Counties Could Shift Funds to Avoid Tax Hikes

The case for local sales and land-transfer tax increases is no better now than it was in May, when voters overwhelmingly rejected tax hikes across North Carolina. That’s the assessment of John Locke Foundation analysts who’ve investigated a series of local tax referendums on the Nov. 4 ballot.

“By diverting savings and existing revenue streams to high-priority government functions, most counties seeking tax hikes could avoid those hikes for years,” said Dr. Michael Sanera, JLF Research Director and Local Government Analyst. “In more than a half dozen cases, the savings would help delay a tax increase for 10 years or more.”

Voters in 15 counties will decide Election Day whether their county commissioners can levy new taxes. Thirteen counties are considering a quarter-cent increase in the local sales tax: Anson, Burke, Caswell, Cherokee, Chowan, Columbus, Guilford, Henderson, Hertford, Jones, Mitchell, Onslow, and Person.

Voters in two counties — Polk and Tyrrell — will consider increasing the real-estate or land-transfer tax from 0.2 to 0.6 percent. The tax for a $200,000 home would climb from $400 to $1,200.

“County commissioners are offering a range of reasons to justify higher tax rates, from school construction needs to other types of capital expense to farmland preservation,” Sanera said. “Our reports show these county governments could address their needs by setting better priorities with existing resources.”

“And taxpayers should remember that commissioners’ statements about how they would use new revenue are not legally binding,” Sanera added. “Once they raise a tax, the law says they can use new tax revenue for any legal purpose.”

Sanera leads a JLF research team analyzing the potential impact of a tax hike in each county. Working with Sanera are Joseph Coletti, JLF Fiscal Policy Analyst, and Terry Stoops, JLF Education Policy Analyst.

Many counties point to local schools as they plead with voters to support the tax referendums, Sanera said. “The numbers don’t back up the argument,” he said. “Many of these counties have had local inflation-adjusted per-pupil school funding outpace student population growth during the past five years. In a number of cases, state and federal spending has jumped dramatically as well.”

Voters should also consider the millions of dollars the state already has pledged for local school construction, Sanera said. “The state has promised Guilford County $136.4 million for school capital improvements over the next 10 years,” he said. “Tyrrell County is in line to get $1.2 million in that same time frame. Most of the other counties seeking tax hikes expect funding somewhere between those two extremes. If a school district has facility needs, county commissioners and the school board need to show taxpayers how they would spend that state money.”

Most of the counties have raised revenue in recent years at a rate faster than the rate of inflation plus population growth, Sanera said. “In Cherokee and Onslow counties, for example, revenues have grown 35 percent faster than inflation plus population growth since 2002,” he said. “A family of four in these and other counties paid hundreds of dollars more to fund county government in 2007 than in 2002.”

If the counties seeking tax hikes adjusted their revenue streams to grow only as fast as the combined rate of population growth and inflation, most would see double-digit percentage increases during the next 10 years, Sanera said. “In most cases, this increase in spending would be more than adequate to pay for county needs.”

Many counties already have more uncommitted cash in the bank than they would raise from a tax hike, Sanera said. “The state requires an 8 percent budget reserve for emergencies, but some of these counties maintain much larger reserves,” he said. “Person, Polk, and Tyrrell counties have reserves of more than 20 percent. Commissioners in these counties already have revenue they could devote to pressing needs before pressing the taxpayers again.”

In 2007, the General Assembly gave every county a chance to raise either the local sales tax or the real-estate transfer tax. The new tax options were part of a deal involving the state relieving counties of local Medicaid expenses. The deal also called on counties to forfeit a half cent of the local sales tax rate.

“While it sounds as if counties were forced to make a sacrifice in this so-called Medicaid swap, they now benefit from another part of the deal called the ‘hold harmless’ provision,” Sanera said. “It guarantees counties will have at least $500,000 in additional funds that can be used to meet other county needs. Our reports show that most counties seeking tax increases are actually in line to get much more money than that minimum level.”

The JLF reports draw attention to several counties that are seeking tax increases after offering tax incentives to a few selected private businesses, Sanera said. “For example, Anson County granted an average of $253,000 in tax breaks a year from 2004 to 2006,” he said. “Taxpayers should consider this corporate welfare before they decide whether their county needs a new source of money.”

Counties cannot raise the sales or real-estate transfer taxes without a local referendum. Commissioners across North Carolina have pursued that option 58 times since November 2007. Voters rejected each real-estate transfer tax hike. They also rejected most sales tax proposals. In all, voters have rejected 50 of 58 proposed local tax increases.

“Most voters see through the misinformation about the ‘need’ for more tax revenue,” Sanera said. “In all the counties voting on tax increases, revenues grew faster than the combined rate of population growth and inflation between 2002 and 2007. The average increase was almost 19 percent. In the same time period, state government spending has outpaced inflation and population growth by 6 percent. This government growth rate cannot be sustainable.”

Voters in several counties have a second or third chance since November 2007 to vote against a tax increase. Commissioners in Columbus, Guilford, Henderson, Hertford, Onslow, and Tyrrell counties are ignoring the results of previous referendums by seeking tax increases again now, Sanera said.

“The Nov. 4 vote provides the opportunity for citizens in these and other counties to be heard,” Sanera said. “The results of the 58 county tax votes in the past year are informative. Citizens, when given the chance, are rejecting tax increases.”