by Joseph Coletti
Senior Fellow, Fiscal Studies, John Locke Foundation
Wake County is one of 11 counties this year that is reappraising commercial and residential property values. It appears to be the first of those counties to have revaluations posted online at its tax administration portal. Home values have increased 20 percent since 2016, and commercial property values have jumped 33 percent. Illustrating the affordability crisis, the biggest gains were in homes under $250,000.
Wake County reappraises properties every four years, as do Cabarrus, Pitt, and 32 other counties. Among the 47 counties that reappraise every eight years, five counties (Bertie, Cherokee, Madison, Montgomery, and Pamlico) last appraised property values in 2012. Carteret and Halifax are on a five-year schedule with 10 other counties, which means their last revaluations were in 2015. Dare is the only county that revalues property every seven years. Its last revaluation was in 2013. Another five counties have a six-year revaluation schedule, but none is going through the process in 2020.
While some states continue to allow tax rates to remain constant even as property values increase, North Carolina has long required local governments to advertise the tax rate required to generate the same revenue based on the new property values. However, local governments can raise the tax rate as normal during the budget process.
The revenue-neutral tax rate does not mean everyone’s tax bill will not change. Instead, it means that the city or county would collect the same revenue from all property owners. In Wake County, homes that increased more than 20 percent in value will have higher taxes due, and those with a smaller increase will have a lower tax bill. The county provides a helpful Revenue Neutral Tax Calculator for taxpayers to see their potential new tax bill (including revenue-neutral changes in the municipal tax rate), as long as the county commission and city or town council don’t raise tax rates.
The county also provides a simplified numerical example of how revenue neutrality works, and the School of Government provides a more detailed explanation. For a typical homeowner, the practical implication is this: If you had a $200,000 house and the tax rate was $0.718 (or 7.18 mills for new transplants), your tax would be $1,436. A 20 percent valuation increase, equal to the county average, would put your home value at $240,000. With a revenue-neutral tax rate of $0.598, you would still pay $1,436 in taxes. If your home value jumped 30 percent to $260,000, you would pay $1,556. But if your house increased 10 percent to $220,000, your tax bill would fall to $1,316.
That is what would happen if the county stuck with the revenue-neutral rate. On the other hand, Wake County has increased the revaluation-adjusted property tax rate by 40 percent since 2014, with six increases in the past six years. Wake County now has higher tax rates than Mecklenburg County. It would be surprising, indeed, if this were the year for county commissioners to stick with the revenue-neutral rate.
North Carolina law compels local governments to include the revenue-neutral rate in the budget. Utah’s Truth-in-Taxation law goes a step further. Local governments in Utah must notify property owners of the revenue-neutral rate and hold public hearings specifically about any proposed increase from that rate. As states around the country face pressure on property taxes, their legislators have looked to Utah as the gold standard for comparison. Those states have put in place a number of stopgap measures to limit tax increases.
North Carolina has some homestead exemptions for people age 65 or older, people who are totally and permanently disabled, and disabled veterans or their spouses. People over 65 can also defer property taxes for a year under the property tax circuit breaker. The elderly exemption and circuit breaker are only available to households with low income. None of the exemptions apply to the full value of a property.
An old idea that has been gaining favor again would be to replace the property tax, which penalizes welfare-enhancing improvements to land, with a land value tax. Charles Marohn, president of Strong Towns, argues a land value tax “rewards neighborhood investments, discourages idleness, and closely aligns private gain with the public good.” Experiments with a type of land value tax in Pennsylvania have increased development since the 1980s, but Altoona abandoned a full land value tax in 2017.
There are two surefire ways to slow the increase in tax burdens. First, spending restraint would go a long way to check the need for tax increases between revaluations. Second, zoning reform would expand the supply of housing, slowing the growth in valuations. A land value tax would permit more improvements on individual lots and discourage holding parking lots or undeveloped land in urban areas, both of which could increase the supply of housing available. In the meantime, expect people to seek more and broader property tax exemptions.