HomeMy WebLinkAboutMinutes - 20080115 - Early APPROVED 2/19/2008
Orange County Board of County Commissioners (BOCC)
And Local Revenue Options Education Advisory Committee (LROEAC)
WORK SESSION
Tuesday, January 15, 2008
5:30 pm (Dinner)
6:00 pm
The Orange County Board of Commissioners met for a Work Session along with the
Local Revenue Options Education Advisory Committee (LROEAC) to hear presentations on
Tuesday, January 15, 2008 at 5:30 p.m. at the Link Government Services Center in
Hillsborough, N.C.
COUNTY COMMISSIONERS PRESENT: Chair Barry Jacobs and Commissioners
Valerie Foushee, Alice M. Gordon, and Mike Nelson
COUNTY COMMISSIONERS ABSENT: Moses Carey, Jr.,
COUNTY ATTORNEY PRESENT: Geof Gledhill
COUNTY STAFF PRESENT: County Manager Laura Blackmon, Assistant County
Managers Willie Best and Gwen Harvey, and Deputy Clerk to the Board David Hunt (All other
staff members will be identified appropriately below)
LROEAC MEMBERS PRESENT: David Brower, Angela Burnette, Margaret Cannel!,
Keith Dixon, Robert Gardinier, Barbara Hardison, Mark Peters, Robin Taylor-Hall, Kathie
Young
LROEAC MEMBERS ABSENT: David Schanzer
OTHER STAFF PRESENT: Rod Visser
NOTE: ALL DOCUMENTS REFERRED TO IN THESE MINUTES ARE IN THE
PERMANENT AGENDA FILE IN THE CLERK'S OFFICE
1. Dinner
2. Chair- Introductions and Desired Outcomes of Work Session
The meeting was called to order at 6:09 p.m.
Chair Jacobs said that at this point, the Board had not made any decisions about local
revenue options. The purpose of this meeting was to have presentations on the real estate
transfer tax and the sales tax.
3. Invited Guest Presentations on Local Revenue Options
a. Dr. Karl Smith, UNC School Of Government
b. Dr. Roland Stephen, NC State University
Dr. Roland Stephen spoke first.
Financing the Future:
Fiscal Modernization in North Carolina
Dr. Roland Stephen
January, 2008
The Institute for Emerging Issues Financing the Future
• IEI is a think and do tank that turns ideas into action.
• We help new combinations of leaders adopt innovative public policies to prepare North
Carolina for its future.
• Financing the Future is a program of work to modernize state and local finance.
North Carolina's Future:
Opportunities and Challenges
North Carolina: A brilliant future, significant challenges:
- Population Growth: Urbanization, Dependency Ratio
- Spending Growth: Healthcare, K-12, Higher Education Roads, Infrastructure
- Financial Modernization: Efficiency, Public-Private Partnership, Reform
North Carolina in the Year 2030:
The population of North Carolina is growing rapidly (chart)
Yet population growth is not evenly distributed across the state (map).
And the population is aging, especially in rural areas (chart)
Major Expenditure Trends
Medicaid expenditures have risen rapidly and will continue to rise as the population
ages (chart)
• The cost of higher education will rise.
• The cost of new schools will be concentrated in rapidly growing urban areas.
• 2.4 million new residential housing units by 2030.
• $30-$60 billion financial gap for new infrastructure.
North Carolina Revenue Outlook
• General Fund availability was $1.3 billion this year.
• But: majority of that excess non-recurring (or one time).
• Future revenues will be slow growing and volatile.
Hard Choices
Modernization of state system of revenues has two elements:
• Adopt sufficient, stable, fair and competitive system of revenues.
• Review division of responsibilities between state and local government.
No magic money tree for the state!
The solution cannot be piecemeal.
Modernizing Tax and Finance
Sales Tax
• Discriminates against manufacturing.
• Relies on a shrinking base.
• Regressive dependence on goods.
The sales tax base is shrinking as percentage of the economy
The Income Tax
• Depends on "bracket creep": Unseen tax increase on the middle class.
• Volatile: New spending or painful cuts.
• Uncompetitive: High rates, often paid by small business.
NC depends heavily on the income tax (charts).
