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Transfer Tax Q&A

Posted on March 27, 2008 by Staff

Why is this option before the voters?

In 2007, the state Legislature passed a law to overhaul the way Medicaid is paid. Before, counties were responsible for paying part of Medicaid expenses. Under the new law, the state takes on the county’s share of Medicaid, and in exchange counties have to reduce their sales taxes from 2.5 percent to 2 percent in 2010.

The new law gives counties an option to recover lost tax revenue. They can either raise sales taxes another 0.25 percent or put in a tax on land transfers of 0.1 percent  to 0.4 percent. Counties cannot pass either of these new taxes without voters’ approval. A special referendum has to be held and approved by the majority of voters in the county. If the referendum loses, the county cannot collect the tax.

How would the tax be applied?

“The tax would apply to any transfer of interest in real estate located within the county,” Prof. Kara Milonzi of the UNC School of Government said. The tax does not apply to gains or losses from the sale of property; it only applies to the value of the property at the time of the transfer.

What have other counties done?

Sixteen counties have proposed land transfer taxes since 2007, and not one has passed. Six counties have offered voters a chance to institute either a land transfer tax or a sales tax. In all six, voters rejected both taxes. Only two counties have passed the new 0.25 percent sales tax. Four counties, including Orange County, are putting the land transfer tax on the May 6 ballot.

Who pays the tax?

The seller is responsible for paying the tax. Land transfer documents can’t be filed with the county register of deeds without paying the tax first. The amount of the tax is based on the market value of the property, not on the property tax value.

Are there any exceptions to the tax?

Land transferred by gift or inheritance is not taxed. But land donated to charity could be taxed if the donor can claim an income tax deduction. Nonprofits are not exempt from paying the tax.

How can the money be spent?

The money can be spent however the county chooses. The Orange County board of commissioners recently passed a resolution dedicating any money raised from the tax to go to schools and parks.

Milonzi said that if the makeup of the board of county commissioners changed significantly, then a new board could theoretically change how the money is spent. “A board of county commissioners cannot bind future boards,” she said.

Don’t some counties already have transfer taxes?

Dare and Currituck counties have had 1 percent  transfer taxes since 1985. Chowan and Camden counties got approval for their taxes in 1986. In 1989, Pasquotank and Perquimans counties added the tax after voter approval. Washington County also got permission for a tax in 1989, but voters rejected the plan twice.

How much money would the county see?

According to a 2007 report by the North Carolina Association of County Commissioners, Orange County would receive an estimated $4.1 million in tax revenues from a land transfer tax, as opposed to $3 million from a sales tax increase. The county estimates the amount that could be collected in 2008 is closer to $3.5 million. As a comparison, in 2007 Orange County collected $111.4 million in property taxes and $22.2 million in sales taxes.

Counties have to continue to pay cities their share of the current 2.5 percent  sales tax, even though counties will only collect 2 percent  by 2010. “So the counties are kind of taking a double-whammy on the sales tax,” Milonzi said. “They’re losing 50 cents on their own, and they’re losing an additional amount to hold the cities harmless.”

— Rich Fowler

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