Property tax cap amendment has NC counties concerned

New Hanover County tax assessors conducted a property revaluation this year. The goal was to determine the market value of homes and businesses, as the county does every four years, to more equitably distribute property taxes.

Property owners were in for a shock. Values were up about 60% since 2022, said New Hanover County Chief Financial Officer Eric Credle.

New Hanover isn’t unique. A recent wave of property revaluations has revealed similar increases across the state. While higher revaluations don’t necessarily equate to higher taxes, depending on local property tax rate decisions, North Carolinians are feeling the strain.

State lawmakers have noticed. Days before his primary election, Senate leader Phil Berger, R-Rockingham, vowed to push legislation freezing property revaluations for a year. It wasn’t enough for Berger to win his primary, but Republican lawmakers remain laser-focused on the property-tax issue heading into a critical campaign season.

State lawmakers know they want to do something to address rising property taxes, but they don’t have all the details quite yet. In the interim between the end of the 2025 legislative session and the beginning of this year’s session, a group of lawmakers dove deep into property tax law to see what they could do.

The committee, chaired by Rep. Julia Howard, R-Davie, found that there was a lack of simple solutions. Generally speaking, she suggested finding ways to expand the property tax base and lower the property tax rates, as well as phase out some exemptions that have accumulated over time.

It will be a long haul, said another committee chairman, Rep. Mitchell Setzer, R-Catawba.

“I’d like to say this committee is probably going to be extended till death, do us part, and then 15 minutes later,” he said.

While the issue will stay relevant for a long time, a few property tax proposals have gained momentum this year.

Berger’s limited moratorium is one. It would freeze nine counties’ property tax revaluations for a year while the legislature determines next steps. There’s also interest in clarifying a law relating to who qualifies for affordable rental housing tax exemptions that lawmakers say some for-profit groups have been abusing.

Finally, a proposed constitutional amendment would limit how much counties and municipalities can increase their property tax levy, or the revenue they collect from property taxes, from year to year.

Meanwhile, Democratic proposals, including efforts to expand existing exemptions for seniors and disabled veterans, have been ignored.

County officials told Carolina Public Press that while the state’s efforts are well-intentioned, they may do more harm than good.

How property taxes and levy limits work

Property tax revenue is the lifeblood of North Carolina’s local governments. It makes up about 60% of municipalities’ revenue on average, according to the North Carolina League of Municipalities. It’s about the same for county governments.

“It’s very stable,” said Randolph County commissioner David Allen, who also serves as co-chair of the North Carolina Association of County Commissioners’ legislative goals committee. “That’s the core base from which we build.”

The next highest revenue source is sales tax, which is subject to the whims of the economy, he said. Sales tax makes up about a quarter of local government revenue, generally.

Property taxes pay for local government services. The biggest expense tends to be supporting public education, which may include building new schools or paying for local salary supplements for teachers. Public safety is the next big ticket item, which might entail maintaining staffing in sheriff’s departments, jails and local health and social services departments, or investing in a new fire truck or ambulance.

Specific situations in individual counties and towns, such as debt maintenance, needing to build new facilities or losing a major lawsuit, could also affect property taxes.

A property tax levy has two components.

One, the appraisal amount, or the value of one’s property, based on a tax assessor’s assessment. That’s what has been skyrocketing across North Carolina, primarily due to inflation and growth.

Two, the property tax rate, or the percentage of the property value a property owner has to pay in taxes.

When appraisal values go higher, counties often reduce the tax rates so that they get about the same level of property tax revenue they did before, said Chris McLaughlin, UNC School of Government local government tax expert. This is called revenue neutrality.

Going above revenue neutral property taxes

But sometimes, localities raise the tax rate above revenue neutral to pay for special projects or expand local government services.

That’s what has Republican lawmakers motivated to impose some sort of levy limit on localities in the future. Wednesday, the state House approved the constitutional amendment with a vote of 73-46.

Instead of raising rates, several lawmakers have suggested that localities get “back to the basics.”

“We don’t need you doing all these other things,” Rep. John Blust, R-Guilford, said in a property tax committee. “We need you doing these core functions and doing these core functions well, doing them efficiently.”

Over the past decade, nine of the state’s 10 most populous counties overtaxed property owners by $2.6 billion dollars beyond what inflation and population growth justify, according to analysis from the conservative John Locke Foundation. Meanwhile, many counties stayed right at or below revenue neutral, adjusted for inflation.

While the revenue neutral rate would be about 29.2 cents per $100 of assessed property value, Credle said, New Hanover County is considering charging 30.6 cents.

Their medical expense costs have risen by 20% in the past year, and other expenses have also been touched by inflation. They’re not exactly offering any new services, he added.

Randolph County Commissioner Allen said their goal is just to maintain core services like emergency management services and the sheriff’s department in order to compete with neighboring suburban counties. If there are issues with specific counties, he suggested the legislature address them on an individual basis.

“It’s kind of like being back in school when you had a couple kids talking, and the teacher cancels recess for the entire class, because of just a couple of folks,” Allen said. “In Randolph, we’ve always at least been revenue neutral or below, and that’s always the goal.”

According to the John Locke Foundation analysis, Buncombe County’s property tax revenue grew by 64%, while revenue neutral was closer to 48%, equating to about $173 million in additional property taxes.

Buncombe County Manager Avril Pinder said they don’t necessarily have to remain revenue neutral to be fiscally responsible. Right now, she said the revenue is supporting teacher staffing and maintaining a jail whose population is increasing after recent law changes.

In Wake County, property tax revenue increased by 103% in the past decade, while 63% was revenue neutral, resulting in about $1.63 billion in additional taxes, according to the analysis.

