A variety of Medicaid “swap” plans have become major sticking points in this year’s budget negotiations between the North Carolina House and Senate. These plans put real Medicaid reform further into the future and either raise taxes on North Carolina citizens, or set the stage for future tax increases. The various plans are similar in that they compel the counties to relinquish certain sales and excise tax revenues to the state in exchange for the state assuming the county share of Medicaid costs. While it has become clear that North Carolina counties can no longer support the numerous unfunded mandates stemming from North Carolina’s “Cadillac” Medicaid program, the fact remains that as long as the state continues to fund a Medicaid program that goes far beyond federal requirements, North Carolina taxpayers are going to suffer. Thus, even as legislative leaders are talking about taking over county Medicaid payments, they are proposing a new tax increase to fund the swap. In particular, both the House and Senate are considering plans that would raise the deed stamp tax. Furthermore, a House plan would allow counties to either raise their sales tax an additional one-fourth cent, or triple the deed stamp tax from 0.2 percent to 0.6 percent. According to data from FY2004-05 (the most recent available), tripling the deed stamp tax would result in an annual tax increase of more than $250 million on property sellers.
The Deed Stamp Tax
The deed stamp tax, also known as the real estate transfer tax, imposes a tax of 0.2 percent of the sale price on the seller at the time of closing. The transfer tax is tucked away among a bevy of line item closing costs and fees that appear within the closing documents of real estate transactions. Most people don’t even realize there is a deed stamp tax, much less account for the tax when pricing their property. As of 2007, the average price home in the Triangle area was roughly $237,000. If the transfer tax were tripled, the seller’s tax bill on this average home would increase from $474 to $1,422. This jump in taxes is likely to have the following ramifications:
- Some sellers will begin to incorporate the cost of the tax into the sale price of their home, driving home prices upward.
- Some sellers will not adjust their sale price and simply allow the higher tax to eat away more of the equity they would have put toward a new house.
- Other sellers will settle on a compromise, setting their sale price a little higher while paying the rest of the tax themselves out of their hard-earned equity.
Either way, homes in North Carolina will become less affordable – especially for those families on the margins of the real estate market.
A Volatile Source of Revenue
Because it is directly tied to the real estate market, which by its very nature is highly cyclical, the transfer tax is a highly volatile revenue source. Data from the Department of Revenue reveals that net collections of the deed stamp tax can fluctuate dramatically over the course of just a few years (see chart on next page). For example, in FY2000-01 collections of the transfer tax statewide declined 1.7 percent from the previous year. By contrast, revenue for FY2004-05 increased 38.7 percent over the preceding year. In spite of these historical trends, however, Fiscal Research Division projections presuppose a steady rate of increase in transfer tax revenues over the next five years. It is virtually certain that these expectations will not be met, with the likely result being another tax hike for North Carolina citizens. According to Dr. W. Mark Crain, an economics professor at George Mason University, tax revenue volatility not only makes for bad policy, it also often leads to further tax increases. Crain stated: “More than 200 years ago Adam Smith maintained that reliability is one of the most important attributes of a good tax system. … Governments benefit from a reliable revenue stream for the obvious reason that spending commitments must be made before revenues are actually in hand.” North Carolina state government would be ill advised to rely on such an unreliable revenue source. When revenues fall short of projections, lawmakers must either cut prior spending commitments, raise taxes, issue debt or undertake some combination of the three. Conversely, revenue surpluses may be looked upon as a pleasant surprise for lawmakers, but there are opportunity costs involved even in the case of a windfall. If, for example, revenues could have been more accurately predicted, a tax cut could have been enacted; or, certain spending priorities could have been included in the budget ahead of time. But whether in a shortfall or a windfall, the end-result is usually not positive for taxpayers. In either case, taxpayers miss out on tax cuts, face tax increases, shoulder heavier debt burdens, or are deprived of potentially vital government services. Once the real estate market cools, so too will deed stamp tax revenues. State lawmakers will then scramble to raise taxes to make up for a shortfall. Once the real estate market heats up again, deed stamp tax revenues will again rise but lawmakers will opt to use this money to increase spending instead of cutting taxes.
- Medicaid “swap” proposals do not address much-needed reform. They merely shift cost responsibilities from counties to the state.
- Plans in both the House and Senate propose that the state take over the county share (currently 50 percent) of the deed stamp tax – a very unpredictable source of revenue. Relying on unstable revenue sources makes for bad policy.
- A higher transfer tax would make housing less affordable for many North Carolina families. SOURCE: Fiscal Research Division, N.C. General Assembly