Fill Property-Tax Holes | Eastern North Carolina Now

   Publisher's note: The article below appeared in John Hood's daily column in his publication, the Carolina Journal, which, because of Author / Publisher Hood, is inextricably linked to the John Locke Foundation.

    RALEIGH     Any tax-reform bill that might move through the North Carolina General Assembly will address only state-level taxes. So the topic of my column today is unlikely to lead to any legislative action in the short run. Just keep this in mind for future consideration: If we are going to continue to rely on real-estate taxes to pay for some local government services, why should property owned by nonprofits or state government be exempt?

    Property taxes are a reasonable way to apportion the cost of delivering government services from which people tend to benefit according to the size and value of real property. For example, if you own a business with a sizable footprint, frontage, and parking lot, the extent to which you benefit from local streets and other city services is greater than if you own a consulting firm and work out of your home. Similarly, if your house is worth twice as much as mine, then you basically have twice as much of an asset to protect from theft or fire - meaning that perhaps you ought to pay something like twice as much as I do in taxes to finance public-safety services.

    This is the theory behind property taxes, anyway. In practice, we often end up using property-tax revenue for services that don't really relate well to real-estate value - such as public education. I think a consumption tax is a better way to shoulder any local share of such services, but that's a topic for another day.

    Theoretically, then, if property taxes make sense as a funding mechanism for certain local services, it is problematic to exempt major nonprofit enterprises such as hospitals and universities from the property tax. The same analysis applies. These nonprofit institutions benefit from local police and fire protection, access to the city street grid, and the like. Unless they make payments in lieu of taxes to the relevant jurisdictions, these institutions - or, more properly, the people who work for or receive services from these institutions - are receiving public services for which they are not paying. Other taxpayers are forced to pay higher rates on their residential or business property to make up the difference.

    Similarly, exempting property owned by federal or state government from local property taxes has the effect of transferring the funding responsibility from those who work for or do lots of business with these government offices to those who don't.

    Defenders of the current system argue that nonprofits ought to be exempt because they do good things. The argument doesn't quite wash. Plenty of for-profit entities also confer broad social benefits - employment opportunities, for starters, and economic innovation. More importantly, if policymakers deem it appropriate to subsidize the operation of nonprofits whose services they appreciate, it would be better to do it via on-budget appropriations rather than off-budget tax exclusions.

    Cities differ widely in how much the property-tax exemption for nonprofit and government affects their operations. Governing magazine published a piece a couple of months ago that estimated the fiscal impact of property-tax exemptions for 20 American cities. Charlotte was among them. The total value of its tax-exempt property was estimated at about $13 billion in 2011, or roughly 13 percent of the total assessed value of property in the Queen City. That was low by national standards (Charlotte is neither a state capital nor the home of a huge university.) More than a quarter of total assessed property value in Houston and Indianapolis is exempt. So is about 30 percent of property value in Baltimore, Boston, Philadelphia, Denver, Jacksonville, Fla., and Columbus, Ohio. The rate for Washington, D.C. is 37 percent. In New York City, it's 42 percent.

    At some point, policymakers ought to restructure North Carolina's property tax - broaden its base, lower its rate, and reform the way real estate is assessed. Perhaps after they fix the state tax code...

    Hood is president of the John Locke Foundation and author of Our Best Foot Forward: An Investment Plan for North Carolina's Economic Recovery.