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Tax reform projected to decrease North Dakota revenue

BISMARCK—An analysis of the federal Tax Cuts and Jobs Act shows that individuals are projected to pay more North Dakota state income tax while small businesses and corporations are expected to pay less than they did before the tax reform.

Tax Commissioner Ryan Rauschenberger said individual taxpayers will see mixed results from the federal tax reform that took effect this year, with smaller families likely paying less taxes to the state while larger families see an increase.

Overall, individual taxpayers are projected to pay $4.8 million more in state income tax for 2018, the Tax Department analysis shows.

Meanwhile, North Dakota is projected to collect $9.7 million less income tax from small business, corporations and international businesses for 2018, the analysis shows.

The result is the state is projected to collect $4.9 million less in state income tax for the two-year budget cycle that ends June 30, 2019, according to the projections.

North Dakota income taxes are calculated starting with a taxpayer's federal taxable income.

Because businesses now have more federal deductions available to them, that reduces the taxable income on which North Dakota income tax is based, Rauschenberger said.

While "virtually all" of North Dakota individual taxpayers will see their federal income taxes decrease, the state income taxes will increase for larger families, Rauschenberger said.

That's due to how the federal tax reform treats families, giving them credits for dependents rather than a deduction, he said.

"They're gaining a federal credit, a much more valuable federal credit, but they're losing a deduction that's used to help calculate North Dakota's starting point for income tax," Rauschenberger said.

For example, a married couple with no kids earning $125,000 would pay $55 less in North Dakota income tax under the tax reform, according to the Tax Department's analysis. A married couple with two kids with the same income would pay $114 more to the state.

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However, both families would see a drop of more than $3,000 in federal and state taxes overall, the department's analysis shows.

"Overall with the federal tax deduction, North Dakota taxpayers are going to come out very well," said Sen. Dwight Cook, R-Mandan, a member of the Legislature's Revenue Advisory Committee, which received a report on the projections last week.

For the 2019-21 biennium, individual taxpayers are projected to pay $10.4 million more in North Dakota state income tax than before the tax reform, the analysis shows.

For the same timeframe, small businesses, corporations and international businesses are projected to pay nearly $39.3 million less in state income tax, according to the projections.

The result is a loss of nearly $28.9 million in state income tax revenue for the two-year budget cycle.

Kylie Oversen, a Democrat who is running against Rauschenberger for tax commissioner, said she was surprised to see a decrease in corporate income tax revenue to the state as compared to what individuals will pay.

"Those dollars that are now not coming into the state could be put to very good use in funding a lot of needs that we're seeing, whether it's mental health or higher education or infrastructure," said Oversen, a former state representative from Grand Forks.

Oversen discussed the projections Monday night, April 20, during a candidate open forum in Bismarck.

"It doesn't seem like that's really the picture North Dakotans were given when this tax bill was discussed in the state," she said.

Rauschenberger said the analysis does not consider other economic impacts from the tax reform, such as farmers or businesses that are able to buy more equipment as a result of the tax reform.

"There's an upside that's not taken into account in these numbers is that more cash in the economy means more income, more jobs, more wages, which has a positive offsetting effect," Rauschenberger said.