A Questionable Case for Raising Taxes | Eastern North Carolina Now

    Publisher's note: The author of this post is Michael Lowrey, who is an associate editor for the Carolina Journal, John Hood Publisher.

    CHARLOTTE — In June, the John Locke Foundation released the fiscal year 2012 edition of By The Numbers, JLF's annual report on the cost of local government. BTN's insights are particularly relevant this year, as two of the state's three largest counties — Mecklenburg and Guilford — have asked voters to raise the local sales tax rate by 0.25 percentage points. The timing is curious, given political and economic developments in the state.

    Local sales tax revenue fell dramatically during the Great Recession. In fiscal year 2008, cities and counties across the state collected $2.8 billion in sales tax receipts. Just two years later, local sales tax revenue had fallen by more than 25 percent, to just $2 billion in nominal terms (not adjusted for inflation).

    Overall local government revenue collection didn't fall by one-fourth from the 2008 peak, however. Rather, counties and municipalities raised property tax rates to make up for their reduced sales tax collections. Between 2008 and 2012, local governments increased their property tax take by $1 billion a year. This came despite significant reductions in property values in many communities as the housing bubble burst.

    Put another way, in fiscal year 2008, local governments in North Carolina received 56.5 percent of their nonutility revenues from property taxes, with sales tax revenues accounting for 21.7 percent of revenues, while other taxes and fees accounted for the remaining 21.8 percent of revenues.

    By comparison, local governments got 64.7 percent — an 8.2 percentage-point increase — of their revenues in fiscal 2012 from property taxes and only 16.3 percent of revenues from sales taxes. And that comes as sales tax revenues grew to $2.2 billion in 2012, roughly 7.5 percent above 2011 collections.

    Both Mecklenburg and Guilford counties followed this general trend. In 2008, Guilford County collected $306 million in property taxes and $88 million in sales taxes. The respective 2012 figures are $362 million in property taxes and only $67 million in sales taxes. Mecklenburg County collected $802 million in property taxes and $248 million in sales taxes in 2008. By 2012, property tax receipts were up to $941 million, while sales tax revenue had fallen to $205 million.

    Endorsing a tax increase generally is a risky move for politicians. That's especially true for a property tax increase, as the average homeowner knows exactly how much property tax he pays. By comparison, the average citizen has no idea how much he pays in sales taxes each year, making sales tax increases much more popular alternatives for pols looking to spend more.

    Both counties have issues. Guilford voters have rejected increasing the sales tax three times in recent years. Mecklenburg County, meanwhile, already has the state's third-highest local tax and fee collections, trailing only two coastal counties where the presence of vacation homes distorts the results.

    The immediate need for higher tax revenues is suspect for two reasons. First, the North Carolina economy continues to recover. Economic growth and increasing employment boosts spending and, yes, sales tax revenues.

    Perhaps more important, a majority of the commissioners in each county claimed the main reason to raise sales taxes was to provide more money for education. The commissions authorized referendums for higher tax rates while the General Assembly was in session, with both chambers proposing significant teacher pay raises, and Gov. Pat McCrory supporting a pay hike.

    Such statements of intent aren't binding, though. Money is fungible, and counties can move money around as they please. Thus, what Mecklenburg and Guilford counties would like to do is tax more to spend more. And that remains a questionable goal, regardless of the state of the economy.