Wake County Commissioner Shinica Thomas, who also serves as NCACC’s second vice president, said county officials are the ones in the grocery store, on the ground with taxpayers.

Since they are closer to the people, they have a better idea of what they want. For example, Wake County may need to go a penny or two above the revenue-neutral property tax rate to support all the infrastructure, public safety, libraries and schools for the county’s growing population, Thomas said.

The commission recently proposed a two-cent property tax rate increase.

On the House floor Wednesday, Blust was skeptical of counties’ concerns. He said they always claim that the essential services are on the block when their ability to tax is threatened, but never the unessential ones.

He’s more concerned about the struggle of average people than commissioners, he said. Citizens don’t have a source of income they can raise every year, but on average, counties have raised revenue by a few percentage points each year.

“You cannot keep dumping this kind of burden on citizens year after year,” Blust said.

Voting on a mystery

If all goes as planned, voters will decide in November whether to grant the legislature the power to set levy limits.

Importantly, the legislature doesn’t need a constitutional change to do that, McLaughlin said. They could pass a law tomorrow, he said.

The proposed amendment also does not give a specific limit or additional details. It’s “amorphous at best,” McLaughlin said.

Thomas said she thinks this is more of a “political tactic to get people to the polls in November” than a concrete plan. Most other county managers and commissioners didn’t go that far, but expressed concern about the vagueness and unpredictability of the amendment.

If voters approve the amendment, Mecklenburg County budget director Adrian Cox hopes they consider inflation and the differences in costs of living across the state in any final calculation.

For a large county like his, a uniform levy limit could threaten some services they pay for that were “traditionally provided by the state” but have not kept up with the county’s cost of living, like local public school funding supplements or court system costs.

For more rural counties, a limit may pose a different sort of issue: bonds. When smaller counties need to pay for something big, like a new school, they likely won’t be able to pay for it all at once.

“If I sell bonds and I need to collect seven cents in order to make my bond payments, I’m in a spot,” Harnett County Manager Brent Trout said. “That doesn’t work financially for a county, and so that’s the concern that I have, is how strict is that levy limit?”

Trout hopes any legislation carves out exceptions, specifically to give local governments flexibility to make their bond payments.

A limited moratorium

If the legislature passes a one-year moratorium on property tax revaluations in several counties, including Buncombe County, county manager Pinder said they’ll be in a bind.

“You’re talking significant changes to our budget, should that happen,” she said. “We probably need to talk to our educational partners. The funding levels that we would give them would be something that we would need to think about, if this were to pass.”

Counties’ budget deadlines are looming. The math is impossible to figure out for nine counties subject to the proposed moratorium.

The idea behind the bill is to avoid the massive increases other counties have seen in recent revaluation cycles, and instead give the legislature a longer runway to find solutions before taxpayers are impacted.

But local governments may struggle to subsist on 2022 revenue levels. Pinder said Buncombe County would have to raise its tax rate to make up for the revenue loss.

Expenses like recruiting detention officers and replacing sheriff patrol vehicles that were not replaced last year because of Hurricane Helene would be at risk, if the moratorium is enforced.

Harnett County is also in a holding pattern, Trout said. They will also have to raise the property tax rate if the moratorium passes in order to make up for the revenue increased valuation would have provided.

While Harnett County has held budget sessions, they can’t make any final decisions. They don’t know what the rules will be.

Waiting also makes the tax distribution more inequitable, McLaughlin said. The most valuable properties may be paying a smaller proportion than they should, and vice versa.

Affordable rental housing loophole

When lawmakers passed an affordable rental housing property tax exemption bill, they meant to encourage new, affordable housing developments, primarily run by nonprofits using federal low-income housing tax credits.

They didn’t intend for existing for-profit housing organizations who happened to have low rent to partner with nonprofits to claim the exemption, without adding any additional affordable housing.

In 2013, a court ruled that these for-profit groups could claim that exemption, under the law. Ever since, lawmakers say some groups have been abusing the law.

One proposal making progress would close that loophole, by requiring either total nonprofit ownership or financing using government housing programs, among other requirements. Existing affordable rental housing currently tax-exempt will have to reapply for the exemption, and if they don’t, they will be taxed retroactively.

New Hanover CFO Credle said they know they’ve been impacted, but aren’t sure to what extent. Mecklenburg County budget director Cox said the same.

Tuesday, the state House passed the affordable housing bill unanimously.

Targeted property tax relief

Democrats have proposed bills expanding North Carolina’s current exemptions, which cover certain seniors and disabled veterans. Some of the exemptions include income thresholds to qualify that haven’t kept up with inflation, for example.

Thomas supports that, but emphasized that there cannot be a blanket exemption. For example, if veterans get a total exemption, that might work in Wake County, but not in Cumberland County, when local governments rely on revenue from the large veteran population.

Allen agreed that expanding some targeted exemptions could help, particularly adjusting to the cost of living, but that lawmakers need to think carefully before acting.

“If you expand a circuit breaker or expand the exemptions, that leaves the rest of the folks having to make up that difference, so you have to be careful with the number of exemptions you’re exempting because it’s a zero-sum game,” he said.

Whatever the state decides, county leaders want a seat at the table, Allen said.

Trout said it’s fine for state lawmakers to pass regulations, but they need to leave room for local jurisdictions to fund and operate their governments.

“We haven’t had this much attempt to limit our authority in North Carolina for a long time, and they’re coming at it from both limiting our levy amount and then limiting how much we can capture when it comes to new property valuation,” he said. “… If they’re limiting both of those, how are we going to survive?”