North Dakota

Tax Incentive Evaluation Ratings

Tax Incentive Evaluation Ratings: North Dakota

Rating: Making progress

Key points:

  • North Dakota is making progress because the state has adopted a plan for regular evaluation of tax incentives.
  • In the first round of evaluations, lawmakers uncovered a potentially serious flaw in the state’s Angel Fund Investment Tax Credit.
  • Lawmakers are studying ways to include rigorous economic analysis in future evaluations.

North Dakota evaluation law

Year enacted: 2015.a

Who evaluates: Political Subdivision Taxation Committee.

Length of review cycle: Six years.

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Tasked with systematically reviewing the state’s tax incentives, the North Dakota Legislature’s Political Subdivision Taxation Committee has studied more than a dozen incentives starting in summer 2015.b This work is poised to help North Dakota improve the effectiveness of its economic development initiatives.

The committee uncovered what lawmakers see as a potentially serious flaw in the state’s Angel Fund Investment Tax Credit. The tax credit encourages investment in North Dakota angel funds, which were created to boost growth and entrepreneurship in the state by providing needed capital to local businesses with strong growth potential. However, lawmakers found out that the program rules have allowed these funds to invest in out-of-state companies, many of which have no economic impact in North Dakota.c Further, the committee’s work was hampered by a lack of data and transparency, making it difficult to measure the program’s results.d 

Ultimately, the committee recommended ending the angel credit. The panel also made several other recommendations, including proposals to end some little-used incentives and to make technical changes  to others.e 

The committee’s work is an early success for North Dakota’s new incentive evaluation process, which requires legislators to play an active role. Under the state’s 2015 evaluation law, the committee holds regular hearings between legislative sessions.f These hearings provide an opportunity for lawmakers to publicly discuss incentives up for evaluation and allow professional, nonpartisan staff to present background information necessary for a proper examination.g To guide this work, the law highlights specific topics committee members should consider such as whether an incentive has met its goals and to what extent it rewards behavior that would have occurred without the incentive.h  This approach is well-suited to North Dakota, where legislative committees are used to taking the time required to tackle significant issues during the 20 or so months they are not in session out of every two years. 

Despite the successes, lawmakers are still looking to improve North Dakota’s evaluation process. Legislative staffers have extensive tax policy knowledge but do not have experience conducting sophisticated economic analyses. Committee members have recognized this gap and have discussed a proposal to give the Legislature access to economic modeling software to evaluate the impact of incentives.i Their hope is that the committee will have even more information with which to draw valuable conclusions about the effectiveness of incentives in the next round of evaluations.

Endnotes

  1. North Dakota Cent. Code § 54-35-26, http://www.legis.nd.gov/cencode/t54c35.pdf?20160317131134#page=12.
  2. North Dakota Legislative Branch, “Political Subdivision Taxation Committee,” updated Nov. 2, 2016, http://www.legis.nd.gov/assembly/64-2015/committees/interim/political-subdivision-taxation-committee.
  3. Nick Smith, “Angel Fund Debate, Bill Draft Review Takes Place Today,” Bismarck Tribune, June 29, 2016, http://bismarcktribune.com/news/local/govt-and-politics/angel-fund-debate-bill-draft-review-takes-place-today/article_63540281-c237-55c1-8417-69ba3cd7b2b5.html.
  4. North Dakota Political Subdivision Taxation Committee, “Economic Development Tax Incentives Study,” 15, http://www.legis.nd.gov/files/resource/committee-memorandum/pst-2015-final-report.pdf.
  5. Ibid.
  6. North Dakota Cent. Code § 54-35-26.
  7. North Dakota Legislative Branch, “Political Subdivision Taxation Committee.”
  8. North Dakota Cent. Code § 54-35-26.
  9. North Dakota Legislative Management, “Minutes of the Political Subdivision Taxation Committee” (Oct. 13, 2016), 3, http://www.legis.nd.gov/assembly/64-2015/interim/17-5172-03000-meeting-minutes.pdf; North Dakota S.B. 2044 (2017), http://www.legis.nd.gov/assembly/65-2017/bill-actions/ba2044.html.

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Tax incentives—including credits, exemptions, and deductions—are one of the primary tools that states use to try to create jobs, attract new businesses, and strengthen their economies. Incentives are also major budget commitments, collectively costing states billions of dollars a year. Given this importance, policymakers across the country increasingly are demanding high-quality information on the results of tax incentives.