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Paying for Growth
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Fair Growth Funding involves tax policy and can get complicated. Here are some answers to many common questions in three basic categories: |
- Transfer taxes are levied against all real estate transactions: new development, commercial property and existing homes.
- Transfer taxes will moderate the pressure on increasing property taxes and are an alternative to significant property tax increases for all homeowners.
- Transfer taxes are usually paid for by the buyer, rather than the seller (i.e. the existing homeowner).
- Transfer taxes will be an important contributor in paying for the rapidly increasing costs of growth and development.
- Transfer taxes will keep the state of North Carolina, including its 100 counties, financially strong. A high quality of life, i.e. good schools, community colleges, roads and parks, water and sewers, etc. will help attract new jobs, and transfer taxes can help pay for these infrastructure costs.
- Transfer taxes have been tried and successfully tested all over the nation and in six NC counties. They provide for sustainable growth.
- County commissioners around NC are requesting the legislative authority for local fair growth funding options, including transfer taxes.
- The attack on transfer taxes is being conducted by the most powerful lobby in the state -- the NC Association of Realtors (NCAR) – which spends far more than any other PAC to influence elections (over $690,000 last year). This lobby is trying to sustain the choke-hold they have had on the General Assembly and local governments for almost twenty years. NCAR says it’s wrong to take 1% from equity to fund infrastructure. But they take 6% (billions of dollars) in commissions from equity across the state.
Introduction:
In an effort to derail the momentum building toward the passage of a transfer tax for school construction and other much-needed public infrastructure, the North Carolina Association of Realtors (NCAR) has launched a massive, statewide, highly expensive, attack campaign under the banner “Stop the NC Home Tax”. Their campaign is based on half-truths and distortions. The intent of the campaign is to deceive the public; intimidate elected officials and generally muddy the water regarding the transfer tax (TT). Taxpayers should “wake up” and protect their wallets, rather than the protecting the financial interests of a single industry.
Below is factual information about transfer taxes, so that all citizens can participate in this important policy decision that could affect our quality of life for decades to come.
Q: What is a TT (aka: a land transfer tax, a real estate transfer tax or a property transfer tax)?
A: A TT is a sales tax on all real estate transactions involving land, new residential construction as well as timber, construction of offices, factories, retail shops, as well as existing residences. It is paid every time a deed changes hand. For new development, it is paid when a developer buys unimproved land, when improvements such as streets and utilities are made and lots sold to builders, and when builders sell new homes, office buildings or shopping malls. NCAR’s half-truth is focusing on your home. For those intending to live in their home indefinitely, the only TT that would be paid is when your estate sells your home. For many of us, it would be paid when we sell our homes and move, typically every seven years.
Q: Is a TT a new tax on homes?
A: The only tax on homes is the property tax, paid by all homeowners every year. A TT would only be paid at time of real estate transfer. A TT would be an extension of the existing deed stamp excise tax of .2%
Q: What TT legislation has been introduced in the General Assembly?
A: Many TT bills have been introduced in the NC General Assembly: three bills are statewide in scope, two bills enabling a TT in Wake County, and seven for other NC counties. Two of the bills are for “menu’s,” providing a tool-kit of options including a transfer tax an impact fee, an added sales tax and for some counties a hotel and prepared meals tax. All TT bills are earmarked for infrastructure: primarily for public school construction.
Legislation has been introduced often at the urging of county commissioners and concerned citizen groups because the only alternative local commissioners have to pay for the growth and the enormous rate of inflation in construction costs is the property tax. In Wake, a 1% TT would have generated this year as much revenue as a property tax increase of 15-20 cents. The estimated revenue from a 1% TT in Wake and across the state has doubled in 4-5 years, tracking the combined effects of growth plus inflation in construction costs.
Rep. Jennifer Weiss’ (D-Wake) bill would permit a 1% TT for Wake County, all earmarked for school construction. Senator Janet Cowell’s (D-Wake) bill for Wake County is for any infrastructure, e.g. public schools, community colleges, parks and open space. All but one statewide and local bills are subject to a referendum of the voters. Cowell’s bill would put an impact fee, an increase in the sales tax and a TT on the ballot.
