Wake’s Leaders Chose Wisely with New Tax Rate

This year’s Wake County tax increase was a big step in the direction of adequate funding because state leaders persist in approving austere budgets which have left large and small counties alike with picking up the tab for services traditionally funded by the state.

Building on the budget recommended by County Manager David Ellis, the Board of Commissioners increased the tax rate to 72.07 cents per $100 of valuation, sending a message to the voters that their board’s priorities are to properly fund county services like libraries, parks and greenways, emergency medical services, behavioral health services, affordable housing, food security, and public education operating costs for both WCPSS and charter schools.

On the heels of this decision, the Pew Charitable Trusts released a thoroughly sourced report on the damaging and lasting effects the Great Recession had on public budgets: “Lost Decade” Casts a Post-Recession Shadow on State Finances” (15-minute read). The report details how state revenues and spending habits were significantly altered during the 2007-09 recession. The effect on state revenue has had a significant impact on Wake County as well.

[Fig. 1 CHANGE IN TAX REVENUE FROM EACH STATE’S PEAK QUARTER, ADJUSTED FOR INFLATION]
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As shown in Fig. 1, North Carolina’s state tax revenue trended with the average of the 50 states until about mid-2014 showing a steep and rapid decline, but then recovered the trend about a year later. Revenue dipped again for most of 2017 but recovered again at the beginning of 2018. Those dips in revenue correspond with state tax cuts.

It’s important to note two things about the graph in Fig. 1. First, the 0 percent line corresponds with the peak quarter near the recession. As shown, North Carolina’s tax receipts dropped earlier and more steeply during the recession than the 50-state average. Second, North Carolina didn’t fully recover its inflation-adjusted revenue until the third quarter of 2016, three years after the 50-state average.

That initial drop and subsequent slow recovery has had significant downline effects on counties across the state. While it has been particularly acute in more rural counties with small tax bases, growing areas have felt the same pressure differently. The scales are inverse. Fewer property owners in rural areas may have more land at lower values, while there are more suburban property owners who have less land and higher property values. Regardless, $300,000 is the same amount of value whether it’s 80 acres or and eighth of an acre, and a tax rate of $1.00 per $100 in value in Scotland County 2018-19 is a lot more expensive than 65.4 cents in Wake County for the same fiscal year.

At the same time the state was slow to recover from the recession, so was Wake County. The Board of Commissioners cut the tax rate from 67.8 cents in 2008 to 53.4 cents in 2009 and then held that rate for six consecutive years. While government belt-tightening was necessary in the days during and right after the Great Recession as unemployment and home foreclosures spiked, the Triangle Region’s economy recovered at a faster pace than other parts of the state because of its growth. Commercial and residential property values also outpaced values elsewhere, propelling Wake County to have the highest total property valuation in the state.

Those increasing values didn’t automatically translate into a tax windfall for county revenue coffers. The commissioners of the past took a measured approach to tax rate adjustments, preferring a philosophy of “revenue neutral” tax rates, meaning the rate could be lowered without reducing overall revenue because property values were increasing. The mistakes prior commissioners made was holding those rates steady for too long and holding too tightly to the revenue neutral philosophy. There were missed opportunities to moderately raise additional revenue without causing sharp spikes in tax bills and it’s the reason why the tax rate increase was so high this year.

[FIG. 2: ACTUAL BASE REVENUE VS INFLATION-ADJUSTED BASE REVENUE]
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As shown in Fig. 2, the blue line represents the actual dollars raised through the property tax, called Base Revenue, over the fiscal years 2008 to 2019, and the red line represents the base revenue after adjusting to inflation based on the regional Consumer Price Index. The key takeaway from this graph are the points where the two lines would cross the same horizontal lines. For example, the 2010 inflation-adjusted Base Revenue wasn’t recovered until 2016 when actual Base Revenue recovered the same value of the 2010 dollars.

Comparatively, although the Great Recession officially ended in 2009, its effect on growth lasted longer with fewer new home starts and increasing foreclosures well into 2011. Property values didn’t increase as quickly as in prior years. In addition, the region’s median income fell from 2008 to 2011 and then stagnated for two years, reaching its actual bottom in 2014. However, since 2014, property values, new construction (especially commercial), and median income have grown at very fast paces.

[FIG.3: TAX RATE VS MEDIAN INCOME]
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As shown in Fig. 3, the tax rate increases of recent years have not kept pace with the rate of increase in the median income of the region. Since the bottom in fiscal 2014, the median income has grown almost 17 percent through 2017, the most recent data available. Since the economy has remained strong locally, it’s a safe assumption that the median income has at least held steady since 2017 and is very likely even higher. Therefore, it is unlikely that the tax rate increase is outpacing the increases in median income.

[Fig.4: ACTUAL VS INFLATION-ADJUSTED TAX RATES]
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Despite the new tax rate being set at 72.07 cents, it’s not the same value as 2008 dollars. As Fig. 4 shows, the 67.8-cent tax rate would be equivalent to 83 cents in today’s dollars, so Wake County’s new tax rate is almost a full dime lower than it was, in terms of value, in 2008. In fact, while the median income is still 6 percent lower in inflation-adjusted dollars than 2008, the tax rate is 13 percent lower.

What all this means is that while taxpayers may be looking at bills which are higher, dollar-for-dollar, than a decade ago, they are receiving more for those dollars than they used to receive. That’s because new schools have been built and older schools have been renovated to enroll and educate more students. There are more greenways, parks, and libraries than a decade ago, and there’s a brand-new court house, jail, and county government building in downtown Raleigh.

All these improvements have enhanced the quality of life and the property values of this county, because tax dollars are an investment not a burden. Wake County government and WCPSS are very good stewards of the taxpayers’ dollars, and the elected and appointed leaders are executing a clear vision based on good government, local needs, and community desires.

True leadership means sometimes choosing the unpopular option for the good of the many. When the commissioners chose to increase taxes to pay for all county services as well as schools, they were showing leadership despite higher taxes being unpopular among many. Without state support at previous levels, it was necessary for local officials to take the lead. And yet, the revenue generated by these increases still isn’t enough to adequately meet all needs but is a big step in the right direction to finally recovering from a “lost decade” of growth.

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