North Dakota Senate Report
The legislature had a two-day recess at the beginning of this week to get the systems recharged for the next set of bill hearings. We are currently $800 million over budget on our spending bills. That is due in large part to the overlap of bills in the House and Senate that affected the same budget. We now begin the reconciliation process.
Last week I stated in my legislative report that I would continue the discussion on tax issues. Most tax issues are very complex, and it would be hard to describe the formulas in depth within the constraints of this newspaper column. I will try to give a condensed overview.
There has been quite a bit of discussion in the media about oil taxes with numerous comments saying that the legislature is lowering taxes for big oil companies. We are lowering the tax rate by 2 percent, but not without some very significant tradeoffs. Currently we have a 5 percent production tax and a 6.5 percent extraction tax on oil wells. However, the formula contains several triggers in it that adjust the tax rate if the price of oil goes below a certain point or if the production of the well falls below a certain level. So with those triggers in place we have never reached an effective tax rate of 11.5 percent.
The first 10 years of this decade we ranged from 8.7 percent to 9.8 percent effective tax rate and only these past two years have pushed up to 10.6 percent.
One of the major components of the tax formula that keeps us from reaching the full 11.5 percent is what is called a “stripper well” exemption. Wells reach stripper well status when they fall below 50 barrels a day. When they reach that point the extraction tax goes away, and they only pay the 5 percent production tax. The new technology of today allows for the re-drilling and fracturing of those wells which increases the production, but the stripper status remains. In addition because of horizontal drilling the oil wells are now on 1,280- acre spacing units. If there is a stripper well within that spacing unit, all subsequent wells drilled in that unit get stripper status.
Our new law going forward eliminates that stripper tax on those 1,280-acre spacing units and each well is treated as a standalone unit. Revising the stripper exemption and removing the trigger on pricing, which is decoupling the tax policy from the price of oil, we will have a much more stable oil tax structure, and will actually improve our revenue by over $600 million over the next 10 years.
Income tax reduction
At this point in the session we have proposed lowering income taxes by $200 million. This will be the third session that we are lowering income taxes, and each session North Dakotans’ average personal income has grown by 10 percent.
We are also proposing a $50 million reduction on corporate income tax which we have done in past sessions as well. Some are critical of giving corporate tax deductions, but if we look at parts of our country that are lamenting the loss of corporate businesses that have gone off shore, most of the time they need not look any further than their taxing of those businesses.
Lower property taxes are hard to recognize because of the rapid increase in valuations we have been seeing the last several years. Although the state has been buying down significant mills, a mill generates more because of the valuation increase. The bills in the hopper right now have about $720 million worth of property tax relief in them. The Governor’s education bill has a 135-mill buy-down in it. That proposal equates to roughly a 41 percent property tax reduction if your taxing district is assessing 330 mills. On average for a residence that would amount to about a $60 savings for every $10 thousand of true and full value (not market value).
The formula for residential property is “True and Full value divided by 2 multiplied by .09.” For agricultural and commercial property the multiplying factor is .1.
Agriculture property also uses a production formula. The formula looks at several things, among them the production of the last 10 years and the interest rate. The high and low production numbers of the past years are dropped from the calculation. In short, if you have high production and low interest your taxes will be higher. Conversely, if you have low production and high interest your taxes will be lower. The last 10 years have seen good production results and the interest rates have been low. Those of us in agriculture should be grateful that we aren’t taxed based on value.
There is a bill, if passed, that would make it mandatory to show on our tax statements the dollar amount of tax relief the state is providing. As we support education and counties and townships in a significant way, it should reduce or at least stabilize the tax burden on our citizens. My only concern is being able to sustain it.
Your District 28 legislators have participated in three forums throughout the district so far this session. Our most recent was in Ellendale last Friday night where we had a nice crowd and good conversations. If any organization within a community would care to host a forum or a meet and greet session to discuss some issues let us know and we will do our best to fit it into our schedules.