CHICAGO -- If it passes, a referendum that would abolish North Dakota’s property taxes would pose a significant fiscal threat to local governments and would also raise their borrowing costs, Moody’s Investors Service said in a report out Thursday.
Residents will head to the polls June 12 to weigh in on Measure 2, which would eliminate property taxes and require the state to replace local governments’ lost revenue.
North Dakota would be the only state without the ability to levy a property tax at any level of government if the measure passes.
Some fiscal pressure from the loss of property tax revenue would be offset by North Dakota’s oil boom, which is hauling in an unprecedented level of tax dollars from the Bakken Shale formation in the western part of the state.
But overall, the proposal would mean a series of challenges to local governments and school districts, which would have to scramble to provide services and maintain operations, Moody’s said.
“The passage of Measure 2 would be a near-term credit negative for local government entities in North Dakota, as it would eliminate a major revenue stream currently available for operations,” Moody’s analyst Kathryn Gregory wrote in the special comment.
“Cities and counties are largely dependent on property taxes for operations and while home rule-entities retain the flexibility to implement or increase revenue streams, the loss of property tax revenues would likely require reductions in services and the use of general fund reserves,” she wrote.
School districts rely on property taxes to a lesser extent than other local governments, but they don’t have the ability to raise revenues through other means, which would make them entirely dependent on the state, Gregory said.
In anticipation of the ballot measure, the state’s public finance agencies stopped issuing local government general obligation debt late last year, as the measure would be retroactive to Jan. 1 if it passes. Most local governments also stopped issuing GO bonds in the new year, though refunding transactions continued. Taxes that secure outstanding GO bonds would remain until the debt is retired.
The passage of Measure 2 would likely drive up local government borrowing costs because it would restrict the type of debt governments can issue, according to Moody’s.
Local governments would no longer be able to issue ad valorem property-tax backed debt, generally the least-expensive type of municipal bonds for issuers. Cities and counties with home rule would be able to issue sales tax-backed bonds. Local governments could also continue to sell bonds backed by special assessments and utility revenues, as well as lease revenue bonds and limited-tax GO bonds that represent a first budget obligation.
“Borrowing costs are typically higher for these types of debts because they tend to be rated at least one notch lower than an entity’s general obligation unlimited tax debt,” Gregory said.
The proposal requires the state to replace revenue lost by local governments, estimated at $800 million annually, though a replacement revenue has not yet been identified. Lawmakers, most of whom seem to oppose the proposal, would have to go into special session after the election and begin to identify replacement revenue, officials said.
Property taxes made up about 40% of general fund revenues for most North Dakota cities that Moody’s rates, about 60% for counties, and 27% for school districts.
Supporters, led by a group called Empower the Taxpayer, argue that putting $800 million back in taxpayers’ pockets would boost the economy.
Recent polls, however, show that most voters are opposed to the question.
