Category: Tax Policy (page 1 of 6)

Balancing the Scales: Evaluating North Carolina’s Local Sales Tax Redistribution Policy Questions for Practitioners

By Jackson Dille and Whitney Afonso

Questions for Practitioners

  • How is the shift towards sales taxes affecting fiscal equity across North Carolina counties?
  • How has North Carolina’s local sales tax redistribution policy impacted the difference in per capita sales tax dollars between urban and rural counties?
  • What lessons does North Carolina’s experience offer for designing equitable fiscal policies in regions with stark urban-rural divides?

Introduction

Local sales taxes (LSTs) have become an increasingly important revenue source for local governments, growing from 7% of total local tax revenues in 1977 to 13% by 2020, with collections surpassing $100 billion. Their popularity stems from their flexibility, political palatability, and ability to diversify revenue streams while offering property tax relief and shifting the tax burden to non-residents. However, the benefits are unevenly distributed, as some jurisdictions experience tax “exportation”—benefiting from non-resident spending—while others suffer from “tax leakage” when residents shop elsewhere. These dynamics have led to significant disparities in sales tax revenues between retail-rich and retail-poor communities.

To address these inequities, North Carolina implemented a redistribution policy in 2017 that pooled a portion of local sales tax revenue at the state level and redistributed it based on a formula designed to reflect both place of sale and population. Then-Senate Majority Leader Harry Brown described the initiative as a way to ensure “all North Carolina counties benefit from tax dollars their own citizens pay.” While the motivation behind the policy is clear, its real-world impact had not been evaluated until recently. The study reviewed here is the first to assess whether this kind of policy meaningfully reduces fiscal inequities tied to sales tax revenue and whether it is well-designed to adapt over time.

Background of LST in North Carolina

In North Carolina, LSTs represent the second-largest source of revenue for counties, trailing only property taxes. However, not all counties have equal ability to generate this revenue. Tax leakage—when residents shop in neighboring counties, particularly from rural to urban areas—creates fiscal challenges for rural communities lacking commercial infrastructure. Urban counties, with more retail activity and larger visitor flows, benefit disproportionately. As a result, rural counties often face lower per capita LST collections and greater challenges funding essential services like education and public safety.

To correct this imbalance, the General Assembly enacted a reform in FY2017 that aimed to redistribute part of the LST revenue more equitably. Under this system, each county contributes a share of its LST collections into a state-managed pool. Revenues from Articles 39, 40, and 42 are included, and then redistributed to counties based on fixed allocation percentages derived from a projected 50–50 split between point-of-sale and per capita distributions. This policy sought to strengthen counties with weaker sales tax bases—typically rural areas—by supplementing their revenue and mitigating the impact of tax leakage. While well-intentioned, the fixed nature of these allocation percentages and their lack of alignment with actual county contributions have introduced challenges in implementation.

Impact of the Revenue Sharing Pool

To evaluate the policy’s effectiveness, researchers used financial data from the North Carolina Department of Revenue and categorized counties as urban or rural. In theory, rural counties with smaller LST bases would benefit the most, while urban counties with larger bases would contribute more than they receive. However, the actual outcomes proved more complex. In FY2017, approximately 75% of rural counties and 50% of urban counties were net beneficiaries. Some rural counties were net contributors, while some urban counties gained more than they paid in. This divergence is partially due to the imperfect alignment between rural/urban designations and actual tax base size. Some rural counties, despite their classification, had relatively strong retail sectors, and some urban counties had weaker ones.

A central issue is that the policy’s allocation formula does not factor in each county’s contribution to the pool. Instead, it relies on fixed distribution percentages based on projections from 2015. As a result, counties with higher contributions may not see proportional returns, and recipient counties may receive less than their level of need or contribution would suggest. In fact, 12 of the 33 counties with net negative revenues in FY2017 received less revenue than they contributed even though they were intended to be net recipients..

