MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE: What's the best mix of local taxes?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

Over the past four months I've had a major education. No, I haven't gone back to school for another degree. Instead, I've had the privilege of serving on a special citizens' committee in Wake County to examine the county's future infrastructure needs and ways to pay for it.

Many counties are in the same position as Wake. They see the demands for schools, roads, parks and public buildings going up while tax revenues just don't seem to keep pace. Where can local governments turn for money? I'll outline here the pros and cons of some of the options.

Property Tax: Still the mainstay of local public finances. The logic for using property taxes to fund local building projects, like roads and schools, is that these projects increase the value of local property and thereby directly benefit property owners.

However, property values are re-estimated very infrequently in most counties. Then, when a revaluation does occur, it often results in a big jump in values and a corresponding large increase in property taxes.

And property values can increase faster than owners' incomes. Although owners are wealthier with higher property values, the rub is they have to pay the taxes from their incomes.

There are no perfect solutions to these issues, but one approach is to revalue property more frequently. This would let local governments tax higher property values earlier, allow governments to match the tax revenues from properties more directly to the costs of local construction, and result in smaller and more manageable tax increases for property owners.

Local Sales Tax: Most counties levy a local sales tax to help fund general county operations and public building projects. Some counties have implemented a special local sales tax used only to fund roads and schools.

The advantages of a local infrastructure sales tax are that it is broad-based — meaning it's paid by just about everyone in the county — and can generate substantial revenues. But one concern is that local retail sales can be lost to surrounding counties if those counties don't also adopt the tax.

Real Estate Transfer Tax: This is a local tax levied when property is sold. For example, a 1 percent transfer tax levied on a $100,000 sale generates $1,000 for the local government.

Transfer taxes can be considered a type of a property tax. The big difference is they're only paid when the property is sold, and this means the seller could pay the tax out of the profits (capital gains) from selling rather than from personal income.

Impact Fees: Impact fees are charged only on the sale of new residences. The idea is that buyers of new residences, who may be new to the county, will pay a fee to help pay the costs of the schools, roads and other public services they require.

Yet there are issues with impact fees. First and foremost, there's no assurance only households moving into the county will buy new homes. New homes are frequently purchased by existing residents. And if the logic of impact fees were followed, every time an existing household in the county had a new child or added to the number of vehicles they owned, they would pay an impact fee.

Local Income Tax: Local income taxes are used in some cities in the country, but not in North Carolina. They would work just like the federal and state income taxes; in fact, a local income tax would probably be piggybacked on top of the state tax. One big difference would be the rate. The rate on a local income tax could be as small as one-fourth of 1 percent, but this small rate could generate lots of public money. One version of this tax would apply it to residents of other counties who work in the county.

So there you have a mini-lesson on local finances and some ideas for the tweaking of those finances.

Mind you, I'm not endorsing any; I'm just throwing them into the think-about hopper for you to decide to accept or reject.

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html