How Affordable Housing Could Be the Key to a Responsible Policy Solution

By Rob Schofield

Quick Take:

• One of the most contentious ongoing tax policy issues in North Carolina concerns the issue of land transfer taxes.
• Though popular with voters and local officials, these taxes are strenuously opposed by two of the state’s most powerful special interests (realtors and homebuilders).
• As they look for viable middle ground, state policymakers should consider the issue of affordable housing as the key to a responsible policy solution.

One of the most promising developments in state policy debates in recent years is the slow but steady evolution of the debate on taxes. After a prolonged period in which simplistic, anti-tax, anti-government messages held sway, public and policymaker attitudes are changing. Confronted with the hard realities in a state that is at once booming and suffering, future-bound and mired in the past, more and more North Carolinians are looking to public solutions to ease the growing pains of the boom areas and lift up the communities that are struggling.

A prime example of this slowly changing mindset can be found in the current discussion of real estate transfer taxes, i.e., the fee that government assesses and collects when private parties consummate a sale of real estate. For many years, North Carolina state policymakers have kept these taxes low at the behest of the state’s powerful realtor and homebuilder lobbies.

Now, however, particularly in the state’s booming counties where explosive growth is sending the demand for schools and other essential services to stratospheric levels, grassroots advocates are pushing back. These groups and individuals are demanding a reconsideration of transfer taxes and impact fees (a variant of the transfer tax in which developers are charged a flat amount of money for each new home they construct) as a way in which growth might help to pay for itself.

The Transfer Tax: Challenges and Alternatives

Like a lot of superficially appealing tax proposals (the lottery and cigarette taxes to name just two), real estate transfer taxes are not a perfect solution. As, in effect, a kind of sales tax, transfer taxes can be regressive – that is, they can have a disproportionate impact on people of lower and middle incomes. Impact fees are particularly regressive in that they are typically applied at a flat rate of so many dollars per lot rather than as a percentage of the sales price, thus discouraging the construction of lower priced homes. In addition, to the extent that they are applied and collected at the local level only, both taxes offer little help to slow or no-growth communities.

The most obvious alternative to the transfer tax is the traditional property tax. Though often unpopular (and also regressive in some circumstances), North Carolina property tax rates are generally lower than the national average. This is particularly true in most of the state’s large and fast growing counties. Wake County, for example, has one of the lowest rates in the central part of the state.

Some analysts and advocates (and even some policymakers) have argued persuasively for years that before North Carolina counties are allowed to raise the extremely regressive sales tax again or cry poverty over their local Medicaid share, they ought to be forced to look closely at their property tax rates. These folks also point out that North Carolina could help nudge such a process along by adopting two statewide property tax reforms: a “circuit breaker” and a requirement of annual reassessments.

Like a real world electric circuit breaker, a property tax circuit breaker protects taxpayers from property tax “overload”: when a property tax bill exceeds a certain percentage of a taxpayer’s income, the circuit breaker reduces property taxes in excess of this “overload” level. With annual assessments, North Carolina could alleviate much of the “sticker shock” and controversy that currently accompanies the system employed by many counties in which reassessments take place only once every eight years. In some states, frequent reassessments have even permitted local governments to reduce property tax rates during periods in which property values have been on the rise.

Hard Political Realities

Even with progressive add-ons like a circuit breaker and annual reassessments, however, property taxes remain a tough political sell. Because so many homeowners pay the property tax in one giant annual payment, it seems likely to remain an extremely visible and unpopular tax. Thus while serious discussion of the role of property taxes in North Carolina’s overall revenue mix remains a “must” for those (like the State and Local Fiscal Modernization Study Commission) discussing the state’s long-term fiscal strategy, those looking for a quicker fix to some of the state’s nearer-term revenue shortfalls will probably need to look elsewhere – especially those in low wealth and high needs counties that have already “maxed out” their property tax rates.

Given the hard political realities of the current situation, it’s not surprising that state leaders keep returning to the transfer tax. Not only is it popular with voters, but it also features a direct and obvious connection to one of the state’s greatest immediate challenges – its explosive (albeit geographically limited) growth. Only two major roadblocks stand in the way: opposition from two enormously powerful special interest groups and the challenge of making the transfer tax fair and effective.

Overcoming the opposition of the state’s realtors and homebuilders, in particular, will not be easy. The Association of Realtors has recently launched a major multi-media campaign against transfer taxes. In the list of reasons for opposing impact fees on its website, the Home Builders Association asserts that such ideas are simply “unrealistic” given their (i.e., the homebuilders’) success in “alerting legislators.” In other words “don’t even think about messing with our legislators.” Together, the two groups control two of the state’s four most active political action committees and seem inclined to do all they can to protect their handsome profit margins.  

Crafting a Practical Solution

One intriguing potential solution to the twin challenges confronting the transfer tax movement revolves around the issue of affordable housing. As has been detailed in this space and other Policy Watch publications on numerous occasions, North Carolina remains in the midst of an affordable housing crisis. Lack of affordable housing for people of modest means plagues strong and weak communities throughout the state. Not only does it place numerous additional burdens on physical infrastructure like roads and the environment as people drive long distances to work, it reduces the efficiency of government workers who can’t afford to live near their jobs and strains schools and human services programs in dozens of ways.

At the same time, despite this shortage and broad-based support (including the backing of realtors and homebuilders), the state’s award winning Housing Trust Fund continues to list along with relatively tiny annual state appropriations. This year, for instance, the Governor’s budget proposes a total appropriation of $8 million for 2007-’08 – more than a 50% cut from the final ’06-’07 budget.

In light of this imposing combination of political and policy dilemmas, an obvious solution is to allow local governments to adopt new transfer taxes (some pending legislative proposals would require local referenda) but to require a significant chunk to be directed toward the construction of affordable housing. Not only would such a move assure that a sizable portion of the new money would be used in a progressive fashion (i.e., to help people of modest income), but it would also serve to soften up and blunt the opposition of realtors and homebuilders by assuring a new and steady stream of funding for new home construction and sales.

To make such a proposal even more widely beneficial, lawmakers could apply the tax on a statewide basis and direct some portion of the revenues toward the Housing Trust Fund. This would allow struggling counties to realize at least some tangible benefits from the tax as well. In Florida, the transfer tax has produced hundreds of millions of dollars for affordable housing with no discernible negative impact. To complete a truly progressive package, lawmakers could exempt the first $100,000 in value of a home from the tax.

In the weeks and months ahead, state lawmakers seem certain to struggle with the precarious balancing act between long and short-term fiscal solutions, boom and bust regions, wealth and low-income individuals, and business interests and grassroots activists. For the first time in a long time, affordable housing has the potential to be the centerpiece of a logical and politically appealing “win-win” solution. Stay tuned.