N.C. House and Senate leaders are facing off over what appears to be a deal killer as they work against the clock to approve the state budget.
County leaders and citizens' groups—especially in Wake and Chatham—strongly favor giving local governments the opportunity to impose a land transfer tax as a way to pay for schools, roads and other pressing infrastructure needs without having to raise property and sales taxes. But the North Carolina Realtors Association, the state's biggest campaign contributors, vehemently opposes the transfer tax. Realtors have put more than $500,000 behind a statewide advertising campaign and are threatening to use their political clout in future elections against lawmakers who vote for the tax.
Land transfer taxes are levied on all real estate transactions, both commercial and residential, for new developments as well as existing homes. The tax is paid, usually by the seller, whenever a deed changes hands. State lawmakers are not considering whether to impose the tax; the change would empower local voters to decide through a referendum whether to allow their local governments to impose a transfer tax of 0.4 percent. (Realtors typically retain 6 percent of the cost of a real estate transaction.)
The transfer tax option was part of the tentative deal agreed to by House and Senate leaders two weeks ago. That complicated agreement addressed three major financial issues: the Medicaid burden, an Earned Income Tax Credit (EITC) for the state's poorest residents, and additional funding options for all cash-strapped counties to generate revenue—namely a sales tax increase and a land transfer tax, which is currently available to only seven counties through legislation passed two decades ago.
But the Senate Democratic Caucus rejected the agreement; the land transfer tax was the sticking point.
At press time, the Senate was expected to pass its own version of a Medicaid relief plan on July 17. That legislation, just one piece of the total state budget plan, also includes a 5 percent refundable EITC.
"In a lot of ways, it's a better version," says Meg Gray, a policy analyst with the N.C. Budget and Tax Center, a nonpartisan advocacy group based in Raleigh. She's pleased with the state's plan to swap counties' Medicaid burden in exchange for sales tax revenue over three years, which will greatly relieve the financial pressure on rural counties. Gray also says the Senate has made progress with the EITC, although she would like more of the state's residents to be eligible. "But the problem is, the Senate is once again refusing to do the transfer tax." Without that option, local governments will be forced to raise sales and property taxes to pay for schools, roads, water and sewer service and other infrastructure expenses generated by residential construction.
The legislation now goes back to the House for further revision and negotiation.
The General Assembly has until July 31 to pass a state budget, or it must pass a temporary resolution to keep the government operating.
Rep. Jennifer Weiss, a Wake County Democrat, is a strong proponent of the transfer tax. She says she's disappointed that the deal House and Senate lawmakers worked so hard to broker fell apart. As co-chairwoman of the House Finance Committee, she is part of the House leadership that is pushing to keep the land transfer tax on the table.
"Many of us feel very strongly that these fast-growing counties need this option," she says. "For the life of me, I don't understand why the voters can't be given that option."
Wake County's public school system is struggling to cope with an influx of new students—8,000 this year, Weiss says—as growth booms but revenue for local governments lags behind. She also hears from constituents living on fixed incomes who are struggling to pay ever-increasing property taxes. She recently got a call from a man in Cary who lives on less than $30,000 a year in Social Security and pension income. "He has to take out a home equity loan to pay down his property tax each year," Weiss says.
The House-Senate split on this issue correlates to the money the Realtors' political action committee has spent in campaign contributions to state legislators.
The N.C. Realtors PAC gave $615,000 to legislative candidates in the two-year period of 2005-06, more than any other PAC during the 2006 election cycle. But more money went to the Senate: 64 percent of senators now in office received at least $3,500 from the PAC, compared to 37 percent of House members. (See box, left.)
Weiss received no money from the Realtors' PAC. Nor did Rep. Paul Luebke, a Durham Democrat and senior chairman of the House Finance Committee, another strong proponent of the transfer tax option.
In Chatham County, citizens' groups and county commissioners express strong support for the transfer tax. Chatham Citizens for Effective Communities, a grassroots group of approximately 2,000 residents, has lobbied for the option in Chatham, where residential growth is exploding.
"Chatham has had an extraordinary boom in growth in the last few years, with one development after another being approved," says Loyse Hurley, the group's president.
Impact fees on new development are required by law to pay only for schools. But the county has many other needs.
"The infrastructure that these developments need is sky high, and when you look at it, where can the money come from?" Hurley says. Increasing property taxes would create a tremendous burden. "We just see [the transfer tax] as a fairer way to solve the issue.
