With the economic situation in the nation, and Rutherford County in particular, there are many ideas and plans being offered to get local government and communities out of this slump.
On one hand, making plans is important as without planning and goals being set, recovery is guaranteed to not happen. However, being that the current situation is of a world wide nature, local recovery plans will only be able to accomplish very limited results.
That being said, there is another factor to be considered when planning a local community's plan for managing the current economic slump. That is:
What happens once the global economy turns a corner and recovers?
The recovery will happen, there is no question about it if we are to learn anything from history. Once it happens, there will be an incrementally growing trend of new businesses and investments looking for areas to plant their operations and expansion.
Because of this, any plan for local recovery must have as one of its major goals a definite destinations which makes the local community an outstanding place to start and grow a business in.
It is no secret that businesses crave low taxation and stable government, and any government burdened with high taxes and high debt will be the last place new capital will flow into.
Rutherford County is currently holding $70 million worth of debt, and is overdue for property reevaluation which is very likely to increase the local property tax rate.
This is not a good place to be now, and especially bad place to be once the economic recovery takes place.
This write up offers a plan which can change Rutherford County's situation within seven years, and make it the best place in NC to run a business. Read on for the details.
Table of Contents
Debt, A Problem That Needs To Be Tackled
While on a personal level debt can be a problem, especially during times of financial crisis (job loss, medical disability, etc), at a government level the problem is multiplied.
Burden On The Taxpayer
When elected government officials decide to spend borrowed money, they risk nothing of their own except maybe a re-election. However, the burden of the borrowing decision is fully carried by the taxpayer, regardless of their opinion on whether the money should be borrowed or not.
In Rutherford County, the yearly debt payments make up 17% of the $48 million county annual spending. That is $8 million per year is spent on maintaining the county's $70 million debt balance.
In simpler terms, each household in the county is taxed about $450 per year just to maintain the county debt.
Debt Hides Spending
Another side effect of debt is that government spending is masked from the taxpayer, so they don't feel the effect of the spending immediately, however in due time, they end up paying for it, with interest.
For example, if the county wanted to spend $30 million on a new project, it would have to double our property taxes in order to collect the money. If this project is presented to taxpayers as a property tax doubling, I am sure many would have serious doubts as to the real need for the county to spend the money.
However, if the county decides to spend the money by borrowing it, the taxpayers would not be affected immediately, and their taxes would be slowly increased over time in order for the project to be paid for.
Sort of like the frog being slowly boiled vs. being thrown into a pot of boiling water.
Tax Rates Are Guaranteed To Increase
As debt spending is falsely "painless", governments inescapably become addicted to spending, thus continuing to fund projects with borrowed money, all the while advertising to the taxpayers that they don't really have to pay for it, as future revenue will take care of the debt.
However, as we have all experienced with personal credit cards, the due date does arrive, and interest rates change due to circumstances out of our own control.
As financial systems are extremely unstable worldwide, it is only a matter of time before government loan interest rates being to climb, just like personal loan rates and business loan rates have already done.
When the time comes, the county will have only one way to pay for the increased interest payments on its debt: by increasing property taxes.
Debt Removes Accountability For Spending
When elected officials approve debt spending, they have no real incentive to be concerned about the consequences of borrowing money, as by the time the debt starts hurting the taxpayers at a significant level, they are already out of office.
The taxpayer gets hurt doubly, as the newly elected officials simply blame the problem on past officers, and then lack the political courage to deal with the problem head on; namely, by reducing spending and/or increasing taxes for a limited time so that the debt can be paid off.
In the end, the taxpayer pays for the irresponsible spending of one administration, and for the weak character of another. All because of debt: the symbol for lack of patience and self control.
Life And Work Without Property Taxes
Consider the changes that having no property taxes will bring to the county. The areas listed in this section are just some benefits that the county will experience, and represent just a part of the whole picture:
Currently, NC counties use property tax refunds as an incentive to attract businesses into a particular county. Being a county without any property taxes would be an unmatched permanent incentive which businesses holding large properties and inventory will find hard to resist.
