RALEIGH – There’s a new debate in the North Carolina General Assembly that demonstrates once again the perils facing any legitimate attempt at tax reform.
For years, the statewide association for home builders has pushed for a measure to exempt just-developed but unsold properties from being subject to local taxation. Currently, a new home is assessed for property taxation regardless of whether it has been sold and occupied by residents. The same is true for other developer improvements, such as laying streets in a new neighborhood. The bill would end this practice, levying the full tax on developed property only after it is sold.
Paul Wilms, who lobbies for the association, said that a version of the bill has been introduced repeatedly since the early 1990s. The date is no accident. That was when inventories were fully exempted from local property taxes. Previously, merchandise stored in warehouses prior to sale was subject to taxation.
The repeal of the inventory tax was one of the tax changes that led to annual tax reimbursements to local governments, a flow of funds subsequently used by state officials for budget-balancing tricks such as moving it on and off budget and redeploying it to other state functions. More on that in a moment.
It is a matter of fairness, according to bill sponsor Walter Dalton, a Democratic senator from Rutherford County. “This is a builder’s inventory, and the same logic should apply” as was the case for manufacturers’ inventories, he said, noting that manufacturing and even retailers have been receiving special tax incentives in recent years, so now home builders deserve consideration.
Those are some good arguments, I think, assuming that you accept two premises: 1) inventories are not going to be pulled back into the property-tax base, and 2) lawmakers are not going to stop subsidizing other businesses via special tax breaks. Just and uniform taxation requires equal treatment for builders. I’d add a third argument, derived from the benefit principle: since unoccupied houses by definition do not impose much in the way of service demands on local governments – no utilities, no kids in public school or health clinics, only limited need for police and fire response – it makes sense that this class of property should not be taxed at the same rate as occupied homes and buildings.
On the con side, the best argument going is simply that local governments can’t afford the revenue hit. I didn’t say it was a particularly good argument, only that it was the best one available. If builders’ inventories deserve to be treated the same as other inventories for tax purposes, then it should be done. You don’t preserve screwy tax policies just because governments want to spend the proceeds. More importantly, if indeed this measure is akin to the original inventory-tax repeal, those worried about city and county budgets should shift their tactics towards seeking a state reimbursement to local governments in some fashion.
You can see a pattern developing here. A tax bill is offered with a clear policy rationale but because “business” benefits it is attacked as a “special break.” This doesn’t auger well for the prospects of serious tax reform in North Carolina.
Hood is president of the John Locke Foundation.