Transfer and Sales Taxes
Recommendation
Counties and municipalities should prove their case for new taxes.
Background
Few people object to paying taxes if the taxes are fairly assessed and the money is properly used. Local governments in North Carolina all have two ways to tax their citizens — the property tax and the sales tax. Some have additional taxes on rental cars, hotel rooms, meals, home sales, or the privilege of opening a business there. Cities and counties also often charge separate fees for water and sewer, solid waste removal, recycling, or electric power.
As part of the legislative deal that swaps sales tax revenue for Medicaid payment obligations, counties also received the right to seek approval from their citizens to impose a new tax. The tax could be either a 0.25-cent increase on the 2.0-cent local sales tax (6.75 cents total) or a 0.04-percent increase on the 0.02 percent land-transfer tax most counties already have.
Twenty-seven counties sought one or both tax increases in 2007. Those counties that put just one measure on the ballot invariably chose the tax that raised the most revenue, even though the sales tax had more natural allies and fewer opponents. Voters in six counties approved the sales tax increase, five rejected the sales tax, eleven rejected a transfer tax increase, and five rejected both.
Some local officials argue that growth does not pay for itself and the new taxes are to make up for that fact. These same counties, however, often provide economic incentives to attract businesses to the area, effectively ensuring that new revenue will not keep pace with spending demands. For example, the town of Holly Springs in 2006 offered (with help from the Golden LEAF Foundation and the state) a $20 million incentive for Novartis to build a new plant, nearly all the town's tax revenue for that year.
Making the question of growth paying for itself more difficult to sustain, 137 municipalities have had revenues from taxes, fees, permits, and services grow 5 percent faster than population and inflation on an annual basis between fiscal year (FY) 2001 and FY 2006. Twenty have at least doubled per capita inflation-adjusted revenue from these sources over the same period.
Forty-six counties sought one or both tax increases through May 2008. Those counties that put just one measure on the ballot almost always chose the tax that raised the most revenue, even though the sales tax had more natural allies and fewer opponents. Voters in eight counties approved the sales tax increase, twenty-six rejected the sales tax, twelve rejected a transfer tax increase, and seven rejected both. Of the six counties that went back to their voters in May after being rejected in November, only Cumberland County succeeded in getting approval the second time around.
Unfortunately, too many local governments have misused the money they now have. In Wilmington, the city council has set aside money for a convention center while the sewer system leaks. Charlotte built a convention center and a short section of light rail instead of expanding road capacity to alleviate traffic congestion. Spending comes first with governments; if they did not spend money, they would not need to tax their citizens. There are many legitimate needs facing local governments, but officials need to convince their citizens that they are spending wisely before imposing new taxes, fees, or other costs.
Why local governments do not need new tax options
Local government cost each person $1,566 in fiscal year 2006.This was 5 percent of per capita personal income. For a family of four, the cost is $6,264.
Local governments must earn the trust of taxpayers. Spending on municipal golf courses, economic incentive packages, convention centers, and other non-essential services have received higher priority in local budgets than school buildings, sewer systems, and roads.
It's not just taxes. Although property and sales taxes are the main source of revenue for most local governments, one county and fifteen municipalities get less than half of their income from property and sales taxes. Eight other municipalities get no property or sales tax revenue. Many of these fees are for inspections of new buildings, water connections, or other items that could avoid the "impact fee" label and the need for legislative approval. Among the high-fee cities is Holly Springs, which collects $6.9 million from property taxes, $2.5 million from sales taxes, but $8.4 million from "Other Permits." Bladen County collects $21 million from "Other sales and services."
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