With lower property taxes businesses already operating in the county will benefit in many ways:
- Equal footing with new business as they will not compete against a competitor who has been given a several year property tax break.
- Lower cost of operation with property taxes eliminated allow for lower product and service prices and/or money to hire new employees.
- Residents keeping the money they would typically use to pay property taxes now can spend that money at local businesses increasing sales and creating need for new employees.
As mentioned in the above examples, with more money in county resident's pockets, businesses will see higher sales numbers, thus creating more job openings to serve those sales. In addition new businesses will move their jobs to the county thus increasing employment opportunities even further.
Residents will have more of their income to spend on what they chose, instead of paying property taxes.
Fixed Income Home Owners
People who own their homes without a mortgage would not face the risk of tax lien on their homes due to unpaid property taxes. This is especially relevant to low/fixed income home owners who struggle to make their finances last for basic necessities. Having to not face property taxes and the threat of no paying them would certainly be a benefit.
As rental property owners will have a lower cost of operation, due to eliminated property taxes, rental prices will also be reduced as the rental amount no longer has to cover the cost of paying the taxes.
Automatic Check On Government Size And Spending
Property taxes give the county government a false protection from the economic state of the taxpayers in the county. This is because the amount of property tax collected is not dependent on the employment status or the income levels of the households paying taxes.
In other words:
- In times of economic growth, high employment and high wages, property taxes are based on the value of the household's property.
- In times of economic slowdown, unemployment and lower wages, property taxes are still based on the same property values as when the household was doing financially well.
Households still pay the same amount of property tax dollars, even if household income has significantly been reduced due to unemployment or job change. This gives the county government a false sense that nothing has changed in the taxpayer's financials, as the property tax dollars it receives do not reflect the household's financial state.
However, a local government funded by a sales tax revenue only, is automatically controlled in size based on the well being of the taxpayers which it is serving.
- If households in the county have a good income, thus spend a good amount of money, sales tax revenues are high and the county government can fund more spending.
- If households in the county are living on lower incomes, then they spend less thus causing lower sales tax revenues, which drive county government spending to decrease and match the spending ability of its taxpayers.
Also, if the county government attempts to increase its revenues by increasing the sales taxes, the higher cost of products and services will drive business outside of the county. Business leaving the county causes fewer taxable transactions to take place in the county, causing lower revenues, which immediately gives a clear signal that the tax burden on the county is too high, forcing the county to reduce the sales tax rate to a reasonable level.
Either way, the government is automatically kept in check from both overspending and overtaxing.
The Seven Year Plan For Rutherford County
So, while debt free local government sounds great as a statement, is it really achievable, especially at the debt levels that we are currently operating. I believe it is.
The plan presented in this section uses spending reduction and privatization of county services to reduce the amount of money the county currently spends, and applies the savings toward reducing the debt.
Commissioners That Understand The Problem
The fact that we are in the situation we are in demonstrates that the people we have been electing over the past 20-30 years do not have what it takes to manage debt and taxes.
Electing commissioners that understand the burden of public debt and taxes is the first step in making this plan into a reality. Without this, the plan is just an exercise in intellectual gymnastics.
Elect commissioners that recognize this plan, or one like it, is something we must do if we ever want to see an improved economy in the county.
Ordinances That Must Be Passed
A set of ordinances must also be passed before this plan is passed so that new debt is not incurred without the county taxpayers approving it. The following are some of the ordinances that would be needed:
- Ban new debt from being incurred.
- Any new spending would have to be done with money collected ahead of time.
- New spending funds can be gathered by increasing the property taxes for at most 24 months, only if approved by a ballot.
- Mandate reduction or growth of government based on revenues.
- Mandate a reserve fund of 9-12 months be maintained which would be used to absorb delays in sales tax distribution from the state.
12-24 Month Plan To Privatize County Services
Setup a commission of citizens that would review all county services, and list the ones that are not mandated by state/federal law to be performed by the county.
Then establish a near term timeline for turning over those services to private operators, where competition and free market optimization will be allowed to offer the best service possible for the lowest possible price.
