June 7, 2010

Fairness and taxes

A lot has been written lately and even more said, about how tax revenues are shared amongst the towns and Dare County.  The Outer Banks Voice reported that Manteo's elected leader's considered raising taxes just to protect their share of shared revenues.  Rob Morris put his two cent's worth in yesterday in both the OBXVoice and the Va. Pilot. writing:

As a former English major, I have a hard time explaining the math behind how they carve up the proceeds of various taxes among Dare County and its six towns.
I have an even harder time understanding why they continue to do it that way.
So does Kill Devil Hills Mayor Ray Sturza. “It’s sad, it’s silly, it’s counter-productive,” he said last week.

I thought I would lay out the specifics (and the math) that underly the problem and then look at the impact any changes might have on the town budgets.  Finally I hope to share a few words about tax fairness and how that might play into the discussion.
The Taxes
First lets look at the tax revenues involved:  Local option sales tax, a share of the occupancy tax and the land transfer tax.  Each one has it's own story and a little different sharing revenue.
Sales Tax: There are actually 3 local option sales taxes.  2 half cent taxes and 1 full cent tax.  They are collected by the state and returned to Dare County for distribution.  By state statue the county can chose to distribute either based on population or by adding up all the property taxes levied by the county and towns and giving each government a share equal to its percentage of the total of taxes levied.  Currently the county uses the levy method. The table below shows this better:
Tax Levy % of total
Dare $45,288,315 71.7%
Duck $2,442,750 3.9%
Kill Devil Hills $5,328,985 8.4%
Kitty Hawk $2,476,750 3.9%
Manteo $1,405,000 2.2%
Nags Head $4,513,424 7.1%
Southern Shores $1,670,000 2.6%
Here is a graphic representation of the current distribution;
Occupancy tax:  Dare County collects 5% occupancy tax on lodging.  one cent goes to the Dare County Visitors Bureau and another goes to the Beach Nourishment fund.  The remaining three cents are split between the county and the towns on a fixed percentage.  As set by the statute authorizing the tax, the town's share is distributed to each municipality based on its tax levy as a percentage of all the municipal property taxes levied.

Land Transfer Tax:  This tax was levied around 1990 to fund capital projects for the county and the Town's.  Initially Dare County received two thirds of the revenue and the towns the remaining third.  After 12 years the ratio was reversed and now the towns share 2/3s of the revenue based on the percentage of levy formula used in occupancy tax.  Dare County gets the remaining third.
There is a slightly dated but still good presentation about the particulars on the Dare County Finance Dept. website.
The Distribution Formula
There are four distribution formula commonly suggested in debates about these revenues,. the levy formula currently in use, per capita (by population) point of origin and assessed value.
Levy: as previously explained each entity gets a share equal to the percentage of the total property taxes it levied.
Population (Pop,) This formula allocates money based on the percentage each entity has of the sum of the populations of the participating governments.  The table below shows these totals and percentages using 2000 census data.

County and townsPop,%



Kill Devil Hills5,89713%

Kitty Hawk2,9916.6%


Nags Head2,7006%

Southern Shores2,2014.9%


Point of Origin:  Under this method taxes would be returned to each jurisdiction based on where the tax was paid.  Revenue from rental cottages in Nags Head would go back to Nags Head, Manteo revenue to Manteo.  There is data for this for the occupancy tax, though it is very closely held.  I used data from 2005, the most recent data I have access to.  This could also be computed for the land transfer tax but I do not know that anyone has actually done that.  My expectation would be that it would be similar to the ratio of assessed value assuming properties sell somewhat randomly throughout the county.  There is no data for the origin of sales tax at the municipal level so this formula could not be used to distribute sales tax revenue.
Property Value:  This method would reward the towns based on their total assessed valuation as opposed to their tax levy.
The table below compares the 4 methods for the municipalities.

LevyPopulationOriginProperty Value


Kill Devil Hills30%39%21%23%

Kitty Hawk15%20%5%12%


Nags Head26%18%36%27%

Southern Shores10%14%8%15%

It is easy to see that each formula has big winners and losers. The choice of a distribution formula has very real implications for tax rates in each of the towns and the county. Given that it is important the formula have some type of equity or fairness basis.  The next chart show the % change in distribution for each entity if the County converted to population from levy and second shows the % change in distribution for each town for each of the possible formula

There are clear winners and losers for each formula.  Dare County loses revenue if it choses to use population to distribute sales tax so there is no incentive for it to change.  Our focus then will turn to the occupancy and land transfer taxes shared by the towns.
Lets talk first about the arguments for each method:
Population:  This method assumes that the need for money is based on the number of people and generally this is the case however, as we see so often in Dare County using census population data skews the results since the census does not account for summer tourist load and non resident property owners.   Under the population formula towns with large permanent populations get big shares regardless of either their need for the money or the actual amount of service they are providing.  Towns with large tourist populations (Duck and Nags Head) are the big losers.
Point of Origin:  This formula assumes that the money should go back to where it is generated.  that there is a correlation between the commercial activity the generates the tax and the need for the funds.   This formula also skews the current distribution model with the towns that lose in population winning big in point of origin.  It punishes towns with large permanent resident colonies that don't pay occupancy taxes.
Assessed Value This formula assumes that the property value equates to the need for services.   It acutally shows little change from the levy method and would offer the advantage of not being impacted by tax increases.  However linking tax value to the need for dollars misses the distorting impact of high value ocean front properties
Levy: The current formula assumes that every dollar paid in property taxes is equal.  It rewards towns who provide high levels of service and rewards tax increases.   It does provide a level of uncertainty when there are shifts in tax rates though I would argue that uncertainty is dwarfed by the uncertainty in just how much money will be generated by these taxes.  We have seen land transfer tax reduce government revenues more than any shift in the formula ever would.
Unlike the population method, the levy system accounts for non resident population and unlike point of origin it accounts for areas of permanent homes that don't pay occupancy tax.  It treats every tax dollar equally.  A dollar paid  in Southern Shores gets the same match as a dollar paid to Manteo.  Every other distribution method treats taxpayers unequally,  rewarding or punishing depending on the type of town they happen to own property in.

Should we base our formula on a method that ignores the commercial realities of high tourist loads (population) or should we reward the town's that handle the commercial traffic at the cost of shortchanging the town's with large permanent resident populations?  I would argue we should do neither but that we should use a formula that treats everyone equally and the only formula that does that is levy.  Yes it gives more to those who tax more but it allocates the funds based on real need not on some other construct that misses a key component of the community.

I hope this discussion clarifies the various formula and the relative impacts of each one.   Maybe now that English major will rethink his call for change and endorse the only fair distirbution formula for Dare County.


At 4:27 PM, Blogger Ronnie Roach said...

Great information Bob. Do you have an estimate as to what share locals pay for each of the three taxes?

At 11:32 PM, Anonymous Anonymous said...

Robert, you rock when it comes to the real issues.


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