Weekly Briefing

Why the Right’s Cookie-Cutter Analysis on Local Tax Referenda is Off-the-Mark

By Rob Schofield

Quick Take:

• This past summer, state lawmakers authorized counties to conduct referenda on two new local revenue options: an increase in the land transfer tax of up to 0.4% and/or a quarter cent hike in the general sales tax. Next month, several counties will conduct such referenda.
• Recently, a market fundamentalist think tank released a series of 28 nearly identical reports that purport to show that none of the counties conducting referenda is in need of additional tax revenues.
• An examination of the reports, however, shows that each of the virtually identical papers is based upon flawed assumptions and methodology.

One of the most significant developments of the 2007 legislative session was the decision of state lawmakers to authorize counties throughout the state to conduct referenda on two new revenue options – a hike in the sales tax and/or the land transfer tax. Though far from a perfect prescription for every county, the General Assembly’s action was important and commendable for at least three reasons: It constituted an important acknowledgement of the need for more public revenue in a growing state struggling to meet the demand for core public services, it was a strong and direct repudiation of both the heavy-handed political tactics of the state’s wealthy and powerful real estate industry and the alarmist claims of the anti-government right, and it will allow at least some counties to raise critically needed new revenues in a politically palatable fashion.

A Complex Picture

This is not to say that the General Assembly’s approval of the local sales and transfer tax options was flawless. As a general rule, North Carolina would be much better off at the state and local levels if it moved to expand the base of the sales tax by taxing more services currently exempt from taxation and regularizing the many different rates rather than constantly adopting new general sales tax rate hikes.

In a similar way, some North Carolina counties would be better served in addressing their need for revenue by raising artificially low property taxes rather than increasing land transfer taxes. Indeed, it appears that in some areas, local officials have proposed raising sales and/or transfer taxes as a way to generate revenue in order to allow a property tax rate reduction. Though, perhaps, a politically popular way for politicians to appear to shift taxes onto newcomers, the property tax-for-transfer tax swap is not a fiscally responsible solution for the long haul.

In short, if there’s one conclusion that comes through from any honest assessment of what it will take to produce a revenue system that’s fair, adequate and stable in each of North Carolina’s 100 counties, it’s that one size clearly doesn’t fit all. Some counties are growing fast and can clearly benefit from the infusion of revenue that a transfer tax hike would provide as they struggle to build new schools and infrastructure more rapidly. Others would benefit less. Some counties – particularly poorer counties –have already adopted relatively high property tax rates. Others have not. Though politically popular in many circles, sales taxes remain a regressive alternative that would be best saved as a last resort. 

The Right’s Simplistic Recipe

And then there’s the “solution” advanced by the anti-government right. Last week, the Locke Foundation released a series of 28 seemingly separate six-page documents that, it contends, analyze the individual tax needs of each of the counties holding referenda in November. According to these reports, none of the counties in question – not a single one – is in need of the proposed tax hike under consideration. Rather, contend the authors, growth will simply pay for itself.

The substance of the reports is no surprise to anyone that’s followed the market fundamentalists in recent years. In fact, there’s a kind of symmetry in the simplistic way in which each of the reports uses the exact same language and offers the exact same prescription for each county since, for all practical purposes, that’s just what the right has been doing for the state and the nation for decades.

Each of the reports makes the same basic argument:

• Growth has and will continue to pay for itself.
• The recent action by state lawmakers to relieve counties of their share of the state’s Medicaid bill will produce a windfall at the county level.
• Public school enrollment growth can be handled through a combination of more charter schools, “virtual schools” “satellite” campuses, “public-private partnerships” and other cost-cutting tactics. 

Each of the 28 reports concludes with virtually identical language:

“________ County faces a crisis, but it is not a funding crisis. The county has about $___ million over and above its base budget to meet its needs (see Appendix A). A ______ tax increase at this time would only encourage more wasteful and inefficient spending. County voters need to demand that the county live within the means of the taxpayer. Continuing on the current path will not meet the real needs of county residents.”

In other words, despite the skillful effort to appear to tailor each report to its own county (a re-packaging tactic that the Locke group regularly uses with considerable effectiveness – especially with local media hungry for copy and not terribly discriminating in what it publishes), the 28 reports are ultimately little more than a restatement of the same, tired old messages, i.e., government is generally a bad thing and is doing more than it should, any new taxes are always bad, public schools should be privatized and those that aren’t should be run on the cheap with a minimum of extravagances like common space.   

Flawed Assumptions

In addition to being simplistic, the conclusions in the Locke reports are also incorrect.

For instance, according to the reports, growth will pay for itself because of the revenue streams provided by new residents. As multiple experts have noted, however, such an assumption fails to take into account the fact that many of the new demands being placed on North Carolina’s public school system are the result of efforts to improve quality – most notably efforts to reduce class size.

Meg Gray of the N.C. Budget and Tax Center points out that Cumberland County teacher to pupil ratios have fallen dramatically over the past decade and a half. In 1992, the ratio in kindergarten through ninth grade was 1 to 26 and in grades 10 through 12 was 1 to 28. In 2006 the ratios were: K-1, 1 to 18; Grades 2-3, 1 to 21; Grades 4-5, 1 to 23; and Grades 6-12, 1 to 26.

And so it goes. The “growth pays for itself” spin also fails to take in to account that the fastest growing populations throughout the state are generally school age kids under 18 and seniors over 65 – two groups that require greater than average amounts of public services. Chatham County’s student population is projected to increase by 19.5% over the next decade. That number doesn’t even take into account the other factors contributing to school facility needs.

Similarly, the “Medicaid relief as local windfall” argument fails to acknowledge that while counties are happy to have the relief, the amounts realized are generally insufficient to underwrite any meaningful infrastructure investments.

Finally, the Locke analysis also conveniently ignores the fact that growth in many counties is concentrated in outlying areas away from existing water and sewer infrastructure (again, Chatham and Cumberland are notable examples). An April 2007 report by Dr. Mitch Renkow of N.C. State’s Agricultural and Resource Economics Department concluded that “for each dollar in property tax and other revenues generated by residential land uses, [Chatham] county spends $1.14 to provide services supporting those land uses.”

Going Forward

Twenty-first century North Carolina is an increasingly diverse and complex state – a rapidly swirling and expanding melting pot that bears little resemblance to the homogenous society of the 1950’s idealized by the market fundamentalists. As they go to the polls next month, voters would do well to look closely at the specific needs of their individual communities rather than the ideologically-driven, “one size fits all” claims of the far right.            

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This entry was posted on Monday, October 8th, 2007 at 8:52 am and is filed under Weekly Briefing. You can follow any responses to this entry through the RSS 2.0 feed.