Columns » Bob Burtman

Sudden impact

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The state budget crisis is coming home to roost at almost every level of government. Rather than proposing any real solutions to the billion-dollar deficit, lapdog legislators seem poised to spend much of their time this session juggling the demands of the lobbyists who hold their leashes. Having decided that "no new taxes" is actually the long-lost 11th Commandment, they propose bizarre measures--such as cutting corporate taxes and fattening the state's runaway incentives program--that any grade schooler could see make no sense right now. Scientists seeking to identify a leadership gene would do well to study North Carolina legislators, in whom the trait is almost universally absent.

In one way or another, of course, the fiscal burden created in Raleigh filters down to the masses. Cities and counties, facing their own budget shortfalls, have nowhere to turn for relief but the taxpayers. How best to pay for such basic needs as new schools, roads, water and sewer, parks--and spread the pain equitably--is the daily grist of councils and commissions.

Durham County has repeatedly sought one such method, an impact fee on residential construction to help pay for new schools necessitated by the county's rapid growth the past few years. It's well established that residential growth doesn't pay for itself; the basic idea behind impact fees is that people who move to a community should pay more of the costs incurred by their arrival than existing residents.

Orange and Chatham counties have had school impact fees for years; Chatham commissioners just announced a substantial fee increase. But the legislature has to authorize counties to levy the impact fee, and Durham's measure has been rejected (most recently last year) despite the consistent support of the county delegation. The reason: The state homebuilder and real estate interests don't like impact fees, and having purchased the fealty of key members of the General Assembly, they consistently manage to derail whatever bills rub them the wrong way.

Faced with the prospect of having to raise property taxes again, Durham simply passed its own ordinance that went into effect the first of last year. A group of developers sued, saying the statute was illegal without legislative blessing, and Judge Orlando Hudson ruled in their favor last month. The case will be appealed to the state Supreme Court if necessary, according to Durham County Attorney Chuck Kitchen. Meanwhile, the county will again appeal to the legislature to approve the school impact fees. Prospects for passage are dim, however, unless development interests relax their uncompromising opposition to impact fees. One way to leverage a compromise might be to slap a moratorium on new development, a possibility the county will consider as a last resort.

The legal fine points offered by the opposing sides aren't the issue here, though it's interesting to note that the homebuilders have argued conflicting views depending on the forum: On the one hand, they claim, the impact fees are simply passed along by the developer to the homeowner, making the cost of housing less affordable to po' folks and the middle class. Yet two of the plaintiffs in the Durham lawsuit filed affidavits stating that they could not pass along those fees and had to eat them, reducing their profits to the point of hardship.

Nor can one take seriously the common homebuilder argument that impact fees will strangle growth. Orange and Chatham continue to expand at a rapid clip despite their fees; Durham County housing starts increased in 2004--after its fee went into effect--and show no signs of abating. Impact fees are commonplace in 31 states; about 60 percent of U.S. cities with more than 25,000 residents use some kind of impact fee, according to federal statistics. Homebuilding remains one of the strongest and most resilient sectors in the national economy.

Legitimate arguments against impact fees do exist. As critics point out, immigrants to a community who buy an older home don't pay the impact fee; conversely, existing residents who upgrade to a freshly built home do pay the fee even though they're not generating any new demand for services. And the tax is regressive--new-home buyers generally pay the same impact fee whether the home costs $100,000 or $1 million.

That's one reason why Orange County would prefer an alternative revenue generator, a deed transfer tax that would be applied to every real estate transaction. The deed tax, while still not perfect, would ease some of the equity concerns. Orange County number-crunchers have discovered another benefit of a deed tax: It will likely raise more cash than the impact fees have.

Such a concept isn't novel--six North Carolina counties already employ a deed tax, and a seventh has the coveted legislative approval but hasn't yet implemented it. Not coincidentally, all seven are concentrated in the northeast corner of the state--Senate President Marc Basnight's turf. But deed taxes are as repugnant to homebuilders and real estate agents as impact fees, and while Basnight has the political clout to clear a path for legislation that development interests don't like, few others do.

Basnight isn't the only one who has been able to grease the wheels for select communities. Cabarrus County received legislative approval to collect school impact fees last summer thanks to a provision in a budget bill inserted by Sen. Fletcher Hartsell of Concord. The Orange and Chatham approvals came in the early 1990s courtesy of power-brokering local reps.

So legislators have created an absurd patchwork of local revenue options, approving some and denying others, another demonstration project in their living realpolitik laboratory. Their inconsistency in that regard has not been matched, on the other hand, when it comes to passing expenses along to the city and county levels. Local governments are already struggling to pay for the legislature's recent mental health "reforms," especially since the state has failed to stock a mental health trust fund as promised. The governor's well-intentioned but unfunded mandate to reduce class sizes in grades K-3 has created new demands for classrooms and teachers that counties must cover. State-granted exemptions from sales taxes on materials used to build new industrial facilities have further drained local coffers. The list goes on.

The North Carolina Association of County Commissioners has a simple proposal that would enable local governments to determine for themselves how to pay their bills--whatever revenue options exist in one community should be available to everyone else. That local governments should be able to choose their methods of revenue generation (within the confines of the state and federal constitutions, of course) is hardly a radical idea. If the citizens object to the methods of choice, they can always use the democratic process to make changes come election time.

Several bills toward that end are likely to be introduced this session. But the usual suspects will oppose any attempt to level the playing field, and the political will to defy them and do the right thing has yet to materialize.

The homebuilders and real estate agents would prefer that all the costs of development be funneled to a single source: property taxes. Undeterred by the facts, they offer a host of specious arguments that impact fees and deed taxes will cause the wheels of progress to grind to a halt and destroy life as we know it. Why it's fair for a homeowner in downtown Durham to subsidize schools they'll never use near Treyburn or Southpoint, for example, is a question the development interests have yet to address.

It would be far more honest for the homebuilders to acknowledge that their primary objective in opposing impact fees or deed taxes is simply to maximize their profits at the expense of those who pay property taxes--the homeowners. But no one wants to admit they're motivated by pure greed.

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