News: CJ Exclusives

Counties Seek Taxes Despite Medicaid Relief

26 counties put transfer tax, increased sales tax, or both, on ballots

After having the General Assembly ease their Medicaid cost burden earlier this year, several N.C. counties will ask voters in November to allow them to collect more revenues from taxpayers either through retail transactions or home sales.

Eleven counties across the state want to impose up to a 0.4 percent levy on property transfers, and 11 others seek permission to increase their sales tax by one-quarter percent. Five more counties have placed both measures on their ballots, but if voters approve each of them, then commissioners may only impose one or the other.

But according to analyses by the John Locke Foundation, which publishes Carolina Journal, some counties are sitting on healthy revenue reserves — or would be had they not shared their resources with nonprofit organizations and corporations through economic incentives — and the need for additional taxes is questionable at best.

“Most of the counties are using the Medicaid deal with the state as an opportunity to gouge the taxpayers,” said Dr. Michael Sanera, research director for the foundation. “Certain county commissioners have not managed the money they have effectively.”

But county officials who have the tax increase proposals on ballots say the new revenue is needed to fund capital projects and a continuing influx of new residents and the corresponding demand upon public services — primarily for education.

“This tax is supposed to enable counties to address their school needs,” said Sara Vanderclute, public information officer for Cumberland County, which only has the sales tax increase up for a vote in November.

Numbers don’t mesh

But John Locke Foundation experts say, based upon data obtained from counties, that nearly all of the local governments who have the new taxes on their ballots will be in an improved revenue position after the state relieves them of their share of Medicaid expenses. The legislature in July lifted that burden in exchange for the state taking one-half cent of the sales tax that had previously belonged to the counties. The ballot options of the property transfer tax or the quarter-cent sales tax was intended to enable the counties to recover the ostensibly lost revenue. However, Sanera said, the counties haven’t lost any money.

As one example, Cumberland County will save $2.8 million in fiscal 2007-2008 because the state will pay Medicaid costs previously assumed by the county. The revenue the county loses by giving the state the half-cent sales tax revenue equals nearly $1.7 million, netting a gain of $1.1 million. But county leaders are not jumping for joy.

“Welcome as it is, the action by the General Assembly does not result in any kind of windfall for Cumberland County government,” wrote Kenneth Edge, chairman of the board of commissioners, wrote in an opinion article for The Fayetteville Observer on Sept. 20. “In fact, it is more accurate to characterize the legislative action as a Medicaid swap rather than Medicaid relief.”

Sanera, though, said the simple exchange presents an incomplete picture. For example, he said, revenues for Cumberland between the years 2001 and 2006 have exceeded the county’s population growth and inflation by 2.6 percent. In addition, Cumberland County is sitting on financial reserves of more than $66 million, which is $40 million more than the state treasurer’s office recommends for counties to keep on hand.

“Recent history shows that growth has more than paid for itself with new residents contributing more than their fair share to county revenues,” Sanera said.

Yet that still does not paint the complete picture, Sanera said. While many counties cite school capital needs as a chief reason for asking taxpayers for new revenues, the data show dramatic increases in other revenues, compared to a not-so-sharp (in some cases) increase in student enrollment. Again in Cumberland’s case, for example, student enrollment growth is projected to be only a little over 1 percent during the next decade. During the corresponding time period annual revenues for school capital projects, from sources such as the new North Carolina Education Lottery and the state-maintained school building capital fund, is expected to total about $200 million for the county.

Add to that spending by county commissioners on targeted economic incentives — nearly $4 million by Cumberland during the last three years — and gifts to nonprofits, and counties’ need for new taxes is dubious, Sanera said.

Other reasons for new taxes

But county officials said the ballot options are not only about increasing funds for capital needs, but to give local homeowners more choices other than raising property taxes as sources for needed new revenue.

“Our whole thing during the [General Assembly] session was to try to secure the right of local communities to secure revenue streams that best suit their local communities,” said David Thompson, executive director of the N.C. Association of County Commissioners. “The Medicaid relief does not generate sufficient revenue to take care of the infrastructure needs of our growing counties.”

Not in every case is the ballot issue entirely about infrastructure, however. For example, in Rutherford County, property values in this year’s revaluation increased by more than 40 percent. According to County Manager John Condrey, new large subdivisions in more mountainous areas of the county, near Lake Lure, have nearly doubled in value. He said the county commissioners hoped, through the other tax options, to offer some relief to senior citizens and lower- income families who are also homeowners. After the revaluation the property tax rate was lowered from 61 cents per thousand to 53 cents, which Condrey said was not a revenue-neutral reduction.

“I think the board just thought if there were some ways to take the pressure off the property tax,” Condrey said, “we ought to look at those.”

Condrey said that for many years additional Medicaid costs consumed more than the new property taxes and other tax increases brought in. He also said more than $100 million worth of new school buildings have been constructed since 1990, and that currently the county needs more space for its tax department and county clerk’s office, which are housed in a cramped county courthouse.

Rutherford County has placed both the transfer tax option and sales tax option on its November ballot.

“I think the commissioners will take a serious look at making our building program more robust, and hope to accomplish more than we would be able to accomplish without it,” Condrey said.

According to the John Locke Foundation’s analysis, Rutherford’s revenues have grown by 3.5 percent more than the rate of population growth and inflation, and the county has almost $18 million in reserves, more than $12 million that the state treasurer recommends. And thanks to the Medicaid swap with the state, which includes a “hold harmless” clause that assures counties get at least $500,000 after giving up their half-cent sales tax, Rutherford will have another half-million dollars to work with.

Similar scenarios exist across the state in counties that have tax increase options up for a vote next month (see chart this page).

“It is time for taxpayers to demand that county government live within the means of the taxpayers,” Sanera said, “rather than the other way around.”