Which North Dakota tax relief will benefit you more? Here are some answers
A proposed flat tax would elimate state income taxes for almost 60% of North Dakota filers, but an alternative tax credit would reduce taxes more for taxpayers with incomes below $125,000.
BISMARCK — Republican proponents of a flat state income tax propose a simple approach: no income tax for filers in low and modest earners, and tax earnings beyond that level at 1.5%.
Proponents of the flat tax — including Gov. Doug Burgum — say it would eliminate state income taxes for three of every five state income tax filers.
For example, someone with an adjusted gross income of $50,000 pays $408 in state income tax under current law, but would have no state income tax liability under the flat tax proposal, according to figures from the Office of the North Dakota Tax Commissioner.
But the tax breaks under the flat tax proposed in House Bill 1158 are especially significant for higher earners.
Someone with an adjusted gross income of $100,000 pays $1,405 in state income taxes under current law, but would see a reduction of $726 and would be left paying a tax of $679.
An earner with an adjusted gross income of $500,000 now paying state income taxes of $11,670 would instead pay $6,679 under the flat tax, a reduction of $4,991.
And the reduction would jump to $11,991 for a filer with an adjusted gross income of $1 million.
“The governor’s flat-tax is a giveaway to the wealthy,” said Rep. Josh Boschee, D-Fargo, the House minority leader. “The benefit to the top 2.5% of the richest North Dakotans is 25 times greater than it is to the bottom 62%. This doesn’t address the real tax concern—property tax relief—which North Dakotans have been demanding for years.”
An alternative to the flat tax, a proposal to extend and increase state income tax credits, would provide greater tax reductions for earners with lower and middle incomes.
Rep. Pat Heinert, R-Bismarck, is the prime sponsor of House Bill 1116, which would provide a state income tax credit of up to $750 for single filers and up to $1,500 for married couples filing jointly during the 2023-25 biennium.
That would be more generous than the $350 credit for single filers and $700 credit for married couples available in the current biennium, tax relief that Heinert also had proposed.
Under the proposed expanded tax credit, earners with adjusted gross incomes of $100,000 would fare better than those under the flat tax, according to the figures from the Office of the State Tax Commissioner. Those earners would get a reduction of $750 with the tax credit, and a reduction of $726 under the flat tax.
“On the lower end of the salaries, it eliminates taxes totally,” Heinert said of his proposed increased tax credit.
Under the current $350 credit for single filers, as of the 2021 tax year 83% of taxpayers benefited, he said.
“I think that’s really significant,” Heinert said. “We went beyond what I expected,” which was that around 60% of taxpayers would get a reduction. By slightly more than doubling the tax credit, he said, “I think we’re going to be in the upper 80s” percentage range of taxpayers getting a reduction.
Also, Heinert said, his tax credit plan would cost $362.8 million, more than $200 million less than the flat tax, which has a price tag of $566 million.
The “savings” from the tax credit plan could be applied to expand the homestead income tax credit program, which reduces property taxes for elderly low-income taxpayers, so could enable property tax relief as well as income tax relief, Heinert said.
“I think the lower price tag gives us the option to do some other benefits for the people of North Dakota.”
Those with adjusted gross incomes of $150,000 or higher, however, would get a bigger reduction from the flat tax than from expanded tax credits.
Some elected officials say they hear more complaints about rising property taxes than the state income tax.
Burgum and other leading Republicans have said they want to see property tax relief, but property taxes are set by local officials. When the state has provided money to reduce local property taxes in the past, not all local governments have reduced taxes, Burgum has said.
Republican proponents of the flat tax, including Burgum, Tax Commissioner Brian Kroshus and Rep. Craig Headland, R-Montpelier, the prime sponsor of the bill, say the plan would effectively eliminate the state’s individual income tax for over 388,000 North Dakota taxpayers whose adjusted gross income is $54,725 or less for single filers or $95,600 or less for married couples filing jointly, based on the current 2022 tax year.
Those with higher income levels would pay a flat tax of 1.5%, compared to current income tax rates that range from 2.04% to 2.9%, which translates to a reduction ranging from 26% to 48% in their state income taxes, according to the GOP proponents.
Burgum has touted the flat tax as an incentive that would help draw workers to the state in an intensely competitive workforce environment that pits states in competition with each other to woo workers.
Asked how Burgum, a former wealthy technology entrepreneur and real estate developer, would benefit from the flat tax, or say how much he would have saved on his taxes, his spokesman didn’t provide a specific answer.
“While nearly 60% of North Dakota taxpayers will have their income tax eliminated, Gov. Burgum will be among the 40% who will still pay income tax and will have their income tax rate reduced to 1.5%, the lowest flat tax in the nation,” said spokesman Mike Nowatzki.
“For the governor, this bill is about eliminating income taxes for hundreds of thousands of North Dakotans and reducing the income tax liability by roughly one-quarter to one-half for those who will continue to pay property taxes,” he said.
Rep. Zachary Ista, D-Grand Forks, a member of the House Finance and Taxation Committee, said the tax credit would do more than the flat tax to help low- and middle-income taxpayers.
“We could institute a 0% tax rate for those 60% of filers” who would modestly benefit from the flat tax, he said. “We can do a better job to target lower- and middle income working families.”
Also, Ista said, the flat tax’s $566 million cost could hamstring the state if oil prices, which pay for a significant portion of the state budget, plunge. Right now the state is flush, partly because of federal COVID relief, but that money will run out, he said.
“That is a very substantial number, maybe the largest number for a single proposal that I’ve seen since I’ve been in the Legislature,” said Ista, who has been in the House since 2020.
Headland, the flat tax bill’s prime sponsor, did not return messages inviting comment on the merits of the flat tax compared to the tax credit and which would benefit lower- and middle-income earners the most.
“Economic competitiveness has come to the forefront as we address the challenges associated with workforce recruitment and continued economic growth,” Headland said in a statement when the flat tax plan was unveiled. “This income tax reform is a major step in the right direction as North Dakota works to meet the challenges faced in oil production, agriculture and technology as we further diversify our economy.”
Legislators will weigh competing income tax relief plans as well as proposals for property tax relief, issues that likely will percolate throughout the session.
“I would expect this would be one of the very last issues resolved at the end of the session,” Ista said.