by Sarah Curry
Director of Fiscal Policy Studies
Each local jurisdiction in North Carolina, whether it is a county or a city, has chosen to provide services for its citizens. Some have chosen to offer more than others, and with every service offered there is a cost involved. Counties are considered an arm of the state and are required to offer and/or partially fund certain state-mandated services including public schools, social service programs, mental health programs, emergency medical services (EMS), courts, jail facilities, registers of deeds, and building code enforcement. Cities are only legally required to provide one service, building code enforcement.
Cities and counties are authorized to provide many other optional services such as water and sewer utilities, zoning and land use planning, recreational and cultural activities, and many more. Regardless of which services a local jurisdiction decides to offer its citizens, there is a cost involved with each.
The most common forms of revenue for local governments are property and sales taxes. Looking at the state as a whole, in 2012-13 property taxes made up 47 percent of total county revenues and local sales tax was 12 percent of total county revenues. In cities, property taxes make up a significantly smaller percentage of the overall revenue because cities instead rely more heavily on the operation of utilities, which account for an average 34 percent of total city revenues in North Carolina.
An add-on to the property tax is a service district tax that provides revenue specifically to fund additional services to the property or property owners within that district and only approved through a referendum. Counties have created service districts for many services including fire protection, beach erosion, flood and hurricane protection, recreation, sewage and solid waste collection and disposal, water supply and distribution, ambulance and rescue, watershed improvement, drainage projects, and cemeteries. Like counties, cities also use service districts, yet they are almost always used for downtown revitalization. Downtown special taxing districts have been used to finance additional police patrols, more frequent solid waste collection, capital improvements such as sidewalk or street improvements, and promotional programs, such as the Main Street program.
Sales taxes are only levied by counties, and all currently levy at least a 2 percent local sales tax, which is composed of three different taxes – the Article 30 one-cent tax, the Article 40 one-half cent tax, and the Article 42 one-half cent tax. Counties may also levy an additional quarter-cent sales tax with voter approval, but so far only 27 out of the 100 counties in North Carolina have approved this, and six more counties will have it on the ballot in November. Local sales taxes are collected by retailers and then sent to the NC Department of Revenue. Of the 2 percent collected, the Department then returns 1.5 percent to the counties. The other half-percent is pooled and allocated to the counties on a per-capita basis. Counties are required to share their proceeds with cities within their jurisdiction. The county commissioners can choose one of two ways to distribute this tax revenue, through a per capita method or an ad valorem method. Counties are not required to share the additional quarter-cent tax revenue with cities or other taxing units located within the county.
North Carolina statutes allow local governments to impose other taxes, as well. The rental car gross receipts tax was created in 2001 when rental cars were removed from the property tax base, and state law allowed cities and counties to levy the tax on all those companies operating inside their jurisdiction. The animal tax is permitted in counties and cities for the privilege of keeping dogs and other pets. In 2008, the General Assembly removed heavy equipment that is rented or leased on a short-term basis from the property tax base and instead authorized counties and cities to charge a short-term heavy equipment rentals tax on the gross receipts of entities whose main business is the short-term lease or rental of heavy equipment. Another local tax that is collected is the motor vehicle license tax on the privilege of keeping a motor vehicle within the city or county limits.
Other local taxes are permitted by local act, and those are primarily occupancy and meal taxes. Occupancy taxes on hotel and motel rooms exist in more than 70 counties. A smaller number of counties levy a prepared meals tax on restaurant meals.
These taxes are the main sources of revenue used by cities and counties across North Carolina. Some local governments use fees, charges, or assessments, as well as a number of shared revenue sources through the state to fund daily activities and services for their citizens. One thing is clear: while many of us enjoy the services and amenities our hometowns offer, nothing is free and everything costs someone in taxes along the way.
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