Progressive Voices

It’s time for round two of North Carolina’s most recent foray into local tax referenda. In 2008, several counties are planning to make use of their new local taxing authority. Recall that last year the General Assembly authorized counties to enact, if approved by a majority of local voters, either an additional one-quarter cent sales tax or a point four percent increase in the real estate transfer tax. A few dozen counties placed these options on their November ballots. None of the proposed land transfer tax increases were approved and only five counties managed to pass sales tax increases.

This year, 19 counties will place tax measures on their ballots. Sixteen are opting for the sales tax increase and three others are trying for land transfer tax increases.

Cumberland County tried unsuccessfully last fall to pass a sales tax increase. The proposal was narrowly defeated and county leaders are going to try again this May.  To tip the voting in favor of the sales tax increase, county commissioners are promising to use nearly half of the expected revenue from the sales tax increase to reduce the county property tax rate by two cents. That amounts to a $20 tax cut for every $100,000 of home value.

The proposal’s supporters might be right in that such a revenue swap might find them some more votes, but they are wrong in thinking that such a swap will be good for their county in the long run.

Much is made locally of Cumberland County’s 88 cent property tax rate – one of the highest in the state. But that number is misleading. After adjusting for the frequency of property revaluations, Cumberland’s effective tax rate is actually 75 cents. More to the point, Cumberland County ranks 83^rd out of 100 counties in the amount of property tax collected as a share of the total income of residents and 44^th in property taxes collected per person.

So if the property taxes aren’t really that high, what do county leaders hope to accomplish with the proposed tax swap? County leaders plan to use the new revenue to pay for public school construction – a worthwhile goal and one that is shared by other growing communities in North Carolina. But is it wise to use nearly half of the new sales tax revenue to provide a property tax cut? In short, the answer is “no.”

Admittedly, there is great public disdain for property taxes. Unlike sales taxes which are paid in dribs and drabs, the property tax is one lump sum payment. And unlike income taxes, when a person’s income declines their property tax bill remains unchanged – or worse still, it may go up. But despite its unpleasantness, swapping property taxes for sales taxes is not all that it is cracked up to be.

First and foremost, the sales tax is the least fair of all major state and local tax sources.  While it may be paid in dribs and drabs, those dribs and drabs add up, especially for low-income taxpayers. In fact, relative to income, the sales tax hits the lowest-income taxpayers six times harder than the state’s wealthiest taxpayers. Property taxes are also regressive, but not as much so, asking three times more of the lowest-income taxpayers relative to income compared with the wealthiest taxpayers.

The sales tax is also an increasingly inefficient way to pay for public services in North Carolina. This is because state policymakers have failed to broaden the tax base to include more services. As a result, the percentage of transactions in the state that are taxed falls every year and revenue from the sales tax doesn’t grow with the economy, much less keep up with school construction costs.

So, what can be done to help counties in Cumberland’s situation? First, and foremost, the state needs to make the property tax fairer by enacting what is known as a property tax circuit breaker. The basic idea behind the “circuit breaker” approach to property tax relief is quite simple: taxpayers earning below a certain income level should be given some amount of property tax relief when their property taxes exceed a certain percentage of their income.

Imagine a hypothetical taxpayer in Cumberland County who owns a home valued at $250,000 and whose income is $40,000 per year. That person’s current property tax bill is $2200, or 5.5% of their income. Let’s assume that a state circuit-breaker kicks in when someone’s bill exceeds 5% of their income. Under this scenario the hypothetical taxpayer that receive a rebate of $200 when they file their state income taxes.

The second thing the state must do to help communities like Cumberland is to modernize the sales tax by broadening the tax base to include more personal services. This will make the tax fairer because wealthier households tend to spend higher percentages of their incomes on services. This will also help revenue from the sales tax to better track growth in consumer spending.

Cumberland County should do what’s best for all of its citizens, and sometimes that may mean looking to the property tax when other revenue sources might seem more politically palatable. In turn, the state should be a better partner to local governments by modernizing the state and local revenue system to make it fairer and more adequate in the long run.

Elaine Mejia is the Director of the N.C. Budget and Tax Center

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This entry was posted on Monday, March 10th, 2008 at 7:05 am and is filed under Progressive Voices. You can follow any responses to this entry through the RSS 2.0 feed.