An alternative income tax structure for North Dakota: Decoupling state income tax from federal tax liability

Using a simple piggyback method, 95 percent of North Dakota taxpayers elect to calculate state income tax as 14 percent of their federal income tax. Some state-level entities view the coupled approach as problematic. With this approach, federal income tax changes automatically affect state income tax revenues, resulting in potentially unstable state tax revenues. Because the 14 percent tax rate is higher than rates of most other states, people may erroneously evaluate North Dakota as a high tax state even though most states apply their lower rates to a larger tax base (an income figure vs. federal income tax).; As a response to these concerns, the researcher created a model income tax structure for North Dakota which applies a taxpayer credit and progressive tax rates to adjusted gross income. When applied to 1995–1997 income data, the model is tax revenue neutral. Suits and Kakwani index computations show that the model maintains the progressivity levels of the current tax structure.; A March 1999 telephone survey of 575 North Dakota taxpayers shows that 50 percent of respondents prefer the current “coupled” income tax structure, 33 percent would prefer to change to a system which calculates tax as a percentage of income, and 17 percent have no preference.; Nonparametric independent samples tests showed that gender, age, number of years state returns have been filed, and education level are associated with tax structure preference. Analysis of variance tests showed differences in ratings of tax characteristics and ratings of reasons for changing tax structures across the three tax structure preference groups.