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Economic options weighed in effort to stem outmigration

Here's one among many questions North Dakota must grapple with while charting a more robust economic future: Should growth come primarily from inside or outside the state's borders?...

Here's one among many questions North Dakota must grapple with while charting a more robust economic future: Should growth come primarily from inside or outside the state's borders?

Another question, an idea rejected by lawmakers last year, will get a fresh look: Should the state scrap its corporate income tax to spur business growth?

Study committees during the North Dakota Legislature's interim are examining those questions and others as efforts continue to boost the state's economic performance to stem its chronic outmigration, as highlighted a year ago in The Forum's series "Saving North Dakota."

And this year's race for governor and legislative contests will, in large part, be a referendum on voters' contentment with the direction the state is heading.

Last year's session wrapped up with few major initiatives acknowledged to spur economic growth.


Majority Republicans tout the state's balanced budget, its relative stability in a time of turmoil, the slowdown in the rate of growth in state spending, and holding the line on taxes as achievements.

Minority Democrats are less impressed, and more likely to argue that bold action is needed.

"From what I've seen from them, generally, is the status quo is just fine," said Rep. Mary Ekstrom, D-Fargo, a member of the interim economic development committee. "Just hunker down and ride it out. Why change anything? The message I'm hearing from them is stay the course."

Not necessarily, said Rep. Rick Berg, R-Fargo, House majority leader and chairman of the interim economic development committee. He's organizing a series of "business congress" meetings around the state beginning later this month in Fargo.

"It's going to be extremely focused on business climate and economic development," Berg said.

To help guide legislative policy, business people will be asked two basic questions: What barriers to growth do you face and is there anything the state can do to help business grow?

Perhaps the most drastic idea under consideration is the study of whether to eliminate state personal and corporate income taxes. Together, they contribute almost 30 percent of state government's general fund.

"The fact is, we're still losing people," said Sen. Randy Schobinger, R-Minot, an advocate for eliminating the state's income tax. He was referring to the latest census figures showing the state lost 74 people last year.


"There's a way to turn that around," Schobinger added. "We need to muster the political will."

The interim taxation committee will study the effects of eliminating the income tax. Also, during the interim economic development panel's examination of North Dakota's business climate, the state's corporate income tax will come under fresh scrutiny, Berg said.

Lacking capital

As a revenue source, the corporate income tax has declined over the past decade, in North Dakota and nationally, said Kathy Strombeck, research analyst for the state tax department. The number filing state returns peaked at about 10,400 in the late 1980s, and now stands at about 9,000, she said.

One reason for the decline is a continuing shift to non-corporate business types, such as limited liability companies or limited liability partnerships. Those businesses don't pay corporate taxes; instead, their owners pay individual income taxes.

Another reason is the success of corporations in avoiding taxes, she said. Given the downward trend, states are increasingly willing to consider dropping corporate income taxes, Strombeck said.

"I know some people view that as outlandish, but that certainly has to be part of the discussion," she said.

The problem, of course, is replacing corporate income tax revenues, which contribute 6 percent of the state's general fund and last year totaled $46 million.


Economists and economic development experts agree that the path to a more vibrant economy lies in creating "new wealth" -- revenue captured by selling goods and services to customers outside the region.

At the same time, experts agree that the state can't neglect its homegrown businesses, which it must keep and help to expand.

Rep. Jim Kasper, R-Fargo, falls squarely in the grow- from-inside camp. In interim legislative meetings, he's pushing a proposal to create a low-cost loan pool for existing North Dakota businesses.

"Most businesses don't have the capital to expand," he said.

North Dakota's current economic development strategy largely is geared to nurturing the primary sector -- businesses such as manufacturers or export service companies that sell mostly out of state, Kasper said.

"It seems to focus more on out-of-state companies that are in the manufacturing sector," he said. "We're discriminating against many companies that can't meet the formula that was developed many years ago."

To come up with the money for a loan pool, Kasper advocates investing money from the state-owned Bank of North Dakota. To establish a $50 million fund, it would cost $1.5 million a year -- the profit the bank realizes on deposits earning 3 percent interest.

Ekstrom agrees the state should use Bank of North Dakota profits to expand access to low-interest loans for entrepreneurs.

Significantly expanding the loan pool probably would have to be done gradually, phased in over five to 10 years, to wean state government from its dependence on state bank profits, Ekstrom said.

A leaner government

But Sen. Tony Grindberg, R-Fargo, disagrees with Kasper's proposal. State incentives should continue targeting primary sector businesses because they bring in outside dollars to the state.

"We have to be focused with our state resources," he said. "Any taxpayer dollars that we invest have to demonstrate that they can expand the tax base."

Grindberg, who heads the research park at North Dakota State University, believes the state has done a good job in providing loan and workforce training programs to foster economic development.

One new program, a measure he sponsored that passed last year, provides a $5 million venture capital fund for seed money to spin off businesses resulting from university research. State renaissance zone tax breaks, originally intended to revitalize downtowns, also were expanded to include university research parks.

What's left, Grindberg said, is to continue aggressively marketing North Dakota's business climate, with its relatively low costs, its well-educated work force, and its expanding technology base.

To help do that, $200,000 is earmarked to promote and market the research corridor between NDSU and the University of North Dakota in Grand Forks, Grindberg said.

This spring, construction will begin on a new plant for Alien Technology Corp., a research park tenant and leader in tiny "smart tags" that use nanotechnology radio frequency devices as sophisticated devices to track inventory, among other uses.

The announcement last year that Alien plans to create 300 new jobs in its start-up phase was heralded as a sign that North Dakota can compete in the emerging nanotechnology industry.

Perhaps surprisingly for a Democrat, Ekstrom believes state government must become leaner to help improve the state's economic prospects.

She cited a recent ranking published by Governing magazine, which last year ranked North Dakota fourth for the number of employees per 10,000 population: 352. By contrast, South Dakota ranked 18th, with 230. The national average was 177.

"I think in states of similar ilk it's telling," she said. Reductions in state employees should come gradually, through not filling vacancies left by retirements or resignations.

Incremental approach

Another idea for helping develop business under legislative review is a proposal, championed by Tex Hall, chairman of the Three Affiliated Tribes at Fort Berthold, to form partnerships between native and non-native enterprises.

Dakota businesses can form partnerships with American Indian entrepreneurs to capture lucrative federal contracts, said Berg, whose committee is receptive to the idea. Around $10 million in federal contracts are available annually, he said.

All in all, the early signs of the legislative study committees don't appear to be forging out in bold new directions.

Rep. Elliot Glassheim, D-Grand Forks, the assistant House minority leader, said that's disappointing, given the state's continual struggle to create better opportunities.

"There's very little excitement, there's no new programs," he said.

On the other hand, he added, the work of economic development is often unglamorous.

"On the whole, it is incremental," Glassheim said. "It's building on strengths. It's getting the word out."

Readers can reach Forum reporter

Patrick Springer at (701) 241-5522

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