Still, the policy’s redistributive effect remains evident, especially when measured relative to per capita LST revenue. Urban counties with high sales tax capacity per capita experienced modest losses—median losses around 2.9%—while rural counties with low capacity gained significantly, with some seeing increases as high as 58%. Comparing actual revenue to a hypothetical 50–50 target also revealed that, post-policy, the gap between actual and intended revenue narrowed, particularly among rural counties. Over time, however, these gains have started to erode. As certain counties continue to grow economically, disparities in per capita LST revenue have begun to widen again, reflecting the policy’s limited adaptability. Figure 1 shows difference in LST dollars per capita across urban and rural counties over time.

Figure 1: Per Capita Dollar Difference Between Urban and Rural Counties

Source: Afonso et al. 2024

Conclusion

North Carolina’s LST redistribution policy represents a thoughtful effort to reduce fiscal disparities and address the challenge of tax leakage between counties. Many rural jurisdictions have meaningfully benefited, and the policy has helped align actual revenues more closely with a population-adjusted benchmark. At the same time, certain design features may limit the policy’s long-term effectiveness. Notably, the use of fixed allocation percentages—based on projections made in 2015—does not reflect counties’ actual contributions to the revenue pool or shifts in local economic conditions over time.

While the policy successfully narrowed revenue disparities in its early years, its static structure may benefit from future refinements to sustain that progress. Updating allocation percentages periodically, incorporating contributions into the formula, or adopting a broader definition of fiscal capacity (including other local revenue sources like property taxes or fees) could enhance both equity and responsiveness. North Carolina’s experience offers important insights for other states pursuing similar reforms: effective revenue-sharing policies can provide meaningful support to communities with lower fiscal capacity, but they are most impactful when designed to evolve alongside changing economic and demographic landscapes.

Finally, it is also critical to consider the cost to the counties that are the beneficiaries of tax leakage (those that import tax dollars) from those non-resident visitors.  Those who commute, travel, and shop in other jurisdictions also consume services and benefit from those public dollars.  As the state (and others) continue to consider what is fair, perhaps measuring the difference between the cost incurred by the counties that import sales tax dollars and the amount that they receive in surplus dollars is a worthwhile exercise.  Ultimately, careful consideration of policy goals and their impacts is warranted.  In the case of GS 105-524, the state set out to correct for tax leakage and they were largely successful in achieving that goal.

Full article: Afonso, Whitney, Alex Combs, and Christian Buerger. “Plugging the Tax Leak: An Analysis of North Carolina’s Local Sales Tax Redistribution Policy.” State and Local Government Review 56.1 (2024): 76-90.

 

Are Sheds Real or Personal Property? Yes.

Have you considered that our generation might be the last to remember life before the digital age?

In 1992, all property tax questions came to me by phone. I could hear voices, sense urgency, and build rapport with assessors and appraisers through small talk. If my answer wasn’t quite right, we engaged in dialogue—what IAAO 400 calls feedback, a crucial skill for effective communication. I sometimes miss those conversations. If someone needed a written response, they’d send a letter, which might arrive a week later.

Today, most property tax questions and answers happen via email. Recently, one exchange stood out as something worth sharing in a blog post. Blogs are a digital-age tool I don’t use enough, but I bet across NC, we have countless emails that could be turned into blog posts—creating a shared space for these discussions..

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Five Criteria to Consider When Thinking About Taxes

Taxes are a necessary aspect of any modern society, as they provide the government with the resources needed to provide public goods and services such as infrastructure, healthcare, education, and security. However, not all taxes are created equal, and policymakers must take into account various criteria when designing and implementing tax policies. In this blog post, we will discuss five tax criteria: economic efficiency, equity, adequacy, feasibility, and transparency.