Some that might be quick to validate easily:
* Convenience centers
* School transportation
* School food services
Taking this year, 2010, as the starting point for the planning phase of the plan, the changes needed to eliminate our $70 Million debt would start in 2011.
As a starting point, the following are the financial facts about our county at the moment:
- $70 Million - total debt held by the county.
- $48 Million - total income the county receives from various taxes.
- $29 Million - total amount the county receives from property taxes.
- $19 Million - total amount the county receives from sales taxes, fees and state/federal program funding.
- $8 Million - total payment made every year to maintain the current debt.
- $0 Million - total savings fund (while there may be some saved now, it is irrelevant due to the debt)
- 0.53% - current county property tax rate.
The above numbers will change over the 7 years, and will be represented as a summary in the order they are listed above in the following format:
- Summary: 70/48/29/19/8/0/0.53
2011 - Reduce Spending 10%
In a county that has suffered near 20% unemployment, expecting the county government to cut its spending by 10% is no big feat.
Just as an example, the Economic Development Commission spends $1.3 Million per year. I am sure they can be convinced to give up $130,000 worth of spending in light of the fact that no serious businesses have opened in the county to justify years of spending on this program.
- Summary: 65/48.7/29/19.7/7.8/0/0.53
2012 - Reduce Property Taxes 5%
As services will be reduced by 10%, the burden on the taxpayers also needs to be reduced at this point, so that the changes in the county's debt and tax burden can be felt by everyone paying property taxes in the county.
- Summary: 54.8/48.1/27.5/20.5/7.4/0/0.50
2013 - Reduce Spending 15%
As privatization of county services should be in full swing at this point, the county should be able to show reduced spending by this point of additional 15%.
- Summary: 45/48.9/27.5/21.3/6.9/0/0.50
2014 - Reduce Property Taxes 10%
As in 2012, this reduction is the best way to demonstrate the proper progression of the plan to the taxpayers in the county. Reduced debt and spending should result in reduced tax burden.
- Summary: 28.5/47/24.8/22.2/6.3/0/0.45
2015 - Reduce Spending For The Last Time By 10%
This is the final cut in county spending and should primarily rest on privatization efforts and simplification of county operations requiring less county funded employees, buildings, utilities etc.
- Summary: 13.3/47.9/24.8/23.1/5.6/0/0.45
2016 - Final Year of Debt And Property Taxes
No changes in county services and taxes are done this year as it will be primarily dedicated to completely eliminating the debt and funding the 9-12 month reserve fund.
- Summary: 0/48.8/24.8/24/0/6.5/0.45
2017 - Eliminate Property Taxes
With the debt eliminated and the county reduced so that it can be supported by sales tax and fee revenues, the property tax is no longer required to operate the county.
- Summary: 0/0/25/25/0/27/0
Table of Details & Calculations
Example of Cuts In Spending
As an example of what services and reduction in spending would be required to reach the above plan, here is one scenario under which the county can operate without property taxes.
This scenario doesn't account for increased sales tax revenue from the additional money taxpayers will have at their disposal due to no property taxes. It also doesn't account for additional businesses attracted to the county due to no property taxes.
It is reasonable to expect that sales transactions within the county will increase due to the lowered tax burden, thus allowing additional funding of county services once that increase is actually apparent in the county's collections.
Another consideration before taking these estimates as the bottom line is the effort that would be underway during the 7 year process, which will drive legislation to be introduced in the State Assembly allowing counties to institute local sales taxes for expansion of services. This also will allow for additional revenues for the county which can support more services if the county's economic operation can support them.
In other words, the following cuts would be the worse case scenario, where no increase in sales activity in the county takes place and no new businesses open up due to the eliminated property taxes. For actual numbers spend on those services you can take a look at the 2009-2010 Rutherford County budget.
Services Without County Contributions
These services and departments will either have to be done by the private sector or fees would be introduced which will fully fund the service currently funded with taxpayer dollars.
