RALEIGH – When a state judge ruled that the North Carolina Department of Insurance had not followed proper procedure in approving major changes to the state’s coastal-insurance pool, many coastal residents celebrated. They certainly don’t want to have to pay up to 30 percent more for their homeowners insurance.
But Rep. Hugh Holliman, majority leader of the N.C. House, has a message for Carolinians on the coast: the pain is still coming.
Holliman, a Lexington Democrat, has reportedly been meeting with insurers, regulators, and other interested parties to work out a comprehensive solution to the chronic underfunding of the Beach Plan, which covers properties in 18 coastal counties. Many property owners would find it extremely difficult to afford a market rate for insurance coverage, given the higher risk of storm damage. So the state set up a pool, the Beach Plan, that essentially compels homeowners in other parts of the state to subsidize the coast.
As policy analyst Eli Lehrer in a research paper published by the John Locke Foundation in December, North Carolina’s Beach Plan is woefully unprepared for potential losses and represents an enormous unfunded liability for state taxpayers.
“Without change, the Beach Plan could result in higher insurance costs for nearly all North Carolina residents, massive withdrawal of insurance companies from the North Carolina market, and fiscal turmoil throughout the state,” Lehrer said. “The Beach Plan’s liabilities already have prompted one major company, Farmers, to withdraw from North Carolina’s insurance market, and others may follow.”
Coastal residents, business interests, and their representatives in Raleigh reject this analysis. They argue that not only did the Department of Insurance fail to conduct due diligence before approving changes in coverage and premiums, but more broadly that there is no significant funding shortfall in the Beach Plan. They downplay the potential for storm damage and argue that whatever subsidy the Beach Plan provides is justified given the role that coastal communities play in providing recreation for North Carolinians and generate economic activity and revenues to the state.
Lehrer and other advocates for reform present ample evidence that the Beach Plan is, truly, in deep financial trouble. As for the case for subsidy, it doesn’t stand up to close scrutiny. Indeed, it reminds me of similar arguments made in favor of state or federal subsidy of beach renourishment projects and for raising sales taxes instead of property taxes to fund local services in tourism-dependent communities.
The underlying problem is failing to distinguish between two groups: those who write the checks and those who actual bear the cost. The two overlap but they are not the same.
When a city imposes a property tax on a shopping center, the manager or owner of the property may write a check to the local revenue office. But the actual costs of the tax are shared among the owners, the employees, and the shoppers in a mix that is hard to pin down. The landlord certainly transfers as much of the cost as possible to the retailers renting space. They, in turn, pay their bills partly by raising prices, partly by reducing salaries or employee benefits, and partly by reducing return to their investors.
While the precise breakdown of the incidence of the tax may elude us, it is clearly the case that levying the property tax makes it a bit more expensive for everyone involved to conduct business at the shopping center, when compared to another shopping center with a lower tax rate.
Similarly, if coastal property owners were presented with a higher insurance premium – one that more accurately priced the risk of living or doing business in areas prone to storm damage – they might well be the ones who write the check. But the costs would be shared by those who live elsewhere and visit or do business on the coast. Tourists would pay higher rents and prices, for example.
Massive taxpayer subsidy of the Beach Plan is neither fair nor sustainable. If Holliman is right, coastal residents can expect to see their premiums rise next month. I understand why they don’t like the prospect. It is, however, the right thing to do.
Hood is president of the John Locke Foundation