The curious case of North Dakota

The theatre in downtown Fargo, North Dakota

With an unemployment rate of less than three per cent, it’s safe to say that North Dakota is booming. The 2006 discovery of oil in the Bakken formation, combined with hydraulic fracturing technology used to extract “tight oil,” has catapulted the small state of 725,000 people into the ranks of major oil producer. In 2012, it passed Alaska to become the second largest oil-producing state in the country. This has resulted in billions of dollars in revenue for the state. So, what has North Dakota done with this new-found wealth?

Jurisdictions around the world endowed with significant oil revenues have wrestled with this question for decades, some more successfully than others. Alaska has pursued a hybrid model of transferring revenues into the Alaska Permanent Fund, which pays a portion of the annual revenues to each resident in the form of a dividend. Other jurisdictions, such as Alberta, have set up similar permanent funds but have subsequently neglected them, choosing to divert revenue into general provincial coffers instead. Norway has built up a $940 billion sovereign wealth fund by limiting annual withdrawals by the state to four per cent or lower.

Daniel Gross explains how North Dakota set up its oil revenue management regime:

Eager not to squander the state’s good fortune, North Dakota in 2010 created the state’s Legacy Fund through an amendment to the state constitution. The amendment stipulated that 30 percent of all extraction and production tax revenues collected should flow into the fund. Further, the money couldn’t be touched for seven years, until 2017—at which point the interest and income generated by the fund would be rolled into the state’s general budget. Money from the principal could only be spent if two-thirds of both houses of the state legislature approved. And no more than 15 percent of the principal could be spent in any two-year period.

The state’s Legacy Fund has now reached over $2 billion in assets and continues to grow rapidly. Most of the remaining 70 per cent of extraction and production tax revenues have been allocated to other budgetary priorities, according to Starr Spencer:

Sizeable amounts of oil money in recent years have found their way into the state’s general fund for road improvement, education, and property and income tax reductions, Joe Morrissette, North Dakota’s deputy tax commissioner said. Last year, over $1 billion went for road projects earmarked for the 2013-2015 biennium. “It might not sound that significant, but in terms of North Dakota, the whole general fund’s budget is not quite $7 billion for the two years,” he said.

In addition, a 20% reduction in property tax rates characterized each of the last two legislative sessions was made possible from oil, he added. Education spending has gone up by $1 billion in the current 2013-2015 biennium to $1.7 billion, from $715 million in 2007–2009, Peterson said, chiefly because of oil.

A battle is brewing over what to do with the 16 per cent of revenues that have yet to be allocated. This debate is largely centered on an upcoming ballot initiative called Measure 5, which is attempting to divert five per cent of future state oil revenue towards conservation activities, such as parks and improving water quality. Proponents of Measure 5 anticipate about $150 million being diverted into the fund each year.

The Environmental Law Society at the University of North Dakota endorsed Measure 5 and summarized its benefits clearly:

First and best, it does not raise taxes. It simply uses money we already have to preserve our land. Measure 5 ensures government will live within its means by not initiating new programs we cannot afford. In other words, this is the fiscally conservative way to conserve.

Second, this is a local and state solution, not a federal government intrusion. The bill creates a local board, with members from industry, farming, parks and the community. This means our friends and neighbors will decide how to protect North Dakota, not an agency in Washington, D.C.

Third, the bill ensures the state can only spend money it already has on conservation. By tying conservation efforts to taxes that are already collected and mandating the money be allocated each year, the bill prevents government from creating projects that are too big and last too long.

The letter is an example of how environmental initiatives can be successfully framed around states’ rights and fiscal prudence. Yet despite its small “c” conservatism appeal, oil and gas interests still mobilized rapidly against the measure. The American Petroleum Institute has already donated over $1 million to oppose it. ThinkProgress speculates that the likely reasoning behind such opposition is that it would make it harder to lower production and extraction tax rates in the future. Lobbyists attempted to lower the tax rate by two per cent last year, but were rebuffed by legislators.

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