The proposed Republican tax reform plan may benefit North Dakota industries, particularly the energy sector, but some doubt remains as to its broader impact.
Among the plan’s adjustments is setting the income tax rate for small and family owned businesses at 25 percent. It would also lower the corporate tax rate from as high as 39.1 percent in 2014 to 20 percent.
Lowering the corporate tax rate would bring the U.S. a couple of points below the global income tax average, with a goal of boosting the U.S. economy.
Rep. Kevin Cramer, R-N.D., said there aren’t many energy-specific items in the tax reform proposal.
“But what I sense from energy and petroleum, in particular … lowering the corporate rate is important for everybody,” he said. “Just the fact that we lower the rate from the highest rate in the industrial world, down to 20 percent … 20 percent is lower than the international average of 22.5, which puts us competitive globally. That makes it better for the job creators.”
Meridian Energy Group, Inc., who plans to build the Davis Refinery in Belfield North Dakota, likely would benefit from a tax cut. Meridian CEO Bill Prentice spoke about how it would be affected.
“When you’re in business, private enterprise, you’re always interested in tax cuts,” Prentice said. “It flows through from top to bottom. We get to charge less for our product, our employees make more, our investors see a higher return … I can’t see a downside for any business. The long-term effect is that … you have more thoughts about expanding.”
These benefits will have a direct impact on the area, he said.
“Specifically in respect to the Bakken, there’s a lot going on up there that would be expedited by a lower tax rate,” Prentice said.
Charles Conrick, a professor at Dickinson State University’s school of business and entrepreneurship, agreed that a tax cut for corporations and businesses would benefit investment.
“Bringing the corporate tax rate down to what they are proposing, 20 percent, (there) is no doubt that it is going to generate investment and hopefully corporate investment,” Conrick said, though he added there’s a silver lining when it comes to energy. “Particularly when you talk about oil companies, that will be a function of the price of oil, which is established on the global markets.”
He said Bakken oil is at a disadvantage because it costs more to extract that oil in other places.
Conrick said he expected a lower tax rate would spur more entrepreneurship.
The tax reform plan also calls for eliminating the federal estate tax, which will affect few North Dakota’s farmers. The current estate tax only affects inheritances valued over $5.4 million.
There were only 149 farms in North Dakota with a market value over $5 million in 2012, according to statistics provided by Darin Jantzi, state statistician with the U.S. Department of Agriculture. In 2007, that number was down to 39. The Internal Revenue Service reports that only 35 estate tax returns were filed in 2016 from North Dakota.
There are other consequences if the estate tax is eliminated.
“I would think that the concern would be that it’s going to reduce revenue and increase the deficit, which I think would have a negative impact down the road on the economy,” said Andrew Swenson, agriculture economist with the North Dakota State University. “If you’re going to have it so it doesn’t increase deficit, then you’re going to have revenue from some other source to offset the elimination of this estate tax. You’re going to tax to make up that shortfall of revenue, and the opposite is that if you don’t have this revenue and you want to be deficit neutral, then what are you going to cut on the cost side? Is it going to be defense, farm programs, food stamps?”
Swenson said that he doesn’t think the plan accurately lays out all the facts, and that it is at odds with what he described as President Trump’s “populist” message.
Cramer said another selling point of the proposed plan is its simplicity.
“(This is) very middle-class and lower-income focused,” he said. “In addition to pro-growth on the top end, it is very pro-growth on the bottom and middle. We believe that 95 percent of Americans will be able to do their taxes on a post card. You have all the costs of complying … that still gets to stay in your pocket.”
Several tax brackets have been reduced to just three, which Cramer said is one of the plan’s better values, following an overall goal of simplifying the tax code to make it easier to understand and harder to take advantage of.
“Much of the complication of the tax code is to the benefit of particular special interests and when I say particular I mean: all of them,” Cramer said.
There are precedents in the U.S. when it comes to cutting corporate taxes, and this plan echoes parts of previous administrations’ attempts.
“There have been two other presidents since the early 60s who have done something similar: President Kennedy and President Reagan,” said Kari Cutting, vice president of the petroleum council. “In both cases, when they cut taxes, the economy started moving forward.”
Conrick said that determining whether risking cuts to welfare programs is worth a likely boost to domestic investment and job growth is a conversation informed citizens need to be having as these plans are debated in Congress.
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