Growth in state revenues is volatile (graph)
State and Local Responsibilities
- There are state responsibilities where shortfalls occur (adequate funding for roads
& schools).
- There are local responsibilities that are growing (roads) but lack a source of
revenue.
- Only a comprehensive solution can address all challenges.
Framework for Change
Comprehensive change to be achieved through:
• Balance among sources of revenues
• Broad base
• Low rates
• Targeted social spending
These are the principles informing the work of the Study Commission on State and Local
Fiscal Modernization.
Subcommittee Recommendations: Income Tax
• Reduce individual rates, eliminate participation by households with 2 children up to
$25,000. Top rate lowered
• Combined reporting, reduce corporate rate.
• Thorough review of the franchise tax.
• Eliminate the estate and gift tax.
Subcommittee Recommendations: Sales Tax
• Broaden sales tax base to include consumer services.
• Lower sales tax rate. Temporary higher rate made permanent at 4.25%
• Highway use tax rate to regular sales tax rate (funds dedicated to transportation
infrastructure, 1% = $200 million).
• Excise taxes converted to ad valorum, set at the general state and local rate.
Subcommittee Recommendations:
Local Revenues and Responsibilities
• Medicaid to be assumed entirely by the state. Passed based on sales tax swap.
• Menu of options: Occupancy, Impact, Prepared Food, Vehicle Tag etc.
• Land Transfer Tax (Deed Stamp) .4% option passed.
• Local sales tax .25% option passed.
• Efficiencies and public/private partnerships
Commissioner Nelson arrived at 6:19 p.m.
Dr. Karl Smith, from UNC School of Government, spoke next.
Revenue Options
- 1/4 Cent Sales Tax
- .4% Land Transfer
- Existing Property Tax
Criteria to Consider
- Revenue Prospects
- Revenue Stability
- Incidence (who ends up paying for the taxes?)
- Effects on Growth
- Fairness
- Ease of Collection
Revenue Prospects
- Which tax raises more money today
- Which tax has stronger growth in the future
o Sales tax will tend to grow slower than the local economy unless there is a
big retail magnet
o Land Transfer will tend to grow as fast or faster than the local economy but
is dependent on the health of the real estate market
o Property tax is very slow in rural areas very fast in urban and suburban
areas
Relative Growth Rates
- Land Transfer Growth: 12%
- Sales Growth: 4%
Revenue Stability
- Will the tax base go up and down with the economy?
o Property—typically the most stable. Property tax bases rarely go down
o Sales — moves with the economy but is a generally "stable" tax base.
o Land Transfer— heavily dependent on the health of real estate market.
Statewide Trends — Deed Stamp (graph)
Statewide Trends — Sales (graph)
What Makes a Strong Real Estate Market
- A strong real estate market means lots of sales
o The price of houses does not drop very often
o Housing sales, however, can and do drop a lot
- Property Tax is dependent on housing prices but Land Transfer is dependent on
housing sales
- Housing Sales are determined by
o Job Growth
o Interest Rates
o National Economy
- Is there a Housing Bubble in North Carolina?
Incidence
- What groups are typically economic supporters or opponents of each?
o Realtors/Homebuilders against Land Transfer
o Large Retailers against Sales
o Homeowners/Industry against Property
- Small Economic Effect— Big Perceived Effect
- Many Hands Make Light Work
o Each additional dollar in tax puts more strain on a taxpayer than the last
o Spreading taxes reduces the total economic burden
Economic Growth: Will higher taxes slow the growth of your county
- It depends
o How high are taxes already?
o What is the tax used for?
o How does your county compete for jobs?
- Bottom Line: Each individual tax tends to have a small effect, but lots of taxes that
fall on a single industry can have a large effect
Equity or "Fairness"
- Horizontal Fairness
o Similar taxpayers should pay similar taxes
- Vertical Fairness
o When possible, taxes should be based on "ability to pay"
o Progressive taxes increase faster than income
o Regressive taxes increase slower than income or not at all
Equity
- Sales Tax
o Regressive
o Based on ability to pay
- Property Tax
o More progressive
o Not based on ability to pay
- Land Transfer
o More progressive
o Based on ability to pay
Ease of Collection
- Sales tax is collection run by the state
- Land transfer will likely be collected in the same way the deed stamp tax is
collected
Commissioner Gordon arrived at 6:40 p.m.
