One of the real wins for local governments in this year's legislative session was the ability for counties to pass local-option taxes to help defray, among other things, the mounting expenses our communities face for growth -- schools, water and sewer, parks, and all the other accoutrements of North Cackalacky living.
Under the plan passed by the General Assembly and signed by Gov. Easley, local governments can bring to voters a choice between a 0.25% increase in the sales tax or an increase in the real estate transfer tax -- levied on the sale of real property -- from 0.2% to 0.6% of the sales price. (Though both may be floated to the public, only one or the other may be enacted, and only if the referendum passes.)
Now, the transfer tax proposal is one which faced an inordninate, nay deafening, level of opposition from the Realtor lobby in North Carolina. Nearly as feared as the developer and home-builder community and just as powerful, the two combine to fret over this plan. The Realtors even sent a 'real mom' (yeah right) around the state in a car, holding trumped-up pep rallies as to how a 1% transfer tax would kill the American dream of homeownership and steal our home equity right from under our nose.
Anyway, Durham's leaders are making a persuasive case for how we could use the additional revenue from these tax options to help defray the costs of growth. Heck, we're looking at bonds in the order of $210 million in school construction and renovation and $20 million in roads on the ballot this fall, and the passage of one of these taxes could pay more than half of the debt service on the new levy, we're told.
So, which one? Here's what Mike Ruffin had to say last week in the Herald-Sun:
Ruffin added that he's inclined to favor asking voters to raise the sales tax, instead of the transfer tax, lest the county get into a fight with the N.C. Home Builders Association and other development interests.
"If we were one of the first counties to put [the transfer tax] on the ballot, it would be a battle royale I'm sure, and a lot of opposition to overcome," he said. "The sales tax is generally an easier sell."
I think Ruffin is right on the ball in his analysis of the situation. Which I think makes a rather sad statement about the power the Realtor lobby wields in the public debate -- and could help lead to a rather regressive outcome for Durham's poorest.
Of course, sales taxes are roundly derided by economists for their disproportionate impact on low-income individuals and families. Some note that poor familes make fewer purchases and so they pay less tax than the wealthy. Well, that's true -- in absolute, nominal dollars. But low-income individuals tend to spend a much greater proportion of their total income on purchases than wealthier families do. Savings, be it a rainy day fund or a tax-sheltered 401(k) fund, are largely the provence of the middle-class and above. Yet the poor have a much lower 'savings rate,' and in many cases have a negative savings rate, whereby they can actually spend more than their income in a year, especially in cases of job loss or emergency.
As much as I love the Bull City, there's no question that Durham is a case-study for the concept of a divided America, one rich and one poor. The graph at left, from the 2006 Durham State of the Economy presentation, is a classic example. Compare the average household income in the city and county as a whole to that of residents of NECD, or the Fayetteville St. corridor. I don't imagine many of the residents of Liberty St. or Angier Ave. are saving beaucoup percentages of their take-home income; if anything, they're much more likely to be barely subsisting in many cases.
A transfer tax, on the other hand, is by its nature more progressive than a sales tax, given the income bias in homeownership. At the same time, given the large number of rental properties in Durham (many of which stay in the hands of long-term owners for a generation or more), it's unlikely to be passed along in the short-run to renters, a population that correlates highly with lower income.
Distribution of burden issues aside, Monday's Herald-Sun shows the latest analysis finds the sales tax netting about 15% less revenue than the transfer tax -- $9.8 instead of $11.6 million.
Ruffin and the county commissioners are realists, though. It's clear Ruffin knows what a fight he'd have on his hands if Durham is at the forefront of the transfer tax saga. But what does it say if we end up choosing a more-regressive, lower-payoff option to meet our infrastructure needs, all because all the real estate agents are aggrieved over commissions?
To be honest, the best solution of all to our funding issues would have been more local flexibility in passing impact fees. After all, it's growth in terms of new housing and new developments that are the biggest drivers of school, road and infrastructure development. Other Sunbelt cities, like my old stomping ground of Orlando, grow far faster than Durham despite having impact fees that run into the high four digits.
In the end of the day, though, the real estate profession is panicked that transfer taxes and impact fees might sway a couple of homebuyers at the margin -- and paranoid that homebuyers might start asking for reductions in the juicy 6% commission, the swipe of hard-earned home equity that sellers traditionally pay for using a 'full-service' real estate agent. (A profession, incidentally, that enjoys significant legislative protection in most states.)
There's no question that Durham needs the revenue; though our nominal tax rates are high relative to the rest of the state, it bears to keep in mind that Durham is blessed with--
- A small size with significant watershed, limiting residential and industrial growth;
- RTP, which brings in lots of jobs but is exempt from all City taxes;
- Duke and the medical centers, which as non-profits reduce the usable tax base (though all the while bringing in many jobs and indirect economic benefit);
- A deeply impoverished urban area in the eastern and southeastern quadrant with low tax values.
At the end of the day, new revenue streams are needed to get past these thorny problems. And I'll certainly understand a realpolitik decision by Ruffin and the gang to make that happen. Too bad the best options may still be off the table.