Would "Regressive" Sales Tax Create Less New Burden on County Taxpayers?
Would "Regressive" Sales Tax Create Less New Burden on County Taxpayers?
The County Commission says sales tax, rather than property tax, might move some costs of expensive projects from residents to visitors. Experts say the issue is complicated.
BREVARD — When Transylvania County Commissioners started talking about adding a quarter-cent local sales tax to help pay for looming capital expenses this week, they repeatedly returned to one potential benefit:
Such a levy would shift some of the additional financial burden from residents to tourists.
“I think a quarter-penny is a whole lot easier to digest than a . . . property tax and I think our strong tourism economy would contribute,” Commission Vice Chair Jake Dalton said in an interview after the discussion at Monday’s meeting.
Other qualities of the tax might also make it more palatable to the voters who would have to approve the levy. It doesn’t apply to groceries or gasoline, County Manager Jaime Laughter told commissioners. Nor, she said in a brief interview afterwards, does it factor into rent or the cost of buying an existing home.
And even Brian Balfour, senior vice president of research for the conservative, tax-averse John Locke Foundation, said the levy really wouldn’t amount to a whole lot of money — adding one penny, for example, to the cost of a $4 purchase.
“It would be pretty minimal from both the regressive side of things and any sort of impact to tourists,” he said.
On the other hand, there’s that word, “regressive,” repeated by taxation experts across the political spectrum.
A sales tax generally hits poor and working families hardest because they tend to spend rather than invest what money they have, these experts said. And unlike, for example, the federal income tax, residents pay the same rate regardless of their wealth.
Also, there’s another option if commissioners want to capture cash from out-of-town residents, including the ones rich enough to own vacation properties: simply raise the property tax enough to generate the same amount of revenue.
Counties such as Transylvania, with large numbers of second homes, receive a boost from people who own here but live elsewhere, said Patrick McHugh, research manager of the nonpartisan-but-progressive NC Budget and Tax Center.
They generally demand fewer county services but shoulder a full share of property taxes, and they often pass that burden on to the very visitors who would be targeted by the sales tax, he said.
“If you have a whole bunch of Airbnbs and rentals that are geared to the tourist market, then effectively the tourists are paying the property taxes on those structures as well,” he said.
“Some of the same dynamic of bringing consumer dollars into Transylvania will filter in through property taxes as well as sales taxes.”
Article 46
North Carolina levies a sales tax of 4.75 percent and its tax law allows limited options for counties to add to the total.
All 100 of them in North Carolina charge the “first two cents” of local sales taxes described in three separate articles of state tax law, two of which also say that a share of the proceeds must be devoted to school capital improvements.
Four urban counties have also adopted a half-cent sales tax earmarked for public transit, according to a mapbook created by the North Carolina Association of County Commissioners. And about half of the state’s counties levy the quarter-cent tax that the Transylvania Commission discussed on Monday — and that would bring the county’s total sales tax rate to 7 percent.
Called the Article 46 local option, it carries no restrictions on its use and no requirement that the proceeds be shared with municipalities.
It must be approved by a referendum, which would likely be scheduled for next year if the Commission commits to pursuing this tax.
Individual commissioners can advocate for the passage of the tax and the Commissions can pass resolutions stating its intended use, according to an NCACC FAQ page. But county funds can only be spent to educate voters about the tax, not urge them to approve it. And the ballot question would appear as a simple “yes” or “no,” with no information about its use.
Which, at this point, is a long way from being decided.
Commission Chair Jason Chappell listed a number of capital needs it might fund, and this discussion started when Dalton brought it up during last year’s campaign as a possible method of paying for a new county courthouse.
But the Commission set aside time at Monday’s meeting not to make a decision about the local option, only to learn more about it.
Including that it would generate a projected $1.5 million per year in revenue, the equivalent of a two-cent increase in the county property tax. That’s enough — based on information provided by a consultant in September — to cover a significant portion of the revenue required to finance a new courthouse.
(The Commission also discussed a lower-cost option for that construction on Monday, eliminating a third-floor shell designed to accommodate expansion and cutting the expected price tag on the Morris Road site from $45.5 million to about $37 million.)
What Laughter couldn’t tell commissioners: exactly how much of the projected proceeds would come from visitors.
It’s assumed to be quite a bit, she said, and a table compiled by the Visit North Carolina tourism organization at least suggests this is the case.
The total spending in the county that would be subject to the quarter-cent tax is about $563 million, county Finance Director Jonathan Griffin wrote in an email. Visitor spending in the county, meanwhile, totaled nearly a third of that amount, $178 million, according to the Visit North Carolina document.
This provides a good snapshot of our robust tourism economy. Transylvania, for example, receives nearly four times as much visitor spending as Person County, an industrial county north of Durham with a population slightly larger than Transylvania’s.
But the total in that table factors in some expenditures that would not be subject to the sales tax, and, Griffin wrote in an email, it doesn’t amount to a definitive account of the visitor spending that would be taxed. Nor does, even, the information from the source the county relies on, the state Department of Revenue, which does not track the home county of buyers.
