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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. Some of these complaints are more legitimate than others. In recent legislative sessions, local officials 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 relatively high rates of state taxation and expenditure. 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 local property-tax increases, North Carolina’s tax burden is now close to the national average and far higher than that of our neighbors.

Local government expenditures in North Carolina have actually grown more rapidly in real, per-person terms (40 percent) than has the state budget (27 percent) over the past decade. 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 many jurisdictions have raised their taxes and fees. In 2003, 35 counties raised property tax rates, according to the N.C. Association of County Commissioners. Only nine cut them. In 2004, there were 31 tax-raising counties and three tax-cutting counties.

While many growing communities face similar challenges, they have chosen to address them differently. Cities and counties that have made efficiency and tax relief a priority have been able to keep their costs down by using such tools as administrative restructuring, competitive contracting, and eliminating low-priority expenditures. The By The Numbers 2004 report from 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 Randolph.

Local governments do have appropriate cause for concern, however, when it comes to some state fiscal policies. North Carolina is one of the few states that forces counties to share Medicaid costs, which have exploded in the past 15 years. Also, during the 2001-02 state budget battles, Gov. Mike Easley and the General Assembly transferred hundreds of millions of local tax sharing and reimbursement dollars to the state treasury, thus imposing a sudden and unjustified financial burden on city and county governments already facing revenue slowdowns.

Recommendations

1. Local governments 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 taxpayers hundreds of millions of dollars during the past decade.
2. Over the next few years, state government should pick up the entire state share of Medicaid expenses, in exchange for local governments ending their efforts in the legislature to acquire new ways to tax their citizens through such economically destructive means as higher sales taxes, impact fees, or real estate transfer taxes.

To view higher quality graphs, download Agenda 2004 [560KB Acrobat].