North Dakota ranks squarely in the middle of states in a study that compares how each state taxes business. The Tax Foundation review gives much better rankings to neighboring South Dakota and Montana.
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The Washington, D.C.-based organization, which produces an annual report on the business tax climates of states, ranked North Dakota 25th among the 50 states in its most recent survey, after four years of ratings in the low 30s. The foundation's rankings are considered important by legislators and economic development officials.
South Dakota, which has no individual or corporate income tax, was ranked first, while Montana was rated sixth among the 50 states, the survey said. Minnesota's business tax climate was ranked 43rd.
Cory Fong, North Dakota's tax commissioner, said the Legislature helped improve the state's standing by cutting individual income and corporate tax rates and reducing the number of corporate tax brackets from five to three. The Tax Foundation's ratings favor states that impose no income tax at all or that have only a single tax rate, instead of progressively higher rates on larger incomes.
North Dakota's tax system may never attain a top rating because tax collections are spread across income, sales and property, Fong said.
"Having a balanced tax structure is helping us immensely during these difficult times, and I think that is an overall strength that businesses are looking at," Fong said. "We've done a good job of demonstrating ... that having the right level of taxation across those tax types makes some sense."
The foundation's ratings included the 2009 Legislature's across-the-board reduction of state income tax rates, which lowered the top individual income tax rate from 5.54 percent to 4.86 percent, and the lowest rate from 2.1 percent to 1.84 percent of state taxable income.
It did not take into account the Legislature's corporate tax changes, which reduced North Dakota's number of corporate tax brackets from five to three, cut the top tax rate from 6.5 percent to 6.4 percent, and applied the top rate to income greater than $50,000. Previously, the maximum tax rate was assessed against corporate income greater than $30,000.
Nationally, North Dakota has been one of the few states where the state government budget is in surplus. Dustin Gawrylow, director of the North Dakota Taxpayers' Association, an advocacy group based in Bismarck, said the state's rankings improvement should be credited to North Dakota's tax cuts and moves to raise taxes in other states with less robust revenue collections.
"Unlike a lot of states, we're not getting any worse," Gawrylow said.
Gawrylow said North Dakota's rankings when compared to South Dakota, Montana and No. 2-rated Wyoming are more worrisome. North Dakota economic development officials appear to put more emphasis on offering tax incentives to selected businesses than on having lower tax rates on all companies, he said.
"We've got to really look at how we can compete regionally," he said. "We need to look at how we can match Wyoming, South Dakota and Montana on those factors that companies are looking at when they come to North Dakota to look for where to place their factories, or their jobs."
The report analyzes a number of taxes that affect businesses, including income and sales taxes, unemployment insurance rates and property taxes.
On property taxes, which are the subject of frequent complaints by business and home owners alike, the report ranks North Dakota fifth among states, while giving less favorable scores to the state's corporate and individual income tax laws.
Fong said that is where he sees "some fundamental flaws" in how the report depicts North Dakota. "Perhaps the measurements they are focusing on don't necessarily coincide with what people in North Dakota are concerned about," he said.
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North Dakota improves in business tax rankings