“It would be impossible to use tax data to know if a hoodie sold at D.D. Bullwinkel’s was sold to a local or a tourist,” he wrote in an email.
Regressive? Or not.
Also hard to pin down: the comparative burden on working residents of an added sales tax compared to a property tax increase.
“A regressive tax is in the eye of the beholder,” said Christopher McLaughlin, a professor of public law and government at the University of North Carolina Chapel Hill School of Government.
But if there’s a spectrum from more to less regressive, he said, “you’re probably putting income tax on somewhat of the lesser side, and then traditional sales tax on the most regressive side and property tax somewhere in the middle.”
For example, in the case of the federal gas taxes that pay for much of the nation’s road construction, “if I make $10 million a year and you make $10,000, and we both drive 100 miles a month, you’re paying a much higher percentage of your income than I am,” McClaughlin said.
Though the same principal would apply to tax allowed by Article 46, McHugh said, its exclusion of several key household expenses makes it less burdensome on low- and moderate-income residents than some other forms of sales tax.
“It could be significantly worse in terms of being regressive,” he said.
Applying that tax in Transylvania could also reverse the usual course of such revenue, which generally flows from rural counties to large hubs of employment and shopping, such as Buncombe County, which already charges the additional quarter-cent tax.
“Those revenues are literally riding in people’s wallets as they drive across county boundaries to work or shop,” McHugh said.
But outside revenue also travels here, he said, by way of property taxes.
County officials have previously pointed to the challenges of generating money in Transylvania from property taxes, one of the few revenue sources controlled by local governments under North Carolina law.
Unlike more urban neighbors, Transylvania lacks an abundance of high-value commercial and industrial properties, they said, and the annual growth of its tax base has historically been stuck at less than two percent.
That’s “not sufficient to keep the county’s financial position out ahead of even a normal assumption of expenditure increases,” Griffin wrote in an emailed response to a question about this issue in October.
After Monday’s meeting, Laughter also listed the burdens created by out-of-town home owners, especially those who don’t really live out of town.
Many residents who maintain residences in low-tax states such as Florida, she said, “are actually here more than half the year.” That means they don’t pay state income tax and don’t contribute their share to county services, such as the Department of Social Services, that are partially funded by such revenue. That’s true even though they sometimes receive expensive assistance from such offices, she said.
The same pattern — residents who mostly live here but claim to live elsewhere — also leads to artificially low counts from the US Census Bureau, leading in turn to the county being shortchanged on allocations of state and federal funds based on population.
But the Census also shows that many Transylvania homeowners really do live elsewhere.
The Bureau’s 2021 American Community Survey classified more than 25 percent of the 19,255 housing units in the county as “vacant,” and most of these, 3,589, as reserved for “seasonal” use, which is probably the most accurate number to determine second-home ownership, said North Carolina State Demographer Michael Cline.
That the owners of these homes pay taxes — and don’t count as full-time residents — probably helps account for the high per-capita property tax paid in Transylvania, tax experts said.
That amount last fiscal year, $1,281, was the fifth highest among counties in the state, according to the NCACC mapbook, even though Transylvania’s property tax rate, .6033, was slightly lower than the statewide average.
A large number of those housing units were offered up as short-term rentals — a total of 1,443 at some point during 2021, according to a county consultant. Though the property tax indirectly paid by visitors who occupy these units was cast as a beneficial outside revenue stream by McHugh, such costs can also trickle down to permanent residents — the people commissioners hope to protect from an additional tax burden.
“You have to remember that property tax is passed on to all renters,” Balfour said.
“Some of the critics say that, yes, sales tax is a bit more of a regressive tax,” he said, but “when it comes down to a binary choice between the local sales tax and a property tax, it’s obviously a difficult decision.”
The Real Source of Regressive Taxes: Raleigh
Transylvania commissioners might not be faced with such a choice not for the more obvious examples of tax inequity on the state level, McHugh said.
“NC lawmakers continue to divert public funds from things like schools, childcare, broadband, water quality, and public safety, to the pockets of out-of-state corporations and the wealthy few,” he wrote in an article on the Center’s website.
North Carolina once levied a nearly 7-percent income tax on corporate profits, he wrote, while that rate has now dropped to 2.5 percent and will be phased out altogether in 2028. In 2013, lawmakers decided to replace the graduated personal income tax with a flat tax and have since lowered the rate to less than 4 percent.
He can’t say for sure that, without such changes, the state would be stepping in to pay for a new county courthouse. He can say that state investment could have freed up more money for Transylvania to handle a range of big expenses.
“All kinds of infrastructure investments have declined from state dollars over the past decade so we can pay for tax cuts for rich people,” he said.
And probably, he said, this is “part of the reason Transylvania County is trying to kick open the couch cushions to pay for a new courthouse.”
Correction: A previous version of this story referred to a 4.75 percent state property tax. It has been changed to say a 4.75 percent state sales tax.
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