"Many of the Realtors I know who live in Chatham have indicated they're in favor of it," Hurley says. "But it's a big lobby, and they have completely blindsided the issue."
The Realtors' lobby says a transfer tax is unfair because it forces homebuyers and sellers to pay for broad-based needs, and that the tax will hurt growth by dissuading buyers. The group's ad campaign calls to "Stop the N.C. Home Tax." Realtors and the N.C. Homebuilders Association also have opposed impact fees charged to developers on the construction of new homes.
The only other options local governments have are to increase property taxes—which would affect every homeowner every year—or to increase sales taxes, which would affect every resident year-round. In the 1980s, seven counties were given the right to impose a transfer tax; six do. Pasquotank County's 1 percent transfer tax brought in $2 million last year; growth there continues at a steady clip.
S. Ellis Hankins, executive director of the N.C. League of Municipalities, says the political battle boils down to the Realtors' influence. "Too many members of the General Assembly, particularly on the Senate side, are unwilling to take on those big money interests."
"It's intimidation," Hankins says. "The Realtors Association has let it be known that anyone who votes even to put this on the ballot locally can expect opposition from them in the election next year." Democrats in swing counties are particularly vulnerable to negative ad campaigns the Realtors might devise, he says.
Yet, Hankins says he believes a transfer tax option might have a chance of passing even in the Senate if it went to the floor for a vote, "but we need to get it on the floor." That requires getting a bill past the Senate leadership, many of whom are being pressured intensely by the Realtors.
The battle over the transfer tax, with all the lobbying muscle and campaign money attached to it, comes at a time when the General Assembly is under an ethical cloud dusted up by former House Speaker Jim Black's conviction and sentence to more than five years in federal prison for corruption and bribery. Black was convicted of accepting $29,000 from chiropractors while pushing legislation in their favor. Black could also face charges for accepting a $500,000 loan from an unnamed lobbyist to help with a real estate deal. (Black's attorneys say the loan was legal.)
Stan Norwalk, vice chairman of WakeUP Wake County, says he's made more than 60 trips to the legislature this year as part of his group's effort to get the transfer tax option passed. With the Black case raising voters' attention to the role of big money in state government, Norwalk says, the legislative standoff is about more than infrastructure.
"I think really what the transfer tax is about, other than infrastructure, is almost like a regime change. Because for almost 20 years we've had the General Assembly—on issues as to how the whole development industry is going to be treated—ruled by the homebuilders and the Realtors. They're the ones who really ruled the roost. And I'd say that eight or nine times out of 10 they've gotten what they wanted."
Correction (July 23, 2007): The land transfer tax is paid by the property seller, not the buyer, as this article originally stated.
Follow the money
The Realtors and homebuilders lobbies are the most influential in the state. During the 2006 election cycle, the N.C. Realtors PAC gave $615,000 to legislative candidates, more than any other PAC. Their allies, the N.C. Home Builders PAC, gave $284,000. Of the 170 legislators, 156 received contributions from one or both groups. Rep. Nelson Dollar of Wake County ranks first among Triangle representatives and No. 10 statewide in total contributions received from the two groups.
Triangle legislators and the combined amount they received from both PACs in 2005-06:
Sen. Bob Atwater (D-Chatham, Durham) $4,000
Rep. Joe Hackney (D-Chatham, Orange) $1,000
Sen. Floyd B. McKissick, Jr. (D) N/A *
Rep. Larry D. Hall (D) $2,000
Rep. Paul Luebke (D) $0
Rep. Henry M. (Mickey) Michaux, Jr. (D) $0
Rep. W. A. (Winkie) Wilkins (D) $2,000
*(appointed April 12, 2007)
Sen. Ellie Kinnaird (D) $0
Rep. Bill Faison (D) $6,250
Rep. Verla Insko (D) $0
Sen. Janet Cowell (D) $0
Sen. Neal Hunt (R) $7,500
Sen. Vernon Malone (D) $6,250
Sen. Richard Stevens (R) $8,500
Rep. Marilyn Avila (R) $1,250
Rep. Dan Blue (D) $4,000
Rep. Linda Coleman (D) $2,250
Rep. Nelson Dollar (R) $13,750
Rep. Ty Harrell (D) $0
Rep. Grier Martin (D) $0
Rep. Deborah K. Ross (D) $2,000
Rep. Paul Stam (R) $9,700
Source: Democracy North Carolina compilations by Bob Hall, using data from campaign finance reports filed with the N.C. State Board of Elections.