Senator Clodfelter’s (D-Mecklenburg) bill would require a statewide TT, for the state to distribute. While this approach raises issues of how much high-growth counties, such as Wake, would receive, it would prevent local special interests from conducting anti-referendum battles. This bill, as the others, will likely be altered by the Finance and other relevant committees, including the Fiscal Modernization.
The TT is not a new tax, rather it is an extension to the existing deed stamp excise tax of 0.2%. In most proposed bills, it is a separate 1% tax. In one bill the deed stamp tax is raised from 0.2% to 0.5%.
Q: Where else is the TT used?
A: All over the world. Thirty four U.S. states have a TT. In several states it is higher than the 1% proposed in most bills. Delaware, with a growth rate close to NC, has a TT rate is 2X-3X higher than proposed here. Six counties in NC have had a separate 1% TT for almost two decades, benefiting from years of the TT paying for schools and local roads, and they have prospered and continued to grow. Why didn’t NCAR tell you that?
Dare County, has the lowest property tax rate in the state, 26 cents versus Wake’s 60.5 cents, in part due to the TT. Dare’s well-equipped schools are the envy of educators across the state. Is it fair for all the other 94 counties not to have that important source of revenues?
Q: NCAR says the TT comes from the equity in my home. Is that true?
A: Other than that the realtors haven’t mentioned their six percent commissions which also come from equity, it’s true. Another half truth. For most of us, it’s better to pay for infrastructure from equity, in the form of homesale profits, the few times we buy homes. The alternative is to pay annually from our checkbooks as enormous spike in property taxes.
Q: Who actually pays the TT?
A: It depends. Who pays the sales tax when you buy a pair of shoes? The proposed bills say the seller pays, but in real estate negotiations, the buyer ultimately pays the costs. NCAR’s framing of the burden falling solely on the homeowner is just a clever trick, based on a half-truth. In the strong markets typical of high growth areas of NC, buyers will treat the TT just as they would a real estate broker’s commission, they will add it on to their asking price, allowing growth to pay for growth.
Remember that quality schools, roads and other infrastructure paid for by a TT help keep the market strong. Areas with good schools and roads are preferred by buyers and are willing to pay more for homes. Prospective employers look for areas with strong public schools and community colleges.
Q: Can TT’s adversely affect low income buyers and sellers?
A: It could. Any tax or fee tends to drive up the price for housing, and low-income sellers who sell in a weak market could be hurt. That’s why WakeUP and some legislators advocate for the first $50,000 of a transaction to be exempt from the TT. Furthermore, the alternative for low-income home owners and small-businesses is far worse…a huge increase in the property tax. Some groups also support the concept of using part of the funds to relieve taxpayers in low-wealth counties from the burden of paying for Medicaid.
Q: Who is NCAR and why do they oppose the TT?
A: The NC Association of Realtors (NCAR) represents thousand of realtors across the state who annually receive billions in commissions (from homeowners equity) based on $90 billion in real estate transactions across the state (over $12 billion in Wake alone). NCAR’s PAC (political action committee) far outspends all other PACs in the state, giving $690,711 mostly to state legislative campaigns in 2006. In addition, owners of large realty businesses are major contributors to campaigns for the NC General Assembly, county commissioners, city and town councils, and likely donate over $1 million per year. Not surprisingly, NCAR often lobbies together with the NC Home Builders because some very large realtors are also very large developers.
NCAR knows that attack ad campaigns, like this one opposing the TT, has worked for decades with little opposition. They do it because the can. Over the years, realtors and developers and builders have lobbied together. They both have large staffs of professional lobbyists and multi-million dollar lobbying budgets.
NCAR’s premise is that money, rather than the will of the people can determine votes in the legislature. They want a big return on the roughly $1 million their statewide attack campaign will cost.
- Q: Why should we have facility (impact) fees?
