Understanding Factors that Influence Local Sales Tax Value

WHITNEY AFONSOSCHOOL OF GOVERNMENT

WINTER 2013NCLGBA

Feeling LOST? Understanding the factors that

influence local sales tax revenue

Whitney Afonso December 2013

North Carolina Compared to Georgia

Georgia: General LOST:

1% rate Levied by counties Shared with

municipalities Voted on to pass Required to reduce

property tax burden Earmarked LOST:

ELOST, HOST, MARTA, and SPLOST

Point of sale

North Carolina: General LOST:

Multiple articles Levied by counties Shared with

municipalities Voted on to pass Expected to increase own

source revenue Earmarked LOST:

One article (previously two) is partially earmarked for education capital

Distributed on a per capita basis


Local Option Sales Taxes (LOSTs)

What do you care about when it comes to understanding LOSTs?


Traditional LOST Considerations

In the academic literature most of the discussion revolves around: If the revenue is used to reduce property tax burdens

Why/when do governments adopt it

Tax Competition If your rate gets too high then you will lose business to

neighbors Less of an issue in NC

Counties that border other states Passing additional LOSTs for transportation


Additional LOST Considerations

You all probably care less about those issues I am happy to answer those questions though if you

have them

So I want to know: What are your concerns?


Who Generates the Most Revenue?

Research I am currently working on

I am looking at four inter-related topics: Do urban areas do better? Do your neighbors matter? Are tourism areas different? How does LOST revenue raising capacity interact with

property tax capacity?


Urban Areas

Are urban areas actually better off?

Total dollars vs per capita


Regional Effects


So if you are…

Urban or “high” population: In terms of per capita revenue you do not do so well

Exceptions are Mecklenburg, Buncombe, and Forsyth True for suburban too

Rural with little tourism: Very low in terms of real dollars and per capita dollars

Tourism rich: Do very well in terms of real dollars and especially in

per capita terms


Who is Paying?

Why do urban and tourism rich areas generate more money?

Residents versus Non-Residents Commuters Tourists

Which is more volatile? Tourists.


Volatility

Sales taxes are more elastic than property taxes They grow more quickly with income They are also more adversely affected by negative

shocks

Understand what it means for your revenue Good times are great! Bad times are hard…

Plan ahead and save


Revenue Raising Capacity

Relationships between primary revenue sources Property taxes and sales taxes

Want to know not just what revenue you collect, but what you could be collecting The idea of capacity


How to Measure Revenue Raising Capacity

Revenue Raising Capacity=

Property tax base X Average millage rate+

Sales tax base X Average sales tax rate

Pattern of who generates the most is similar Rural still generates the least


Revenue Raising Capacity by County

(732.4905,3570.058](531.6586,732.4905](453.6219,531.6586][326.1053,453.6219]


Further Considerations

Sales taxes are often seen as extremely inequitable It appears they are

But not on the dimension previously discussed One caveat:

Tourism rich and urban areas have a lot of non-resident traffic

This means they are able to export a portion of the burden

However they also have large populations coming and using resources and services they do not pay traditional taxes


County Distributions: NC & GA

Georgia: General LOST:

Distributed to munis by the discretion of the county

8 considerations in LOST distribution -> no formula

Different munis can receive dramatically different amounts arbitrarily

Earmarked LOST: Must be used for the

earmarked purpose

North Carolina: General LOST:

Distributed to municipalities by the discretion of the county

Per capita or ad valorem distributions

Constant for all munis in the county

Earmarked LOST: For the earmarked

revenue munis can treat it like a typical intergovernmental transfer


County to Municipality Distributions

Per capita versus ad valorem PC: Total population in addition to population in municipalities AV: Total property tax levied in county and munis

So dependent on revenue, not necessarily capacity

Revenue Raising Capacity One way to frame this discussion is to look at county and

municipal RRC Not just which way would they receive the most LOST revenue Especially if different strategies benefit different munis within

the county Look at sales tax revenue distribution strategies instead of the

“base”


Questions

Any questions about LOSTs and literature?

Any thoughts or considerations about LOST?

Any areas of LOSTs you would like to see explored?

Please feel free to contact me: [email protected]


Brief Background on NC LOSTs

Local option sales taxes (LOSTs) in NC are composed of many “articles” or smaller LOSTs Rates vary between 2% and 2.25% with 3 counties having and

additional 0.5% for transit Base 2% taxes food unlike the state level sales tax

One article is partially earmarked for counties For education capital Revenue is distributed on a (weighted) per capita basis

This is a change! There used to be more distributed and earmarked like this

Municipalities are not constrainedState collects revenue and distributes it back to

counties and counties distribute to municipalities Per capita versus ad valorem basis

Whitney Afonso October 2013

Revenue Raising Capacity

Average Property Tax and LOST Revenue

LOSTProperty tax

revenue

Total Property

Value

In total dollars (000s)

Urban 14,700 291,709 44,000,000

Suburban 5,463 41,237 8,225,920

Rural 3,020 19,948 3,308,751Tourism rich 8,953 60,061 12,300,000

In per capita dollars

Urban 89.75 610 93,316

Suburban 89.53 633 143,451

Rural 64.54 465 79,799

Tourism rich 100.71 554 132,354The suburban and rural counties that have been re-coded as tourism are not

included in the suburban and rural averages. The totals are presented in thousands of dollars, the per capita terms are not.

Understanding Factors that Influence Local Sales Tax Value

Economy & Finance

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