Property tax relief's effectiveness in question
FARGO -- As a homebuilder, House Majority Leader Al Carlson knows a thing or two about foundations.
And before the Fargo contractor and his fellow state lawmakers agree to build on a property tax relief program that supporters tout as a success and critics deride as a blank check for local government spending, it's going to undergo a close inspection, he said.
"I think before the state seriously throws a lot more money into it, they've got to look at reforming the system so that dollar for dollar this money moves down to the taxpayers we intend it for," Carlson said.
During the past three sessions, the Legislature approved property tax relief packages that combined have cost the state roughly $732 million, said Tax Commissioner Cory Fong.
"And it's going to dominate the legislative discussion this session too," he said.
The discussion reached peak intensity in June with the statewide vote on Measure 2, an initiated measure to eliminate North Dakota's property tax.
Voters rejected the measure, 77 percent to 23 percent, but lawmakers got the message that many feel property taxes are still too high, said Rep. Wes Belter, R-Fargo, chairman of the House Finance and Taxation Committee.
"I think legislators are very aware of the possibility of another Measure 2 coming forward," he said.
The ongoing relief program adopted by lawmakers in 2009, in which the state provides grants for school districts to reduce their mill levies, has saved taxpayers between 15 percent and 19 percent on their overall property tax bills, depending on the district, Fong said.
But because property tax bills in most counties show only three years of tax history, taxpayers didn't see the savings in print this year, something lawmakers will try to change this session.
"People have become accustomed to it. It works," Sen. Dwight Cook, R-Mandan, said of the program. "It works. Our only problem is the taxpayers have forgotten they're getting it."
Senate Minority Leader Mac Schneider, D-Grand Forks, agrees that property tax bills should better inform taxpayers of how much relief has been provided and what they're paying for.
"At the same time, if we were cutting property tax bills substantially, people would know it, so I think that speaks to our argument to do more," he said.
Relief started in '07
The Legislature took its first stab at property tax relief in 2007 with the creation of an income tax credit worth 10 percent of property taxes paid. The bill meant savings of up to $500 for individual filers or $1,000 for married people filing jointly.
Lawmakers insisted that the program benefit only those living in North Dakota, not out-of-state property owners, said Cook, the current chairman of the Senate Finance and Taxation Committee.
The program cost the state nearly $90 million for the 2009-11 biennium, Fong said.
One downside, Cook said, was that the dollar caps were the same regardless of what an owner owed in property tax.
Dispensing a property tax break through income taxes also proved to be a clumsy process, Fong said, recalling how property owners whose income tax liability was less than the allowable relief had to get a voucher to apply to their property taxes.
"It was a bit of a disconnect for the taxpayer," he said. "They were hearing, 'Oh, we're getting property tax relief,' but they weren't seeing it in their bill."
Lawmakers aimed to change that in 2009, approving a package that used state oil tax revenue to buy down school districts' mill levies by up to 75 mills.
The mill levy reduction grant program, which then-Gov. John Hoeven proposed while running for re-election in 2008, carried an initial price tag of $295 million that grew to $310 million by the end of 2009-11 biennium.
Lawmakers doubled down on the program for 2011-13, setting aside $342 million. Because of some savings in the program, it will end up costing the state about $332 million for the biennium, Fong said.
In his 2013-15 budget, Gov. Jack Dalrymple proposed reducing school district levies by an additional 60 mills, for a total savings to taxpayers of $714 million, and making the relief a permanent part of the funding formula for K-12 education.
While the program has reduced school districts' share of the tax bill, the savings have been partially offset -- or, in some cases, completely wiped out -- in some areas as local assessors raised property values and cities, counties and other political subdivisions didn't reduce their mill levies enough to offset the increases.
Carlson's property tax bill is a good example.
Tax records show the assessed value of his home on Fargo's Rose Creek Parkway increased 20 percent in 2009, from $370,900 to $445,900, as a two-year property tax exemption for the new home expired.
Despite the big bump in value, his property taxes increased only 1.4 percent, to $10,436, thanks to a $503 cut in Fargo School District taxes as a result of the mill levy reduction program.
