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Local Government
Local Budget & Taxes

Local governments across North Carolina are complaining about increasing demands for public services, proliferating unfunded mandates from the state and federal governments, and insufficient revenue sources to meet their financial obligations. In recent legislative sessions, city and county governments have asked for new taxing authority, all the while using their existing control over property taxes and other taxes and fees to impose an ever-higher cost on North Carolina taxpayers.

The Real Story On Local Finances

When compared to the national average, North Carolina has traditionally had low property tax rates and local government expenditures. This has helped to offset our rates of state taxation and expenditure, relatively higher by national standards. In critical areas of service delivery such as education and highways, North Carolina long ago chose statewide finance and control while other states opted for a less centralized approach. For decades, our combined state and local tax burden remained well below the national average but moderately above the average for the Southeast. In recent years, the picture has changed dramatically. In part because of sizable local property-tax increases — including at least $75 million in tax hikes in 2002 alone — North Carolina’s tax burden is now at the national average and far higher than that of most of our neighbors.

Local government expenditures in North Carolina have actually grown more rapidly in real, per-person terms than has the state budget over the past 20 years. Although demands for core services such as law enforcement, school facilities, and infrastructure have risen due to rapid population growth, particularly in urban areas and along the “I-85 corridor,” tax revenues have grown rapidly for the same reason. Not only has the tax base grown, generating new revenue from existing rates, but more jurisdictions have raised their property taxes (and added new fees) than have reduced them. In 1999 alone, 36 counties raised property tax rates. Only 3 cut them.

Comparative data show that, while many growing communities in North Carolina face similar challenges, they have chosen to address them in very different ways. Cities and counties that have made efficiency and tax reduction a priority have been able to keep their costs down, and maintain or improve their service quality, by using such tools as administrative restructuring, “rightsizing,” competitive contracting, and eliminating lowpriority expenditures in order to focus taxpayer resources on core public services.

Of the state’s five largest cities, the amount of city and county property taxes collected per person ranges widely, with Charlotte’s tax burden 30 percent higher than that of Winston-Salem. The By The Numbers 2002 report published by JLF's Center for Local Innovation shows that the share of personal income going to local government, while growing statewide in recent years, is as high as 5 to 6 percent in such counties as Durham, New Hanover, and Mecklenburg and as low as 3 to 4 percent in Davidson, Alamance, and Iredell.

Recommendations

1. Local governments in North Carolina should make tax relief and spending restraint high priorities in setting their budgets. A local version of a Taxpayer Protection Act, which would limit annual spending increases to growth in inflation and population, would have saved hundreds of millions of dollars during the 1990s.
2. Localities should, as much as possible, reform their tax and fee systems to make growth pay for itself. This approach should include charging accurate prices for hooking up to water, sewer, and transportation systems. They should not, however, seek new ways to tax their citizens, through such regressive and economically destructive means as higher sales taxes or new impact or real estate fees for school construction.

To view higher quality graphs, download Agenda 2002 [560KB Acrobat].