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Wednesday, 08 August 2007 00:00

The nuts and bolts of the property transfer tax

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By Julia Merchant • Staff Writer

A bill hailed by state and local officials as a way to help pad the bank accounts of county governments may not turn out to be as simple, or as lucrative, as it initially appeared.

The bill, passed as part of the state budget last week, gives counties the authority to enact either a 0.4 percent tax on all real estate transactions or a quarter-cent sales tax. The new tax options — which must be approved by voters — are the first source of revenue counties will be able to directly collect besides property taxes.

But the bill isn’t all good news for county coffers. It contains a Catch 22 that puts most counties in the red if they fail to take up one of the tax options.

The second — and not so popular — part of the bill relieves counties of the Medicaid burden, but also takes away a half-cent sales tax counties currently get.

For most mountain counties, the half-cent sales tax reaped more than Medicaid cost. While counties have long wanted the burden of Medicaid off their backs, also taking away a half-cent sales tax defeated the purpose — leaving many counties who choose not to enact either of the new taxes worse off. (See “Option 3: Do neither” on the accompanying chart.)

 

A much-anticipated move

To Todd McGee, communications director for the North Carolina Association of County Commissioners, the new tax options are a product of a lengthy, challenging effort.

“We’ve been lobbying for several years ... to give counties another tool to choose to use if they want to meet their needs,” he said. “(The tax) is something we’ve pushed for a long time and it’s very significant. The General Assembly understood what our needs are and agreed we needed funding.”

The idea to add a land transfer tax as a revenue option was inspired by six coastal North Carolina counties that have had a real estate transfer tax for almost 20 years. He said the usual thinking at a state level is that if one county has a tax, all counties should have it.

The real estate transfer tax was promoted as a desirable option because of the benefit it has brought to the six counties that have had it. The county commissioner association has studied its impact and found that the transfer tax “has not negatively impacted growth, the cost of housing or economic development,” according to a report on the group’s Web site.

The land transfer tax was not without opposition. During debate in the General Assembly, Realtors and homebuilders lobbied intensely against the tax. Rep. Phil Haire, D-Sylva, heard that the opposition groups spent an estimated $600,000 in their efforts, running newspaper and television ads against the tax.

“There was quite a media blitz against this,” Haire said.

Marty Jones, a Realtor in Cashiers, said state lawmakers pulled a smooth move to get it passed.

“They couldn’t get it approved as a stand-alone bill so they had to sneak it in the budget,” Jones said. Some lawmakers were against it, but didn’t want to vote against the whole budget just because of that measure, such as Sen. Joe Sam Queen, D-Waynesville. Sen. John Snow, D-Murphy, did vote against the entire budget on principle, due to his opposition to the land transfer tax.

It is unlikely opposition to the land transfer tax will reside anytime soon, as members of the Realtor and homebuilder camp will likely attempt to keep the land transfer tax option off the ballot at the county levels (see story page 9).

 

The swap

At first glance, both tax options appear capable of generating whopping revenues for counties, especially with the Medicaid burden being lifted. But factoring in the loss of a half-cent sales tax paints a vastly different picture (see chart).

Macon County Manager Sam Greenwood said the swap — taking over Medicaid but also taking away the half-cent sales tax — was a dirty trick by the state legislature.

“The counties almost come in on the verge of taking a real shaft on this,” Greenwood said. “The state legislature is coming out ahead at the expense of the counties under the guise of relieving the counties of their debt.”

Macon County is left $800,000 in the hole after the state takes away the half-cent sales tax along with the Medicaid burden.

“That’s about a penny on our property tax rate,” Greenwood said, referring to the amount brought in annually by each cent of the county’s property tax.

That leaves the county little choice but to take up one of the additional taxing options — if approved by voters.

“The state has in essence turned the process on its head. It’s forcing the counties to raise taxes,” Greenwood said. “They are coming in and saying we are giving you a choice of raising taxes one of these two ways, but you have to go out and convince the voters of that to make up for a loss.”

McGee contended that though profits might not be as large as counties would like, every county in the state still comes out ahead in the swap if voters approve one of the taxes. Some small, rural counties — though none in the mountains — might actually choose not to enact either tax, simply because their Medicaid relief dollars will be so substantial.

 

The voter referendum

Ultimately, the decision of what tax will be enacted rests in the hands of voters — to a certain extent. The reality is that county commissioners will have the power to put the tax of their choice on the ballot, or might, in the end, choose not to hold a vote at all. An additional option is that counties could place both taxes on the ballot and let voters choose which one, if either.

Letting the people vote on a new tax, particularly a sales tax, is not standard practice, McGee said. The General Assembly has provided four local option sales taxes before, but none had to go to a vote of the people.

“But because this is a new revenue, the General Assembly just felt more comfortable saying let’s not put a new tax on the people unless the people want to be taxed,” explained McGee.

The counties of Macon, Haywood, Jackson and Swain are already leaning toward one of the tax options (see article on page 9). For all of these counties, it is currently estimated that the land transfer tax option will rake in more revenue than a sales tax increase. Choosing not to enact either option will be detrimental to all counties except Swain, who would barely come out with a net gain.

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