Letter: An economics lesson on tax reform
Jeremy Jackson of Fargo writes, "Property taxes are set locally, and the revenue from property taxes is spent on local services such as public schools, parks, and roads. Therefore, we should address property tax concerns at the local level where local politicians are accountable for how money is collected and allocated."
North Dakota’s tax coffers are overflowing, and politicians are looking for ways to return the excesses to the hard-working wage earners of the state. One recently announced plan would drastically lower the state income tax. Under the plan , those with adjusted gross income of up to $54,7235 for single filers or $95,600 for joint filers would pay no income tax. Income above those values is taxed at a flat rate of 1.5%.
Since the announcement, some have renewed calls for North Dakota to eliminate or buy down property taxes. This is a bad idea, and I wrote about the reasons why in a previous letter ( Don’t abolish property taxes ). While there are many states, including South Dakota, that have no income tax, there are zero states who have eliminated property taxes—and for good reason.
Property taxes are set locally, and the revenue from property taxes is spent on local services such as public schools, parks, and roads. Therefore, we should address property tax concerns at the local level where local politicians are accountable for how money is collected and allocated.
When it comes to income tax reform, there is a plethora of academic literature examining the effects of different policies on income redistribution. Economics has a long tradition of respecting the geographic mobility of resources and the entailing consequences of taxation. Because residents and businesses are mobile, they will tend to move to locations with lower tax rates. One way to avoid a tax is to move to a different area where the tax rate is lower. This realization spawned a research field known as tax competition.
State and local governments compete for mobile businesses and citizens. This means attempts to redistribute income using state or local personal income taxes are not very effective. Economists Feldstein and Wrobel addressed this in their 1998 paper “Can state taxes redistribute income?” published in the "Journal of Public Economics." They conclude in the negative, because efforts to increase redistribution with income taxes are offset by the effects of migration.
A similar result is supported by the work of Cebula and Alexander (2006) published in the "Journal of Regional Analysis and Policy." They find that states with a lower individual income tax burden see an increase in net in-migration. Related work found that individuals migrate toward states with relatively low tax burdens in general. In other words, a low flat rate can attract workers.
If we want our state and local governments to operate efficiently, and if we are serious about the workforce needs of our state, we should focus less on efforts to eliminate the property tax. No state has abolished property taxes, and there is good reason why. If North Dakota wishes to reduce the tax burden on its citizens, the income tax is a much better target.
Jackson, Fargo, is the director of the Center for the Study of Public Choice and Private Enterprise and professor of economics at North Dakota State University. His views are his own.
This letter does not necessarily reflect the opinion of The Forum's editorial board nor Forum ownership.