YOU DECIDE: What's a tax increase?
Few topics spark as much controversy as taxes, especially a tax increase. But what really constitutes a tax increase? Are all tax increases “created equal?”
To some the answer is easy: a tax increase is whenever taxes you pay rise. That is, if Joe Smith paid $1,000 in taxes last year and this year he pays $1,200, that's a tax increase. End of story.
But what if we're talking about the income tax, and what if Joe's tax payment rose only because his income rose? Should he still consider this a tax increase, especially if the percentage of each of Joe's dollars taken in taxes remained the same?
Taxes paid result from multiplying whatever is taxed — the tax base — by the percentage of that tax base taken in taxes, or the tax rate . For example, how much sales tax you pay equals the dollar amount of your retail spending multiplied by the sales tax rate (cents of sales tax per dollar of spending).
So an increase in taxes paid can occur for two reasons: the tax base rises or the tax rate increases. But should both be considered a tax increase?
If your retail spending increases, shouldn't you expect to pay more in sales tax? So tax base increases (here, retail spending) aren't usually considered a tax increase. Only a tax rate increase (here the sales tax rate) would be thought of as a tax hike.
Most taxpayers understand this logic with one exception: property tax. Like all taxes, property taxes paid equal the property tax base (here, the property value recorded by the county, called assessed value) multiplied by the property tax rate (cents of tax per dollar of assessed value).
However, two characteristics make the property tax different. One is that tax base (assessed property values) is not updated every year. Indeed, in many North Carolina counties the time between assessments is eight years. In between, the tax base only increases due to new construction, and even here the value of the new construction is recorded as the estimated value at the time of the last assessment. Yet, when reassessments do occur, the increase in property values can be large because it represents the accumulated change in values over several years.
Second, there is no assurance property values and owners' incomes will change at the same rate. In fact, in recent years property values have risen much faster than incomes. This can create a problem for owners who pay their property taxes from their current income.
As a result, when property values are reassessed and the property tax base rises by a substantial amount, owners will often perceive this as a large tax increase, even if the property tax rate has remained the same. Consequently, counties will often lower the property tax rate in reassessment years to soften the blow. Yet because the costs of many local infrastructure projects, like schools and roads, are tied to property values, placing such a lid on property tax revenues can create backlogs in school and road funding.
What's the solution?
One option is to better educate property owners about why the long lags in property reassessments create periodic big jumps in property tax payments. Another is shorter time periods between reassessments, so owners could adjust to more frequent, yet smaller, payment increases.
A third option is to develop some creative ways to pay property taxes. For example, rather than paying them out of income, some share could be paid from profits realized when the property is sold. This could be particularly helpful to property owners with high wealth yet low income.
Tax determinations are more complicated than they seem at first glance. Keep your eyes on the underlying fundamentals of the tax base and tax rate before deciding where taxes are headed.
Dr. Mike Walden is a William Neal Reynolds Professor and extension