JLF report questions Cherokee’s proposed sales tax hike

October 9, 2008

RALEIGH — Cherokee County commissioners could avoid a proposed sales tax increase for 11 years by diverting almost $10 million in savings and existing revenue streams to high-priority county government functions. That’s a key finding in a new John Locke Foundation Regional Brief.

“The savings and revenue reallocation recommended in this Regional Brief would generate more than 11 times the amount of money the sales tax increase would provide to Cherokee County,” said Dr. Michael Sanera, JLF Research Director and Local Government Analyst. “That means the county could adopt the ideas in this report and delay a sales-tax increase for 11 years.”

County commissioners are asking voters to approve a quarter-cent increase in the sales tax Nov. 4. “Commissioners say they need to raise taxes to add more money to the county’s general fund, to be spent by commissioners at their discretion,” Sanera said. “Our report shows that Cherokee County government could address its needs by setting better priorities with its existing resources.”

Cherokee is one of the latest group of N.C. counties asking taxpayers for the right to raise local sales or real-estate transfer taxes. Sanera leads a JLF research team analyzing the potential impact in each county. Working with Sanera are Joseph Coletti, JLF Fiscal Policy Analyst, and Terry Stoops, JLF Education Policy Analyst.

Cherokee County commissioners cannot argue that local schools are underfunded, Sanera said. “Over the last five years, the school population has increased by 1 percent, while inflation-adjusted local school spending has jumped by 23 percent,” he said. “That’s not to mention the inflation-adjusted 8 percent increase in state spending.”

“If the school district has facility needs, county commissioners and the school board need to show taxpayers how they would spend the $6.2 million the state has promised for capital improvements over the next 10 years,” Sanera added. “Commissioners should also follow this report’s recommendations for reducing education costs without hurting classroom instruction.”

Cherokee County revenues have grown 35 percent faster than the combined rate of inflation and population growth since the 2002 budget year, Sanera said. “Cherokee raised $6.7 million more from its taxpayers in the 2007 budget year than in 2002,” he said. “The average family of four paid $992 more in taxes in 2007 than in 2002. A family’s income would have been forced to jump by 54 percent to meet the increase in county government revenues during the past five years.”

Cherokee County government doesn’t need to take additional money away from taxpayers, Sanera said. “If Cherokee County adjusted its revenue stream to grow only as fast as the combined rate of population and inflation growth, total revenues would increase 42 percent during the next 10 years,” he said. “This increase is more than adequate to pay for county needs.”

County commissioners have easy access to one piece of Cherokee County’s $10 million in funds available for high-priority government functions, Sanera said. “Cherokee County government already has cash reserves equal to 13.5 percent of the county’s annual budget,” he said. “The state requires an 8 percent reserve for emergencies, but that leaves almost $1.7 million that’s still available to spend on pressing needs.”

“That excess in cash reserves represents about two times the $863,000 per year expected from the proposed sales tax,” Sanera added. “In other words, the county could turn to its cash reserves for the next two years before seeking new sales-tax revenue. This item alone should convince skeptics that the county does not need to increase the sales tax.”

In 2007, the General Assembly gave every county a chance to raise either the local sales tax or the real-estate transfer tax. The new tax options were part of a deal involving the state relieving counties of local Medicaid expenses. The deal also called on counties to forfeit a half cent of the local sales tax rate.

“Even though Cherokee and other counties were forced to give up some revenue as part of the Medicaid deal, they now benefit from another part of the deal called the ‘hold harmless’ provision,” Sanera said. “It guarantees that Cherokee County will have at least $500,000 in additional funds that can be used to meet other county needs. Cherokee actually fares better than that, with almost $770,000 in the first full year and $15.3 million expected over 10 years.”

Counties cannot raise the sales or real-estate transfer taxes without a local referendum. Commissioners across North Carolina have pursued that option 58 times since November 2007. Voters rejected each real-estate transfer tax hike. They also rejected most sales tax proposals. In all, voters have rejected 50 of 58 proposed local tax increases.

“Most voters see through the misinformation about the ‘need’ for more tax revenue,” Sanera said. “In all the counties voting on tax increases, revenues grew faster than the combined rate of population growth and inflation between 2002 and 2007. The average increase was almost 19 percent. In the same time period, state government spending has outpaced inflation and population growth by 6 percent. This government growth rate cannot be sustainable.”

“The November 4 vote provides the opportunity for Cherokee County citizens to be heard,” Sanera added. “The results of the 58 county tax votes in the past year are informative. Citizens, when given the chance, are rejecting tax increases.”

The John Locke Foundation’s Regional Brief “Does Cherokee Need a Sales-Tax Increase?” is available at the JLF Web site. For more information, please contact Sanera at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].