4. BOCC Questions/Dialogue with Presenters
5. BOCC Discussion of Revenue Options and Next Steps
Chair Jacobs made reference to the comments about the sales tax and how it is not as
regressive, and said that this is not what he has heard at this presentation. He asked for
clarity on this. Roland Stephen said that the reforms contemplated by the Legislative Study
Commission would address some of the regressive issues. There are people working on a
radical broadening of the sales tax base, and a radical lowering of the sales tax rate. To the
extent that this can be done, it will be fairer and it will keep up with the economy as it grows.
This is the dream of sales tax reform at the State level.
Chair Jacobs asked about the comments about the impact of sales tax on the wealthy
and Roland Stephen gave an example that most older people tend to buy services, which are
not taxed, rather than items.
Mark Peters asked about the sales tax leakage due to internet commerce. Roland
Stephen said that it is estimated to be $600 million for North Carolina. It is growing more on
the side of business transactions as opposed to retail transactions. There is an effort to
remedy this by the Streamlined Sales Tax Agreement, which is an agreement among states.
Frank Thomas asked clarifying questions about the housing market, which were
answered by Karl Smith.
Ben Lloyd asked if the transfer tax would apply if the property was willed and Karl
Smith said that he believes that it would not apply. His understanding is that it would apply
only if there is a monetary transaction.
Ben Lloyd asked about non-profits and Karl Smith said that there are lawyers at the
School of Government that would know about this.
David Brower asked why a land transfer tax was not simply a sales tax on real property.
Roland Stephen said that essentially it is a sales tax, but it is set at a very low level.
David Brower asked if there could be tax increment financing, where the tax is paid out
of the incremental increase in the value. Karl Smith said that the County would not have the
power to make that decision.
Discussion ensued on keeping the property tax low and using an alternative revenue
option.
Chair Jacobs thanked the presenters for coming and said that once the County
Commissioners decide on one of the options, then there will be an education campaign.
The County Commissioners left at 7:30 p.m. to attend their regular meeting.
Laura Blackmon suggested that the LROEAC could continue its discussion if desired.
Roland Stephen said that voters understand better if a county chooses a new option
and it goes to an enterprise fund or a dedicated pool because there is a visible effect. This is
something to consider.
Budget Director Donna Coffey pointed out that this particular sales tax would exempt
food and medicines.
Ben Lloyd said that the trend in Orange County is that land transfers are going down
and sales tax is going up. He thinks that the projections for Orange County are artificial. He
said that the sales tax is the way to go because everybody would pay it.
Roland Stephen and Karl Smith left at 7:53 p.m.
Rod Visser said that at the last meeting, there was discussion about the potential of
having meetings early Tuesday evenings. He suggested planning to get back together next
Tuesday at 5:30 p.m. to create a list of FAQs for the revenue options.
Rod Visser distributed a meeting summary from the last meeting and welcomed
comments. Also, before the next meeting, he suggested that the members email him the pros
and cons of each option. He reiterated that the County Commissioners are not looking for a
consensus recommendation, but they welcome comments from individual committee members
or citizens.
A committee member asked about the Board's position and Rod Visser said that the
Board decided that it did not have enough time to put this issue on a ballot in November,
however, it is the intention to place the question on the ballot on May 6, 2008. This is the
stated position of the Board at this time.
A member of the advisory committee stated that he would like to know what can and
cannot be said in an education piece. He suggested having someone come to make a
presentation about this, since it is the charge of the advisory committee to educate people.
Rod Visser said that the short answer is that there is no case law about this issue, and
there is a controlling thought process, which is an article that was written at the Institute of
Government in 1987. The basic point is that you do not spend public tax dollars to advocate
for or against. There is no statute or case law in North Carolina about this. He said that the
individual members of the committee could advocate for or against, but the education advisory
committee should not support one or the other.
6. Adjourn
With no further items to discuss, the meeting was adjourned at 8:15 p.m.
Barry Jacobs
Chair
David Hunt
Deputy Clerk to the Board