Let Wake property taxes keep pace with rising values

Students move between classes at Mills Park Elementary in Cary last November. Wake County will need higher property tax revenue to house a growing school-age population.
Students move between classes at Mills Park Elementary in Cary last November. Wake County will need higher property tax revenue to house a growing school-age population. cseward@newsobserver.com

Wake County is facing two crucial issues that have common origins and common solutions. One is the need to build more schools and classrooms for the growing school-age population. The other is the concern about the impact of rising housing prices on households with modest incomes.

Both of these issues are related to the fast growth in the county. Since 2010, Wake County has been the 48th fastest growing county in population among more than 3,000 counties in the nation, and the Raleigh metropolitan area – in which Wake is the largest county – has been the 33rd top region in economic production growth among almost 400 regions.

Growth brings many good things – new jobs, wider business opportunities and national-brand firms and entertainment options that only locate in regions of a certain size. For example, Raleigh likely wouldn’t be under consideration for a major league soccer franchise if its recent population and economic growth hadn’t occurred.

But another impact of fast growth is higher land prices. The reason is simple: demand and supply. As an areas grows, the demand for locating there increases. Yet the amount of land at any site cannot be increased. So rising land demand coupled with limited land supply is a recipe for higher land prices.

Higher land prices increase the costs of building both schools and homes. Further, higher land prices motivate developers to build larger and more expensive homes to recover their bigger land investment. We see the latter impact at work in Raleigh when smaller, older and cheaper homes in accessible neighborhoods are torn down and replaced by larger and pricier structures.

Part of the solution to both the school and housing issues created by fast growth is a reform of the local property tax system. The property tax is a major revenue source for local governments. Building new schools and supporting affordable housing will rely on funding from the local property tax.

But as revealed by the 2006 Blue Ribbon Committee on the Future of Wake County – of which I was a member – there is a flaw in the property tax that prevents revenue from keeping up with land-based construction needs. The problem is that property values are revalued for tax purposes with a lag – in Wake County, revaluations occur only once every four years. This means that property value increases that occur when land values are rising are not incorporated into the tax base until the next property revaluation.

So for county property tax revenues to keep up with rising land-based construction projects, property tax rates must be raised. Since raising tax rates is controversial, locally elected officials are often reluctant to support a rate increase that will put property tax revenue growth in line with actual property value growth.

A solution is to reduce the time between revaluations, which the Blue Ribbon Committee recommended and the county commission implemented in 2016 when it cut the lag from eight years to four years. But this reduces the problem; it doesn’t eliminate it.

According to the Federal Reserve, average Raleigh home prices have already risen 11 percent since the last revaluation. If this gain was taxed today, it would yield enough revenue to support more than $1 billion of new county borrowing without a tax rate increase. So moving to two-year or even annual revaluations would significantly help the county deal with the growth-related school and affordable housing issues.

There are other ideas worthy of consideration. For new schools, designers (maybe from NCSU’s College of Design) could plan schools with easily moveable walls and doors, enabling the buildings to better accommodate changes in mandated classroom sizes.

For affordable housing, a review of local building codes should be undertaken to identify possible constraints on constructing low-cost housing. Also, vans could be provided for transport of workers living in remote residences, with the transportation funded by businesses employing the workers. And at the state level, re-instituting the earned income tax credit would provide limited-income households with more resources for shelter expenses.

If it’s any consolation, most dynamic regions are facing the same growth issues as Wake County. The difference will be how each region responds.

Michael Walden is a Reynolds Distinguished Professor at N.C. State University. His new book, “North Carolina Beyond the Connected Age: the Tar Heel State in 2050,” will be published next month by The University of North Carolina Press.

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