A: Impact fees are a means of providing for the growing needs of a community while alleviating the associated burden on existing residents. They are used to pay for infrastructure - including such facilities as schools, roads, parks, gyms and playing fields, water and sewer pipes, police and fire stations, and so on.
Financing these facilities with impact fees is based on the principle that since new development has a significant impact on community needs, developers should help pay for a portion of the cost of the additional facilities needed.
- Q: But I thought property taxes paid for all that stuff.
A: Property taxes do form the major funding source for a lot of community facilities. But in very high-growth regions (like the Triangle), it's often the case that property taxes alone can't keep up with the excessively high demands for new facilities generated by new development.
That's because when growth is very rapid, the capital costs of new facilities quickly outstrip what the existing tax base can generate.
To prevent massive borrowing and tax hikes, it's often a better policy choice to impose a fee on new development to help pay for new capital costs, while allocating property taxes to operations and maintenance funding.
The facility fee helps pay for the up-front capital costs (for installing infrastructure, such as new roads or school buildings), and the ongoing revenue from general property taxes goes to ongoing operational needs (such as teachers' salaries, facility maintenance and repair, heating and cooling costs, and so on).
Many communities have found this to be a good match. For one thing, using an impact fee tends to closely correlate the rate of growth to the funds generated to pay for that growth. As growth speeds up or slows down from year to year, the funds generated also rise or fall - matching the need.
Also, impact fees tend to follow an established principle of good fiscal policy: in general, the person placing the demand on the system should bear part of the costs of meeting that demand. This is known as the "user pays" principle. Since it's new construction that is generating the need for new parks and new roads, new construction logically ought to carry a bit more of the burden than the general tax base.
Thus, when growth is fast-paced, a facility fee (also called an impact fee) can be a useful funding tool and promote sound fiscal policy.
- Q: Why are the builders running $100,000 worth of radio ads to stop impact fees?
A: Right now, impact fees in Raleigh are so low that the homebuilders are benefiting from a massive public subsidy to their bottom line. Too-low impact fees mean that growth doesn't pay for the demand it puts on new infrastructure. The money has to come from somewhere - and it does: from the general taxpayers - that's you and me.
In other words, most the cost of new facilities to serve growth is drawn from general revenues (mostly property taxes).
In Raleigh the subsidy that the builders get from the rest of us amounts to $20 million per year just for roads and parks. The figure would be even higher if the costs of schools, police stations, and other public facilities were taken into account.
Naturally, the homebuilders have decided that spending $100,000 on a radio ad campaign, to keep getting a subsidy of $20 million per year, is very advantageous to themselves. It equals a 20,000 percent rate of return! A very savvy move on the part of the homebuilders lobby - and they get to write off the cost of the ads as part of doing business! Too bad we all can't take advantage of that kind of return when we invest our own money.
In the meantime, all we ask is that our public officials put an end to a small fraction of this massive subsidy to developers, by revising the impact fee upward so that growth will help to pay more of its own way - freeing up our other tax dollars for re-investment in our neighborhoods, rather than as a giveaway to a special interest group.
(Source of figures: "Facility Fee Analysis: Policy Report," an independent study by Duncan Associates specially performed for the city of Raleigh by top experts in the field.) Independent study by Duncan Associates.
- Q: I heard that impact fees will make housing less affordable?
A: This is an important question and there has been quite a bit of research by economists into the real effects of impact fees on housing price. For the most part, the studies conclude that impact fees are not a primary factor driving housing costs.
The most important single factor in housing cost is the prevailing wage. Where wages are high, house prices tend to be high, and where wages are low, house prices tend to be low.
That's simply because builders and developers, by and large, charge for their product what people can afford to pay. The real estate community is very good at anticipating what wage earners can afford in terms of monthly mortgage payments according to the prevailing wages and charging the maximum price that can be sustained by the local wage market for different housing products.
