for many North Dakotans, the burden of the state income tax is negligible, and thus the benefit of certain tax credits is dubious.
This came up during a recent floor debate over House Bill 1244 , introduced by Republican Rep. Mike Schatz, which in its original form would have provided a $10,000 tax credit per homeschooled child in a household. The version of the bill that passed the House on a 65-27 vote reduced that credit to just $1,000, but even at that reduced level, there was concern expressed among lawmakers that, thanks to income tax reductions, this was essentially a subsidy for the wealthy.
ADVERTISEMENT
After all, those in the lowest tax bracket are paying a 0% tax rate. This credit would be useless to them. “Our prior income tax rate reductions have put us at a level of taxation where credits have become somewhat useless,” said Rep. Craig Headland, R-Montpelier, during a committee discussion.
He's got a point, and to the extent that it's a problem, it's bigger than tax credits for homeschoolers.
I hesitate to call this a problem because lawmakers have eliminated the income tax burden for many North Dakotans. That's far from a bad thing. Also, we should be skeptical when politicians start trying to use the tax code for social engineering. These policies can produce some unseemly outcomes.
For instance, Todd Berning, the founder of Epic Companies, whose financial freefall has made headlines over the last year, came under fire from lawmakers in years past for using tax credits for angel fund investments for various dubious schemes.
Any given tax should be simple, broad in its application and low in its rates. When politicians start making carve-outs in the code, they complicate the law and narrow the tax base, even when they have the best of intentions.
But philosophical matters aside, as a practical matter of policy, North Dakota lawmakers are at an inflection point when it comes to this sort of initiative. The more they reduce income taxes, the less effective the myriad tax credits and deductions they've created will be.