JLF report questions Chowan’s proposed sales tax hike

October 13, 2008

RALEIGH — Chowan County commissioners could avoid a proposed sales tax increase for 14 years by diverting almost $4.5 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 14 times the amount of money the sales tax increase would provide to Chowan 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 14 years.”

County commissioners are asking voters to approve a quarter-cent increase in the sales tax Nov. 4. “This request for a sales-tax increase occurs in the midst of a financial scandal that already has led to a 9-cent property-tax increase and a 10-percent cut in county services,” Sanera said. “It would seem at a minimum voters should wait until the State Bureau of Investigation and State Auditor report on the financial facts and possible criminal behavior linked to this scandal before approving a tax increase.”

Chown 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.

Chowan County commissioners cannot argue that local schools are underfunded, Sanera said. “Over the next 10 years, the number of public-school students in Chowan County will decrease by about 4 percent,” he said. “If the school district has facility needs, county commissioners and the school board need to show taxpayers how they would spend the $3.7 million the state has promised for capital improvements over the next 10 years.”

Chowan County revenues have grown 30 percent faster than the combined rate of inflation and population growth since the 2002 budget year, Sanera said. “Chowan raised $3.6 million more from its taxpayers in the 2007 budget year than in 2002,” he said. “The average family of four paid $976 more in taxes in 2007 than in 2002. A family’s income would have been forced to jump by 48 percent to meet the increase in county government revenues during the past five years.”

Chowan County government doesn’t need to take additional money away from taxpayers, Sanera said. “If Chowan County adjusted its revenue stream to grow only as fast as the combined rate of population and inflation growth, total revenues would increase 32 percent during the next 10 years,” he said. “This increase is more than adequate to pay for county needs.”

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 Chowan 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 Chowan County will have at least $500,000 in additional funds that can be used to meet other county needs. Chowan actually fares better than that, with an average of $800,000 per year for the next 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 Chowan 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 Chowan 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].