CHAPTER VIII

THE NORTH DAKOTA INCOME TAX

I. The income tax law of 1919

NORTH DAKOTA, one of the newer states, made few significant contributions to taxation history until recently. In 1919, however, largely as a result of the influence of the Non-Partisan League in the state, the legislature carried through an extensive program of changes in the tax and revenue code which included the inauguration of an income tax along unusual lines. At the same time provision was made for several state industrial undertakngs. The impelling motive for the adoption of an income tax law seemed to be not so much the usual accumulation of dissatisfaction with the operation of the personal property tax along particular lines as a conviction among the legislators that the existing scheme of taxation exacted contributions for the support of the state from the wrong people,—those not best able to contribute. As a result the effort was made to obtain more revenue from the richest individuals and those who were the recipients of " unearned" income.

The income tax law passed in 1919,' therefore, made a distinction between "earned" and "unearned" income and imposed a doubly heavy progressive rate on unearned income up to $12,000 at which point the two sets of rates begin to converge. The law applied the tax to the income of both residents and non-residents, from all sources within

1 Laws of North Dakota, 1919, ch. 23.

2 Income of non-residents from personal services and intangibles was

exempt.

136

[136

one.

the state. The personal exemptions were $1,000 for the individual, $2,000 for the head of a family, and $200 additional for each dependent person above the number of Deductions for ordinary business expenses, losses, bad debts, depreciation, interest on indebtedness, and taxes were allowed. Personal property tax receipts were allowed as offsets. Collection at the source of interest, dividends, profits, premiums, and annuities was provided for, but this provision was later repealed. The proceeds were to defray the general expenses of the state govern

ment.

The type of administration provided for was along the lines which have proved most successful in recent years. The tax commissioner was given the supervision of the system and was authorized to divide the state into income tax districts and to appoint special assessors of income, although he might "appoint an existing tax officer to act as such income tax assessor."

The scale of taxation of incomes was as follows:

17th 1,000

4.25

6.

A corporation income tax imposed under the same law was levied at the rate of three per cent on net income, plus five per cent of any amount undistributed six months after the end of the fiscal year.

2. Criticisms of the law of 1919

Critical comment on the act of 1919 has been general. Not only was the discrimination between earned and unearned incomes by means of a graduated tax with doubled rates on the unearned income an innovation in this country, but the maximum rates of taxation (10 per cent) were unprecedented in state income taxation. Such a plan of taxation has been usually regarded as more suitable for a highly developed community, with large incomes and vested interests of long standing, than for a community in which industrial and commercial affairs are in an almost pioneer stage. The whole body of legislation enacted in the session of 1919 was apparently the work of a body of legislators determined to place so-called "capitalistic" activities at a disadvantage, and significantly, appears as The New Day in North Dakota: Some of the Principal Laws enacted by the Sixteenth Legislative Assembly, 1919, the compilation of laws of that year published by the state industrial commission. Much of the fiscal legislation bears the mark of this intention rather than of the results of a careful analysis of the financial situation of North Dakota.

Collection at the source involves many problems which have already hampered the authorities.1

This system of collection must involve tremendous administrative difficulties and complications, for the withholding agents are required to deduct from each payment of interest, dividends, or other form of taxable income, such part as will be required to pay the tax, and there are no less than twenty-three different rates any one of which may be the proper one in a given case.

Furthermore, double taxation, produced in this case by requiring the taxation of dividends as unearned income but permitting no deductions to the individual for taxes paid by corporations subject to the act frequently has undesirable results.

The defects in the act of 1919 which became apparent almost immediately had to do with the scale of rates and the differentiation between earned and unearned incomes. The income tax was apparently constructed with the intention of promoting social justice through the medium of compulsory contributions to the expenses of the state. The incomes of the wealthy were to be drawn upon for large amounts, in a proportion almost unparalleled in the history of the state taxation of incomes, while only nominal sums were to be exacted from the persons in receipt of small incomes. When the primary rates of the North Dakota act (one-fourth of one per cent on the first $1,000 of taxable earned income and one-half of one per cent on the corresponding category of unearned income) were devised, several signs of the times were already pointing out a safe course for state income taxes which should probably have been heeded in North Dakota. The committee on a model system of state and local taxation appointed by the National

1 H. L. Lutz, "The Progress of State Taxation since 1911," American Economic Review, vol. x, no. 1 (March, 1920), p. 73.

Tax Association had already reported against a smaller initial rate than one per cent. The expense of collecting small tax bills due from persons with low incomes had already received attention in states where the income tax seemed a doubtful success, and changes were imminent. Furthermore, for the first time the actual status of individuals with respect to their incomes was becoming a matter of common knowledge, through the operation of the federal income tax and the publication of Statistics of Income by the United States Internal Revenue. A cursory examination of the published figures would have shown that the tax-paying capacity of North Dakota incomes was exceedingly small, both absolutely and relatively, and that such a tax as that provided for in 1919 might be expected to yield only a small amount and to be expensive to administer.

The federal income taxes received in 1917 from North Dakota incomes in 1916 amounted to only five-hundredths of one per cent of the personal income taxes collected in the country as a whole. The tax itself amounted to $66,344, and the number of individuals making returns was 1,176. The federal tax for the year 1916 applied to incomen of $3,000 and over ($4,000 in the case of married persons) and was imposed at the normal rate of two per cent, with surtaxes reaching 13 per cent on the largest incomes. It should have been clear that little return was to be expected from the state tax on large incomes. For the incomes of the year 1917, when the federal tax reached down to incomes of $1,000, the number of returns from North Dakota increased by nearly 20,000. But earned incomes of $4,000 and less were taxed at less than one per cent in North Dakota. The majority, presumably, were

1 United States Internal Revenue, Statistics of Income for 1917, pp.