His overall property tax bill would have dropped by even more, but city taxes increased $197 and county taxes jumped $213 that year, even though their mill levies didn't change -- demonstrating the impact of increased property valuations.
Since then, Carlson's annual bill has remained relatively flat, at $10,520 in 2010, $10,635 in 2011 and $10,541 last year, not including the early payment discount.
Another metro-area lawmaker, Rep. Kim Koppelman, R-West Fargo, whose home's assessed value hasn't changed since 2008, saw his property tax bill shrink by 16 percent, from $3,131 to $2,630, not counting the discount.
Fargo Mayor Dennis Walaker, whose home near Fargo South High School also held its assessed value from 2008 to 2012, saw his property taxes decrease by 17 percent during that time, from $3,241 to $2,679, not counting the discount.
"What this has meant is that it has provided savings to taxpayers," Fong said.
Filling the gap
Critics contend that other taxing entities have simply filled the gap created by the buydown of school district levies.
Tax Department figures for general and special property taxes show growth across all taxing entities except school districts since the mill levy reduction program began.
As school district taxes were falling 19 percent from 2009 to 2012, city taxes crept up 7 percent and county taxes jumped 22 percent. State and miscellaneous taxes rose 27 percent.
The U.S. inflation rate during that time was about 7 percent, according to the Bureau of Labor Statistics.
Looking back further to 2007, the increases in city and county taxes are more dramatic -- 20 percent and 35 percent, respectively -- while the decrease in school taxes is less impressive, at 12 percent.
Zach Tiggelaar, executive director of the North Dakota Policy Council, points to those figures when arguing that North Dakotans haven't seen significant relief through the mill levy reduction program.
"What we see it as doing is basically giving blank checks to the local governments from the state government, and then they continue to increase our taxes in the process," he said.
"That's absolutely not true," said Mark Johnson, executive director of the North Dakota Association of Counties. "But what people get confused about is that there's been some growth in the values of property, and as a result, some of the counties and cities and even townships and the like have at least taken that growth."
Fong noted that effective tax rates -- calculated by dividing the total tax by the market value of a property (or, in the case of agricultural property, its value based on productivity) -- have gone down for all classes of property since the mill levy reduction program took effect in 2009.
The rates fell from 1.87 percent to 1.51 percent for residential property, from 1.63 percent to 1.29 percent for agricultural property and from 2.18 percent to 1.73 percent for commercial property.
For residential property, that meant the average owner of a $100,000 home saw their annual property tax bill shrink from $1,870 to $1,510.
Values on the rise
Of course, that assumes no increase in property values, and there's the rub: From 2007 to 2012, the true and full value of residential property in North Dakota increased by about $6 billion, or 37 percent, and commercial property value increased by about $3 billion, or 39 percent, Tax Department figures show.
Changes to assessed values were largely responsible for the higher values. On average, new construction accounted for only 2.5 percent of the residential value increases and 3.4 percent of the commercial value increases, according to the Tax Department.
Fong said it's important to view the increases in the context of the state's economy. Values have been on the rise across the state -- especially in central and western North Dakota -- largely because of rapid economic growth, additional jobs, higher wages and more demand, he said.
Ralph Muecke, a farmer currently renting out his land near Gladstone in western North Dakota's Stark County, saw the assessed value of his five parcels increase by 26 percent last year, not including his farmhouse.
Despite a drop in the overall mill levy, his property taxes still rose by about 20 percent, he said.
Muecke, who was among the Measure 2 organizers pushing to eliminate the property tax, likened the current relief program to "trying to fix a broken arm with a Band-Aid."
"If these taxes go up a couple more times like this, another Measure 2 will come up again," he said. "And then it's going to sail right through."
Carlson said lawmakers are still analyzing whether the program is working for all school districts. He added that while it's good to have a high property value when one is looking to sell, that's not necessarily the case when it comes to paying property taxes.
"It's a dual-bladed sword, it's a complicated issue, and we've got to really dig through that this time. And we will," he said.