The Grand (Fiscal) Illusion: Property Tax Relief and Education Spending in North Dakota

Abstract

Property taxes have been a contentious issue in North Dakota for decades. Property tax relief implemented in 2009 gave local governments a grant of state funds to compensate for lost revenues from reductions in property tax rates. Additional relief in 2013 simultaneously reduced property tax rates alongside changes to the model used to determine the state contribution to local K-12 education. From 2005 to 2018, the average per-pupil expenditure on K-12 education in North Dakota nearly doubled. We argue that property tax relief shifted the funding burden from the local property tax towards dependency on state funds creating increased complexity in the tax system and leading to fiscal illusion. The consequence of the fiscal illusion was an unintended increase in education expenditures. We test this hypothesis econometrically using panel data at the county and school district level in North Dakota. We find evidence that supports the fiscal illusion hypothesis.

Keywords

fiscal illusion property tax relief education spending

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