A sticking point among the Sampson County Board of Commissioners last year and during last week’s budget deliberations was the tax rate, with commissioners splitting on whether to adopt what was originally identified as “revenue neutral” at the tail end of the 2011 revaluation or keep the rate steady at 1.5 cents higher.
The board ultimately voted 3-2 last week to approve the county’s 2012-13 budget, with two commissioners favoring a 77 cent tax rate — a figure deemed revenue neutral in the midst of revaluation during the 2011-12 budget process — over keeping the 78.5 cent rate. The rate will remain at 78.5 cents per $100 property valuation for 2012-13.
During budget deliberations last week, Commissioner Jarvis McLamb said he contacted the School of Government in reference to his concerns regarding the revenue neutral rate, speaking with the School of Government’s Chris McLaughlin.
“I told him if there was an error made or mistake or the revenue-neutral rate was incorrect, is there a policy for it being done correct?” McLamb said. “He said there was no policy, but the revenue neutral rate should be corrected. He said the board should vote on it, and I said we have.”
State law requires counties to present a revenue-neutral tax rate for comparison in a year when a property tax revaluation is conducted. North Carolina General Statute 159-11(e) states that the revenue-neutral property tax rate is the rate that is estimated to produce revenue for the next fiscal year equal to the revenue that would have been produced for the next fiscal year by the current tax rate if no revaluation had occurred.
McLamb noted that for the 2011-12 budget, county staff had to “do some guesswork” in coming to the projection of 77 cents per $100 valuation as the revenue neutral tax rate. Later in the year, after all the dust cleared from the 2011 revaluation and the final figures came in, the actual revenue neutral rate was 75.5 cents, he noted. He said keeping the rate at 78.5 cents would be “stealing from the taxpayer.”
He told McLaughlin that one of the commissioners had been in the hospital and the vote to bring the rate down to 77 cents deadlocked 2-2.
“He said the two of you who want it corrected should go before the (news)paper and make sure it is made very simple so the public can understand what the board is doing,” McLamb said. “This has been a main concern in making some cuts to adjust to the revenue neutral tax rate, but it doesn’t seem the board wants to correct it so it’s something we’ll have to live with, but he did stress that the revenue neutral rate should be corrected.”
Reached this week, McLaughlin said the tax-paying public should be aware of the revenue-neutral rate and how they will be affected, but does not advise governments on what the approved tax rate should be.
“Setting the (tax) rate is a policy decision and it’s fact-dependent and based on needs and services,” he said. “There’s no right decision. It’s different from town to town and county to county.”
The reason the revenue-neutral rate was established was to let taxpayers know exactly where they stood, notably after the mass property appraisals known as revaluations. Counties have to go through the process at least once every eight years and the revenue neutral rate — at which there is no change in the tax rate — fluctuates with the value of the tax base.
A revenue-neutral rate provides taxpayers a benchmark against which they can compare a proposed post-revaluation tax rate. Although many local governments lower their tax rates after revaluations, their taxpayers may still have an effective tax increase depending on how far the rates are reduced.
“That’s why it was created,” McLaughlin said, “to create some transparency after revaluation, to prevent local government boards from saying, ‘look, we went down on your tax rate.’”
According to an annual survey conducted by the N.C. Association of County Commissioners, in 2011-12, when Sampson County was wrapping up its revaluation process, 21 counties increased property taxes. That included seven counties that went through revaluation and adopted a rate higher than their published “revenue neutral” rate, including Sampson. Of those seven, four kept the same rate for 2012-13, while Scotland County went back up from 99 cents to $1.03 per $100 valuation, trumping its pre-revaluation $1.02 rate.
Only Mecklenburg and Rockingham came down, 2.44 cents and 0.2 cent, respectively.
McLaughlin said the importance of letting the public know what the revenue-neutral rate is and how it compares to the proposed rate cannot be undersold. The tax rate is only approved before the fiscal year begins and can only be modified at the beginning of the next fiscal year. However, revenue-neutral rates as a base of comparison are only really relevant following revaluation.
“(The revenue-neutral rate) is only relevant when your tax base goes through dramatic changes,” McLaughlin said.
Aside from revaluation, dramatic changes that can necessitate the utilization of a revenue-neutral equation can be annexation, de-annexation, merger or similar event. County manager Ed Causey said he has been cognizant of that during larger property tax appeals heard during the Board of Commissioners’ service as the Board of Equalization and Review.
Causey said the revenue-neutral rate is merely a projection at a particular time and is constantly fluctuating. The county manager said it is akin to hitting a moving target and county officials have done their best to do just that.
“At the end of the day, the revenue neutral rate is an estimate,” Causey said. “Granted, you do not want to over-estimate. The part I think a lot of people don’t understand is it can change as tax collections change. It’s not as if you made a mistake. It can change as you have more data available. You can only estimate with the best information you have.”
Causey said he is concerned with making the correct decision at a specific point in time with the available information.
“Sometimes you can estimate high, sometimes you can estimate low,” said Causey. “You’ve done the best job of evaluating the system. The concern I have is when there is a perception of gaming the system.”
Like McLamb, Commissioner Albert Kirby has raised concerns of raising taxes under the veil of a supposed tax decrease, or a smaller increase.
“Last year we were told that the revenue neutral rate was 77 cents,” Kirby said. “The tax rate was set at 78.5 cents so the citizens are thinking they’re getting a 1.5 cent raise. They really got a 3 cent tax raise.”
Causey concedes that while the revenue neutral rate was 77 cents at one point, it changes at any given point. If finance officer David Clack was to run the numbers today, it would likely be different than figures from earlier this year based on tax collections, Causey said.
“On any given day, the revenue-neutral rate could change,” Causey said.
While Sampson was faced with a lower number for its revenue-neutral rate during last year’s revaluation, and ultimately, its approved tax rate in 2011-12 that stayed steady this year, many counties are seeing a revenue-neutral figure higher than its current rate.
Of the counties that went through revaluation in 2012-13, several found that their revenue neutral rate was actually higher than the previous year’s tax rate, meaning that property values in the county had declined. Eleven counties experienced a tax increase, while 15 managed to cut their rate. Of the 13 counties that went through revaluation, nine actually wound up with a higher revenue neutral rate than their 2011-12 tax rate.
“The trend is that so many counties are seeing reductions in their tax base, whether it is zero growth or a reduction,” McLaughlin noted. He said more and more counties going through the revaluation process are finding they have a rising revenue-neutral rate indicating the loss of tax base and declining property values. “Counties that go through reval are seeing that revenue neutral rate are larger than their current tax rates. There is some hesitancy when the revenue-neutral rate goes up to adopt that, which some people are loathe to do.”
That was never a problem before 2008, but has been a growing issue since, McLaughlin said. It was seen to a lesser extent when Sampson held its revaluation last year. It reared its ugly head this year, and was expected to continue next year.
“We’ll see that just as much in 2013,” McLaughlin said. “It’s a growing phenomenon.”
Just as there is hesitancy to adopt higher revenue-neutral rates, there is the same hesitance to adopt one when it goes much lower. Some counties, such as Sampson last year, opt to adopt a lower figure that still encompasses a tax hike. That overall tax increase does not necessarily mean everyone pays more taxes, McLaughlin is quick to note.
“Individual taxpayers’ (property taxes) can go up or down based on where they live,” he said.
Chris Berendt can be reached at 910-592-8137 ext. 121 or via email at email@example.com.