Despite continual criticism hurled at local government officials, let’s give them credit for trying innovative approaches sometimes — although the attempts often are not as well-publicized as the complaints.
Lee County and Sanford have opted to pursue an innovative way of collecting taxes. Other cities would do well to examine the localities’ new approach. In linking performance to paying the county for tax collection, both the city and county have made a good decision.
Tax collections are not the most uplifting of topics discussed among citizens, but there are some important concepts that can affect tax rates. A good example is automobile property-tax collections. As much as we might hate to pay the tax, if the collection rate is low, it means total tax collections drop.
In that case, it is possible that local officials might have to increase the overall tax rate to make up for lost revenue. It is not uncommon for motor-vehicle property-tax collections to hover around 87 percent. But property taxes, in general, enjoy a much higher collection rate, usually 97 percent or more.
Having a high collection rate means that everyone is paying their share of taxes and not having to compensate for those who don’t. Having said that, cities often use counties to collect their taxes for them or farm the collection out to another entity. Counties assess property values and do the collection, so cities have no need for a tax office. But they still need to collect city taxes. So, it’s in the interest of cities to ensure that the collection agency (the county in this case) has a high collection rate.
In Lee County’s case, financial departments and managers looked for an effective way to collect taxes based on performance. The first draft of the proposed change was straightforward. If the county collected 99 to 100 percent of taxes owed, the city would pay the county 1 percent of the total collections. For a 98 percent collection rate, the city’s payment would have dropped to 0.875 percent and less. The drawback was that the average for North Carolina as a whole on property tax collections in this population group was 98.43 percent. So achieving the 99 percent or higher rate would be nearly impossible.
After numerous discussions, local officials agreed they would like the collections rate to be at or above the state average. If the county could collect taxes at the state average or higher, then the city would pay 1 percent of taxes collected as the service fee. If the county collects 0.5 percent less than the state average, the fee would fall to 0.875 percent. If the county collects 1.5 percent less than the state average then the city would pay only 0.5 percent. It’s a sound agreement that took a lot of work to hammer out.
The actual collection rate for the previous year was 97.55 percent for the city, which would have been almost a full percentage lower than the state average, triggering a 0.75 percent fee. If Lee County officials want the full 1 percent fee, they’ll have to achieve a higher collection rate.
The net result of this is that everyone wins. The city would pay a premium for performance, which, it is hoped by city officials, would trigger higher tax collections. The county would achieve a higher fee for beating the state average of collections. Taxpayers would benefit by both entities having stable collection rates. The incentive is to perform.
Sadly, this kind of collaborative effort is often overlooked and this particular issue was ratified on the consent agenda with no discussion. Though not well publicized, it does show that local government leaders, when challenged, can solve problems with forethought and creativity. Here’s hoping we see a lot more of this type of performance management at all levels of public service.
Chad Adams is vice chairman of the Lee County Board of Commissioners, director of the Center for Local Innovation, and vice president for development for the John Locke Foundation.