For many of us, Labor Day signifies the last day of summer. For local governments, it is the day property tax bills are sent to millions of citizens. Property taxes are one of the oldest forms of taxation in North Carolina and were used through the 1930s as a joint tax by state and local governments. Since the Great Depression, property taxes have been levied only though local governments and are the single largest source of revenue for counties.
Last year $8.1 billion was collected in property taxes across North Carolina. That amounts to $830 per person (not per taxpayer). Property tax is assessed in the form of a valuation, a set amount per every $100 in value of a property. Total collections vary based on population, size of the county, and the value of property within each county. While the larger counties collect the most revenue, they do not have the highest property tax rates in the state. See the table below for the highest and lowest property tax rates and collections as of June 30, 2013. More information is available here.
Counties are legally required to fund a portion of certain state-mandated activities, acting like an arm of the state by administering programs for the state in their local jurisdictions. These programs include public schools, social services programs, mental health programs, emergency medical services, courts, jail facilities, registers of deeds, and building code enforcement. In addition to the services mandated by the state, there are also many optional services counties choose to offer their citizens, such as water and sewer utilities, economic development, and recreational and cultural activities. If we look at the total of all revenue sources for the counties in North Carolina last year, 47 percent was from property tax.
The three main elements of the property tax system in North Carolina are real property, personal property, and motor vehicles. Real property consists of land, buildings, and other improvements to land. Personal property consists of business equipment, automobiles, boats, and all personal property that is not intangible and is not permanently affixed to real property. Motor vehicles, if registered, are assessed according to their registration renewal dates.
While many homeowners across the state will receive a tax bill this autumn, there are many exemptions from property tax in North Carolina. According to the N.C. Constitution, units of government, burial property, religious property, educational property, religious educational property, and charitable property are completely exempt from paying property taxes. In addition, there are also a variety of other exclusions from the property tax, about 47 in total. These include inventories, poultry, livestock, feed, and nonbusiness property (personal property that is used by the owner of the property for a purpose other than the production of income and is not used in connection with a business).
These exemptions and exceptions cause counties problems when a large amount of their property is exempt. A great example is Wake County. Much of Wake County’s property is N.C. State University, Wake Technical Community College, public schools, and state government buildings. All of these large property areas are exempt from the property tax, thus reducing the county’s tax base. Since the overall property tax rate is capped by statute at $1.50 per $100 of assessed valuation, and none of the counties is close to that amount, they have found other creative ways to fund services.
A popular addition you have probably seen on your property tax bill is a service district tax. State law mandates that the property tax rate must be uniform throughout the taxing unit, but if a service district is created within the unit to provide certain services, an additional tax may be levied. A common example of this is fire protection. Citizens who live within a fire district pay an additional tax, which is earmarked for that fire department.
While county governments offer services that increase our quality of life such as police, fire, solid waste disposal, and water/sewer, their scope should be limited. Property taxes can be stretched only so far, and many of the optional services counties offer can be accomplished better through families, charities, or for-profit companies.
Spending on privately owned athletic stadiums, convention centers, economic incentive packages, downtown parks, and other nonessential services has at times received higher priority in local budgets than essential functions such as school buildings, sewer systems, emergency management, and roads. Prioritization and using existing revenues more efficiently, rather than higher property taxes, are the keys to healthy local governments.
Sarah Curry is Director of Fiscal Policy Studies for the John Locke Foundation.