The Millennial Guide to Doing Your Taxes

  1. Economic Efficiency: Economic efficiency refers to the ability of taxes to raise revenue with minimal distortion to economic behavior. Taxes can create economic distortions by altering the incentives of taxpayers, which can lead to changes in their behavior. For example, high taxes on labor income may discourage people from working, while taxes on capital may discourage investment. A tax system that minimizes these distortions is considered economically efficient. Policymakers can achieve economic efficiency by designing taxes that are broad-based, have low rates, and minimize exemptions.
  2. Equity: Equity refers to the fairness of the tax system. One way a tax system is considered fair when taxpayers are required to contribute to the cost of public goods and services according to their ability to pay. The ability to pay is usually determined by income or wealth. A progressive tax system, where the effective tax rate increases as income or wealth increases, or a proportional tax system, where the effective tax rate is the same across income groups, is typically considered more equitable than a regressive tax system, where the tax rate decreases as income or wealth increases. Policymakers can achieve equity by designing taxes that are progressive or proportional, provide targeted tax credits or deductions to low-income households, and eliminate tax loopholes that benefit only segments of the population.  A second way to consider equity is through the benefit principle, where a tax (or fee) structure is designed to target those who benefit from a service at a higher level than those who do not (at least directly).  Policymakers can achieve this form of equity by designing taxes (and fee) structures where the consumption of the service or good is linked to the use of it.  This is justification for many taxes and fees like a fuel tax which finances roads and highways.
  3. Adequacy: Adequacy refers to the ability of taxes to raise enough revenue to fund public goods and services. Policymakers must ensure that the tax system is capable of generating sufficient revenue to meet the government’s spending obligations. Adequate taxes can help maintain public confidence in the government’s ability to provide essential services, promote economic stability, and reduce the risk of fiscal crises. Policymakers can achieve adequacy by designing taxes that are broad-based, have moderate rates, and are regularly adjusted to reflect changes in the economy.
  4. Feasibility: Feasibility refers to the ease of administering and enforcing the tax system. A tax system that is too complex or difficult to enforce can result in high compliance costs, tax evasion, and reduced revenue. Policymakers must consider the administrative and enforcement costs of implementing tax policies when designing the tax system. Simplicity and clarity can improve the feasibility of the tax system. Policymakers can achieve feasibility by designing taxes that are easy to understand, have simple compliance requirements, and use modern technology to improve administration and enforcement.
  5. Transparency: Transparency refers to the openness and accessibility of tax information. A transparent tax system provides taxpayers with clear and understandable information about the tax policies, tax rates, and tax revenues. Transparency can help promote public trust in the tax system, reduce tax evasion, and increase compliance. Policymakers can achieve transparency by providing clear and accessible tax information, engaging in public consultations when designing tax policies, and publishing regular reports on tax revenues and expenditures.

Tax IRS Cartoon 32

In conclusion, tax policies play a vital role in any modern society. Policymakers must consider various criteria, including economic efficiency, equity, adequacy, feasibility, and transparency when designing and implementing tax policies. By incorporating these criteria into tax policies, policymakers can create a fair, efficient, and effective tax system that promotes economic growth, social justice, and public trust.

So, Your Jurisdiction is Thinking of Starting a Revenue Manual…

Consulting and updating your revenue manual is the first step of the administrative process for revenue forecasting.  At least, that is what I say when I teach revenue forecasting.  Of course, when I then turn to the course participants and ask how many of them have revenue manuals in their jurisdiction only one or two raise their hands.  In fact, there are some years when no one raises their hand.

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Who Says You are an Appraiser? Appraisal and other Property Tax Certifications, Credit Hours, and Designations

There are many certification programs involved with property tax.  I suggest that every NC property tax student be familiar with which organizations provide certifications, credit hours, and the requirements of those organizations. A certification or designation is required by law for some positions. Two are required in the assessor’s office. If you are one of the 100 appointed county assessors in North Carolina or a county appraiser, you must be certified by the NC Department of Revenue. Becoming and being a certified assessor or appraiser includes requirements for initial certification (certifying education) and also follow-up requirements for continuing education. If you represent yourself as a real estate appraiser but do not fill one of the two positions above, NC law requires your certification to be through the NC Appraisal Board. All other certification programs for property tax are not legally required in NC law but may be required by your employer or by your association. Perhaps you’re not currently in a position that is required to be certified but your future could lead you in that direction. Regardless, I think you should maintain your course records for attendance and successful completion of property tax courses. I have recognized uncertainty in this area over the years and it seems to be more so in recent times. I hope this post is a way to help bring us back to certainty. Continue reading