- County contribution to Department of Social Services - the non-county revenue would be the only income the department would use for its services ($3.5 Million)
- County contributions to ICC - tuition would have to be sufficient to support the operation of the college without tax subsidy. ($1.9 Million)
- EDC - the Economic Development program would have to operate under the county's Chamber of Commerce, where it belongs. ($1.3 Million)
- Special appropriations/spending by county commissioners - why is this even an item in the county's budget. ($943,000)
- Libraries - would have to be run on a membership system with funding from private grants and donations. ($575,000)
- Inspections - would be operated based on inspection fees sufficient to fund the department's expenses. ($531,000)
- County Contributions to Health Department ($277,000)
- Airport - the airport can remain under the county's umbrella for federal/state regulation requirements, however it's costs will have to be covered by usage fees and membership. ($83,000)
Services Whose Spending Will Be Cut 50% Or More
These services will either be significantly reduced or combined into merged departments
- Miscellaneous Spending - from $1.7 Million to $995,000
- Tax Supervisor - from $709,000 to $354,000
- Tax Collector - from $314,000 to $157,000
- Governing Body - from $293,000 to $146,000
- Property Reevaluation - from $260,000 to $52,000
- Mapping Services - from $236,000 to $47,000
- Senior Center - from $226,000 to $113,000
- This service will have to consider a membership fee in order to support the services it offers to its users
- Cooperative Extension - from $197,000 to $98,000
- Mental Health Contributions - from $111,000 to $55,000
- Soil and Water - from $104,000 to $52,000
Services Whose Spending Will Be Cut 30%
- Maintenance - from $765,000 to $535,000
- Information Technology - from $724,000 to $535,000
- Register of Deeds - from $273,000 to $191,000
- Board of Elections - from $245,000 to $171,000
- Animal Control - from $180,000 to $126,000
- Garage - from $112,000 to $78,000
Services Whose Spending Will Be Cut 20%
- Detention Center - from $2.2 Million to $1.8 Million
- 911 Communications - from $1 Million to $850,000
- Finance Department - from $389,000 to $311,000
- Court Facilities - from $187,000 to $149,000
- County Manager - from $149,000 to $119,000
- Human Resources - from $133,000 to $106,000
Services Whose Spending Will Be Cut 15%
- Public Schools - from $12.2 Million to $10.2 Million
- Sheriff - from $4.8 million to $4.1 Million
- Emergency Services - from $2.5 Million to $2.1 Million
After The Seven Year Plan
Spread The Plan To Other Counties
Once the debt and property taxes are eliminated, and residents and businesses start experiencing the benefits of the lowered local government burden, the county can start outreach activities to other counties in NC and the state government, in order to enable others to experience the growth fueled by this model.
Initiate State Legislation For Local Sales Tax Levy And Collection
Another initiative that the county can lead would be an introduction of legislation that would open the possibility for counties to levy and collect sales taxes.
Currently the entire amount of sales tax charged at the time of purchase is sent to the state treasury, which in turn distributes the local portion of the sales tax back to the counties based on a two part formula. This system ends up costing a real amount of money to operate, while also causing delays in the local government being able to receive its portion of the sales tax transaction.
With the local government being empowered to collect the entire sales tax amount, and also introduce local sales taxes, it will be able to immediately receive the revenue from local business, while delivering the state portion of the sales tax to the state treasury.
This approach benefits the county by letting it be in direct control of its revenues, while reducing the state's tax collection complexity as it now has to only deal with the 100 counties as sources of revenues instead of looking over the thousands of businesses withing the state borders.
Encourage a Sales Tax Only State Revenue Model
Not only will this allow for prosperity in the entire state, thus helping local county businesses to prosper due to growth all around, but at the same time, the state government can be encouraged to look into a consumption tax only funded government.
At the state level this model would eliminate all taxes except for the sales tax. That would mean no income taxes, no business taxes, no estate (death) taxes, or any other form of taxation. With this model implemented at the state level, and with small local government models in the counties, NC can become one of the top locations in the country for new and existing businesses to locate their operations.
Can Sales Taxes Be Used For County Operation?
