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Published May 16, 2012, 10:29 AM

Study calls ND property tax abolition 'risky'

BISMARCK, N.D. (AP) — Abolishing North Dakota's property taxes is a risky gambit that would make aid to local schools dependent on volatile state oil revenues, according to a report by a think tank that specializes in budget issues.

By: DALE WETZEL, Associated Press

BISMARCK, N.D. (AP) — Abolishing North Dakota's property taxes is a risky gambit that would make aid to local schools dependent on volatile state oil revenues, according to a report by a think tank that specializes in budget issues.

"You just can't get rid of property taxes without causing a major disruption to funding for your schools, and for fire and police protection, and other basic local government services," said Michael Leachman, an analyst for the Center on Budget and Policy Priorities in Washington, D.C.

The center issued a report Tuesday on Measure 2, a proposed North Dakota constitutional amendment that would abolish property taxes. Almost all of North Dakota's property taxes are levied by cities, counties, schools and other local government units.

Supporters of the ban circulated petitions to put the issue to the June 12 primary election ballot.

Charlene Nelson, of Casselton, the chairwoman of the initiative campaign, argued the analysis betrayed ignorance of the state's tax structure. Many local governments also receive state and federal funds, and are not wholly dependent on property taxes, Nelson said.

"They haven't read the measure, nor do they understand how government is funded in North Dakota," Nelson said.

The proposal faces widespread public skepticism. A public opinion poll commissioned by Forum Communications Co., which owns The Forum of Fargo and other daily newspapers, showed 74 percent opposition to the amendment.

North Dakota's treasury has benefited from a huge influx of oil revenues as the state has risen to become the nation's second-ranking oil producer, behind Texas.

Eliminating property taxes will make the state more reliant on a fickle money source to replace state aid for schools and other local needs, Leachman said.

"That would leave the education of your state's children, your future workforce, vulnerable to a highly volatile industry," he said. Production, and tax revenues, could plummet if prices drop or federal regulatory changes make oil production in North Dakota less attractive, he said.

No other state has ever banned property taxes, which are a traditional source of money for local police, fire and public works agencies, as well as schools and parks. North Dakota has had property taxes since it became a state in 1889.

The amendment would require the Legislature to replace local governments' lost property tax revenue with statewide taxes, including those on sales, income and energy. North Dakota's Tax Department estimates that local governments would not collect $812 million in property taxes annually.

The amendment would not require the replacement payments to increase, and gives the Legislature power to determine which local services it will continue to finance.

Leachman said the Legislature would probably adopt a block-grant formula for distributing money to local governments. It would not be practical for lawmakers to consider the individual spending needs of hundreds of county, city, school district and township boards, as well as school and park districts and other local government units, he said.

"No matter what formula they design, it won't work perfectly for everyone. There will be winners and losers," he said. "We've seen these kinds of formulas in other contexts, and the outcome is usually that the funding erodes over time."

Eliminating property taxes would also provide extra money to property-owning companies outside North Dakota, which are unlikely to spend it creating more North Dakota jobs or manufacturing more goods, Leachman said.

Measure 2 "would hand a windfall to out-of-state property owners at North Dakota's expense," Leachman said. More than one-third of commercial property taxes in North Dakota are paid by companies located outside the state, he said.

Nelson said that reasoning ran counter to public officials' rationale for offering property tax incentives for businesses to locate and expand in North Dakota.

"Every single one of our elected officials will say, if you give a (property tax) exemption to a business ... you come out ahead," Nelson said.

Copyright 2012 The Associated Press.

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