Fernando Quijano, Published April 06 2012
Property tax question only one element of state’s tax landscapeAssuming that North Dakota voters are rational people who seek all available information when making a decision as controversial as abolishing property taxes (Measure 2), I wish to offer an economist’s point of view, or refresher, on the impacts of taxation.
Fundamentally, a tax is an incentive designed to change people’s behavior. Tax increases usually reduce economic activity, while tax reductions boost economic activity. Abolishing property taxes would reduce the effective cost of owning a house, and give people in other states an incentive to move here. With an increase in population, some of the revenue lost would be offset by an increase in the tax base.
North Dakota is gaining a reputation for job creation, and its economy could, in fact, absorb many new workers. From the workers’ point of view, the prospect of finding a good job and a tax-free house adds two important premiums to our living standards. With many expanding enterprises and work opportunities, a tax-reduction boom, compounded by an oil boom, would translate into a huge economic boom for North Dakota. The demand for housing would increase, thereby increasing property values and the wealth of property owners. More people would be enticed to own rather than rent a house.
As with any other tax, lower property taxes would carry both winners and losers. Local governments that depend on these taxes to support their schools and firehouses, for example, may experience a significant reduction in revenue. If those localities were unable to attract new residents, they could not compensate for the loss of property tax revenue with new sources of revenue. Some communities that do not expect to welcome many of the newcomers will be more dependent on the state government or on private-market solutions for the provision of services.
The moral of the story is simple. A tax has redistributive effects, which transfer wealth, often arbitrarily, from one person to another. That’s why politicians get involved. Economists can only alert people to the likely changes in economic activity resulting from a reduction in taxes and to the “multiplier effects” that communities often fail to anticipate.
The greater concern to communities should not be the reduction in tax revenue; it should be on how to prepare for rapid changes in the composition of the population, the size of government and the distribution of wealth in our state.
Quijano is assistant professor of economics, Dickinson (N.D.) State University.