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YOU DECIDE: Is a land transfer tax in your future?

September 07, 2007

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

Many North Carolinians may get a real opportunity to directly influence public policy in the coming months.

This is because the North Carolina General Assembly has given voters the right to register a "thumbs up" or "thumbs down" on a tax that would be new to most counties - something called a "land transfer tax."

The idea of the tax is fairly simple. It would be paid any time real property - real estate - changes hands. The tax, which can be no higher than .25 percent of the property's value (for example, $400 on $100,000 of value) could generate around $300 million annually if all counties adopted it at the maximum rate. Voters in each county would have to approve use of the tax, and county commissioners would decide how the funds were spent.

My job here is not to support or oppose the tax, but in a role as educator, to provide some information so you can make up your mind about it.

I think the economic issues swirling around the land transfer tax can be grouped into three categories: who would pay it, how would it affect the local economy, and what are the alternatives?

Who would pay a land transfer tax? Even if the seller writes the check for the land transfer tax, the question is whether the seller could pass on that cost to the buyer. Probably at least part of the tax would effectively be paid by buyers.

The ultimate split of the tax payment between buyer and seller depends on conditions in the real estate market. In a "seller's market," where many buyers compete for available properties, more of the tax will be passed on to buyers. In contrast, in a "buyer's market," where the real estate market is relatively slow and fewer buyers compete for available properties, less of the tax will be forwarded to buyers.

How would the tax affect the local economy? It depends, importantly, on how residents - and especially real estate buyers - value the public services funded by the land transfer tax.

If buyers pay more for property as a result of the land transfer tax, then this result alone would reduce sales and economic activity. However, the impact doesn't stop here. If buyers see benefits from use of the tax revenues that exceed the cost of the tax, then sales could rebound and the local economy could be boosted.

Conversely, if the majority of residents don't perceive many benefits from the funds' use, then the tax will be considered a cost without offsetting benefits, and county real estate sales and economic activity will decline from what their levels would have been without the tax. So how the land transfer tax revenues are used and how residents evaluate those uses are crucial to their economic impact.

What are the alternatives? The same legislation allowing counties to consider the land transfer tax also permits county voters to speak on an additional .25 percent local sales tax. Some see two advantages to the sales tax over a land transfer tax.

First, it could be a more stable source of revenue not susceptible to the ups and downs of the real estate market. Second, it's a broader-based tax paid by virtually everyone in the county, in comparison to the land transfer tax being paid only by real estate sellers and buyers. Yet opponents see the retail sales tax as regressive, meaning low-income households pay a higher percentage of their income in the tax than higher-income households.

Another alternative is the annual property tax paid by all owners of property in the county. This tax is the single largest source of locally raised public revenue in North Carolina. Instead of the land transfer tax, county commissioners could adjust the property tax rate to provide the same amount of additional revenue.

Finally, there's the argument that counties should look for ways to reduce, or control, public spending rather than adding new revenue. This is a constant source of debate on which I won't take sides. Fortunately, there is a Web site (http://www.treasurer.state.nc.us/lgc/units/unitlistjs.htm) that makes it very easy to track North Carolina counties’ expenditures by type and function.

However, before comparing any specific expenditure between years, I recommend calculating the expenditure as a percent of a county’s total personal income. The personal income numbers are here:
http://www.bea.gov/regional/reis/default.cfm?catable=CA1-3§ion=2.

The land transfer tax, or its alternatives, is truly a case in which you can decide.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html

Posted by Dave at September 7, 2007 10:46 AM