Fiscal Impacts from COVID-19–Revenue Structure Matters

Guest Contributors: Hai (David) Guo and Can Chen

What is the most significant fiscal challenge for the municipal governments facing the unexpected outbreak of the COVID-19 pandemic? It is no surprise that Florida city managers placed the forecasts for the pandemic’s impact on local revenues as the top priority, as local governments are revenue-driven entities. The tradeoff between revenue growth and stability has always been a concern for local governments. With procyclical fiscal policy, local governments usually face abrupt revenue shortfalls and high demand for public service during economic recession. The COVID-19 pandemic-induced recession is no exception. Furthermore, there is tremendous uncertainty regarding the duration of the pandemic, the magnitude and requirement of federal government aid, and the public’s behavioral change.
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On Demand Webinar from UNC’s Tax Center on State Response to the Pandemic

Recently I participated in a webinar for Kenan Flagler’s Tax Center.  It covers state responses to the pandemic and policies being considered.  While it is not focused on North Carolina or local governments, I think there is still much in there that is likely of interest to you all.  Especially because we all know that what happens at the state level impacts the local level.

And my co-presenters (their bios are at the bottom) were amazing!  One was named “The Most Influential Person on the Planet in State and Local Tax” by State Tax Notes and the other was identified by State Tax Notes as the “single most influential person in state taxation” and named as the publication’s inaugural Person of the Year.

The webinar is available here.
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Sales Tax Considerations During the Pandemic

I have been having a great deal of conversations with folks across the state about what is going on with their sales taxes (and occupancy and food and beverage taxes).  What has happened versus what was expected for FY21 and what they are thinking about for FY22 now that local governments are starting to begin their budget processes.  I thought it might be useful to share some of the questions I have been getting and my answers to them and some of my broader thoughts about sales taxes and the pandemic, though it is no crystal ball.  I am going to structure it like a q&a.  I am not covering everything here and please reach out if there is more than I can help with.

 

  • Q: Our sales taxes are recovering quickly, what are you seeing other places in the state?
  • A: We are seeing that sales taxes have recovered more quickly than most people anticipated. That is great news, but I think a dose of caution should accompany it.  First, we see a bump starting in in the June collections (so sales for the month of May) where it went from down 13.3% year-over-year to down 4% year-over-year and then by July (so June sales) it was up year-over-year by 10.75%.  So that is all really promising, but we have to keep a few things in mind.  1) That is right when the state moved into Phase 2 and there may have been pent up demand. 2) That is when we have more generous unemployment benefits and federal stimulus, so people had more disposable income than they might otherwise have had.  3) Some people were deferring payments on rent and/or utilities, so they had less income than it looked like from their spending in that period.  Also, that trend is not universal.  Some areas are doing much better and others are having a slower recovery.

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Update: The Impact of the COVID-19 Crisis on Local Government Budgets for FY21

In a previous blog post, The COVID-19 Crisis and How North Carolina Local Governments are Budgeting for It, I laid out the results of a survey that the NCLM and the NCLGBA had conducted to counties and municipalities across the state in April.  In this week’s blog post I am going to provide an overview of an updated survey that was send out in May.  This survey had fewer respondents, but also provides more up-to-date information about the strategies and plans that local governments in North Carolina have, with another full months of information and better understanding of how COVID-19 is impacting their jurisdiction.
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The COVID-19 Crisis and How North Carolina Local Governments are Budgeting for It

Recently the North Carolina League of Municipalities (NCLM) and the North Carolina Local Government Budget Association (NCLGBA) partnered on a survey of county and municipal governments across the state to better understand how local governments are budgeting for FY21.  There are 142  responses.  29 are from counties and 113 are from municipalities.  See the map below to see the number of jurisdictions from each county area (total of the county and municipal responses).


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