In plain English, that means that if the developers and builders know the median income buyer can afford a $200,000 house, then that's where the price of the median house tends to rest, so long as the developer and builder are turning a profit. Because the prevailing wage is so important in setting housing price, the builder's profit margin is a lot more likely than the final housing price to be affected by the impact fee. (Now you understand why they really don't want impact fees.)
In addition to builders and developers absorbing part of the cost, there's also some evidence that the cost of the impact fee can slightly depress prices for raw land. When we say "slightly," we mean very slightly. So land speculators might have to absorb a miniscule cost, meaning that their profit is not quite as huge.
The real question about housing affordability goes directly to property taxes. For the great majority of homeowners, property taxes are included in the mortgage payment. If property taxes go up, and up, and up, that has a direct impact on affordability, and it's money straight out of the homeowner's pocket.
In cases where an impact fee can be shown to have an effect on house price, there are many ways to structure the fee so that it has less effect on home buyers. Some communities have a tiered approach so that modest homes are assessed a lesser fee. Other places allow reimbursement of the fee to builders of affordable housing. There are many ways to structure the fee program to avoid undue burden on purchasers.
So the affordable housing argument really isn't much of a winner for those who oppose impact fees.
(Also, to be quite honest, a lot of us hadn't noticed that builders in our communities are exactly falling all over themselves to provide abundant affordable housing.)
- Q: What effect do impact fees have on existing dwellings?
A: If you're the owner of an existing house, you benefit from impact fees. For one thing, since no fee is assessed on existing houses, the value of the fee tends to be reflected in your home equity.
Also, a study by the Brookings Institution found that impact fees help support housing value, precisely because they help guarantee that community services are in place and are adequately funded.
Remember, dwellings have value on the market because they are in communities served by infrastructure. Crumbling roads, jammed schools, and overcrowded parks don't help sell houses or support your home equity. By the same token, good roads, good schools, and nearby parks and recreational facilities add to the price that buyers will pay for a home!
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- Q: Aren't you just really anti-growth?
A: We're a diverse group of ordinary citizens, and like any group of people, our members have various feelings about this question. Undoubtedly, some of our members feel that more growth isn't necessarily a good thing. In contrast, a majority of our members probably would say they welcome growth. But we all agree, and agree strongly, that the way we grow ought to enhance our community and improve our quality of life.
That means making sure that our infrastructure keeps pace with growth - that roads are in place to handle traffic, that schools aren't stuffed way past their capacity, that we add new recreation and parks to serve new development, and not allow infrastructure to fall way behind, worsening our quality of life.
Infrastructure includes natural systems as well. When new development happens, we've got to be sure that our waterways and drinking water sources (primarily Falls Lake) are protected from pollution and silty runoff. We also need to protect our air quality. Little kids, sick people, and elderly people particularly need to breathe clean air.
All of us also agree that we must use a fiscally responsible approach to paying for the costs of growth, without burdening existing residents beyond their fair share.
- Q: What do other places do to manage growth?
A: Maryland is among the states using a tool called "Adequate Public Facilities" to ensure that facilities (that means infrastructure such as schools, roads, parks and recreation, water and sewer, police and fire stations and so on) are in place to serve new development when it's constructed. This excerpt is from an official State of Maryland document on growth management:
Adequate Public Facilities laws are an effort to rein in 'runaway' development until facilities can be made adequate. APF, an adequate public facilities law, bases development approvals under zoning and subdivision laws on specifically defined public facility capacity standards. They are designed to curtail development in areas where public facilities are inadequate, and to delay development in planned growth areas until adequate service levels are in place or reasonably assured.
In plain English, APF laws say that if the roads are too congested, if the school classrooms are too crowded, if the water system cannot provide enough water, if the sewer pipes or treatment plant are full, or if there are not enough playing fields for recreational use, then, development cannot be approved until the problem is corrected.
This is just one example of how communities can ensure that growth is properly served by new facilities. We'll be adding information on how other places have chosen to manage growth.
Our communities should be able to utilize the best available approaches from a menu of options. We need to learn from communities that have been through the "growth curve" before us.
Click here to view all content on this Web site about paying for growth.