The sales tax collections in North Carolina are anything but simple, however anyone with some time on their hands can research, review and understand them using the original legislation defining the sales tax structure.
All sales taxes in NC are paid to the NC Department of Revenue by businesses who charge the sales tax when sale transactions take place.
The state then uses a formula to calculate how much of the local county sales tax will be returned to each county.
The 7.75% sales tax applicable in Rutherford County is made up of the following components:
- 5.75% state sales tax (Article 5 tax) This is the component of the sales tax that is retained by the State of NC.
- 1.00% local use sales tax (Article 39 tax) This component of the total sales tax is defined by legislation "obtain an added source of revenue with which to meet their growing financial needs". It can be used for any county spending.
- 0.50% local sales tax (Article 40 tax) This component of the total sales tax is defined with a restriction requiring that a part of the revenue from this tax be spent on school capital/building spending or debt incurred for capital/building projects:
- In the first 5 years of this tax 40% of revenues generated by it MUST go to school capital spending or debt retirement of the same.
- After the first 5 years only 30% of the revenues MUST go to to school capital spending or debt retirement from the same.
- The remaining 60% (or 70%) of revenues from this tax can be used for any county spending.
- 0.50% local sales tax (Article 42 tax) This component is similar to the previous one:
- 60% of the revenues from this tax MUST be used for school capital/building spending, retirement of debt incurred by school capital spending or saved for future school capital/building spending.
- The remaining 40% of the revenues from this tax can be used for any county spending.
(There are other sales tax components in NC, however they are not applicable in Rutherford County so they will not be discussed in this section.)
Considering the above information, we can conclude the following about sales taxes in Rutherford County:
- On sales transactions in the county, a 5.75% tax charge is applied and sent to the State of NC.
- On those same sales transactions, a 2% tax charge is applied and (ultimately) kept by the county.
- 3/4 (75%) of the 2% tax can be spent any way the county decides.
- 1/2 (25%) of the 2% tax must be used on a school building project, school building debt or school building reserve fund.
In the 2009-2010 Rutherford County budget the revenues from sales taxes are budgeted as follows:
- $4.4 Million from the 1% Article 29 tax, available for any county spending.
- $2.8 Million from the 0.5% Article 40 tax
- 40% dedicated to school capital funding, or $1.1 Million
- 60%, or $1.7 Million available for any county spending
- $2.4 Million from the 0.5% Article 42 tax
- 60% dedicated to school capital funding, or $1.4 Million
- 40%, of $1 Million available for any county spending
In conclusion, for the 2009/2010 budget year, of the $9.6 Million collected in local sales taxes:
- $2.4 MUST be used for school capital spending
- $7.2 Million can be used for any other county spending
- City of Durham Stop New Projects Due to High Debt and Reduced Revenues
- NC Considers Privatization of State's Alcoholic Beverage Control System
- NC Buncombe County looks to outsource child care program
- March 2010 Agenda for Rutherford County Commissioners Meeting
- Rutherford County EDC Analysis
- Rutherford County Budget And Debt Analysis
- NC Sales Tax Information
- Kansas City on the brink of bankruptcy, wants to close half its public schools
- Low-tax Texas beats big-government California
- A handful of companies have lined up to expand and operate the city-owned White Street Landfill — some offering incentives to the landfill’s neighbors for the trouble of living next to the facility. (Greensboro, NC)
- N.J. Gov. Chris Christie plans privatization of as many as 2,000 state jobs
- Tax-Cutting Tax Hikes
- City Council members have been considering a rare move in Greensboro’s political history: reducing the tax rate.
- From the RBC Center in Raleigh, to the Booth Amphitheater in Cary, to municipal golf courses all across our area, the major venues are losing money, and taxpayers are making up the difference.
- The Associated Press reports that a Missouri Senate Appropriations Committee voted last week to eliminate state funding for several government programs, reducing state expenditures by $506 million.
- Website designed to help policymakers and the public understand where federal funds are being spent and how to reform each government department.
- Editorial on simpler sales taxes in NC
- December 2010 - "As cities and states boost their debts by 800 percent, a housing-like crisis looms."