April 13, 2008

Click here to view and here to listen to Michael Sanera discussing this Regional Brief.

RALEIGH – Lincoln County commissioners could avoid a proposed sales tax increase for 17 years by diverting $26.3 million in 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 17 times the amount of money the sales tax increase would provide to Lincoln 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 17 years.”

County commissioners are asking voters to approve a quarter-cent increase in the sales tax May 6. “Commissioners say they need to raise taxes to pay for school bonds,” Sanera said. “Our report shows that Lincoln County government could address its needs by setting better priorities with its existing resources.”

“And taxpayers should remember that commissioners’ statements about how they would use new revenue are not legally binding,” Sanera added. “Once they raise a tax, the law says they can use new tax revenue for any legal purpose.”

Lincoln is one of more than 20 counties asking taxpayers this May 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.

Lincoln County commissioners cannot argue that local schools are underfunded, Sanera said. “Over the last five years, the school population has increased by 9 percent, while school personnel have increased by 12 percent and inflation-adjusted local school spending has jumped by 16 percent,” he said. “That’s not to mention the inflation-adjusted 5 percent increase in state spending and the whopping 21 percent increase in federal spending.”

“If the school district has facility needs, county commissioners and the school board need to show taxpayers how they would spend the $16 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.”

Lincoln County revenues have grown 31 percent faster than the combined rate of inflation plus population growth since the 2001 budget year, Sanera said. “Lincoln raised $17.5 million more from its taxpayers in the 2006 budget year than in 2001,” he said. “The average family of four paid $1,012 more in taxes in 2006 than in 2001. A family’s income would have been forced to jump by 49 percent to meet the increase in county government revenues during the past five years.”

Lincoln County government doesn’t need to take additional money away from taxpayers, Sanera said. “If Lincoln County adjusted its revenue stream to grow only as fast as the combined rate of population and inflation growth, total revenues would increase 48.6 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 Lincoln County’s $26.3 million in funds available for high-priority government functions, Sanera said. “Lincoln County government already has cash reserves equal to 15 percent of the county’s annual budget,” he said. “The state requires an 8 percent reserve for emergencies, but that leaves almost $5.2 million that’s still available to spend on pressing needs.”

“That excess in cash reserves represents 3.4 times the $1.5 million per year expected from the proposed sales tax,” Sanera added. “In other words, the county could turn to its cash reserves for the next three 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 Lincoln 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 Lincoln County will have at least $500,000 in additional funds that can be used to meet other county needs. Lincoln actually fares better than many counties, with $1 million promised in the first year and $6.3 million expected over 10 years.”

The JLF report also draws attention to Lincoln County government’s questionable spending practices, Sanera said. “Lincoln County gave $3 million in economic incentives to businesses and corporations from 2004 to 2006,” he said. “Taxpayers should consider this corporate welfare before they decide whether the county needs a new source of money.”

Counties cannot raise the sales or real-estate transfer taxes without a local referendum. Twenty-eight counties have pursued that option since November 2007. Five counties placed both options on the ballot in November. Voters rejected each real-estate transfer tax hike. They also rejected most sales tax proposals. In all, voters have rejected 27 of 33 proposed local tax increases.

“The May 6 vote provides the opportunity for Lincoln County citizens to be heard,” Sanera said. “Citizens, when given the chance, are rejecting tax increases.”

The John Locke Foundation’s Regional Brief “Does Lincoln 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].