A Guide to County and Municipal Revenues in North Carolina

By Kara A. Millonzi, Associate Professor of Public Law and Government

School of Government

The University of North Carolina
at Chapel Hill

August 2014

Table of Contents

I.Introduction......

II.Overview of Local Government Revenue Sources......

III.Local Revenue Sources......

a.Available to Both Municipalities and Counties......

i.PROPERTY TAX (AD VALOREM TAX)......

ii.SERVICE DISTRICTS......

iii. PRIVILEGE LICENSE TAXES......

iv.RENTAL CAR GROSS RECEIPTS TAXES......

v.ANIMAL TAXES......

vi.GENERAL USER FEES......

vii. PUBLIC ENTERPRISE FEES......

viii. REGULATORY FEES......

ix.STATUTORY FEES......

x.FRANCHISE FEES......

xi.SPECIAL ASSESSMENTS......

xii.SHORT-TERM HEAVY EQUIPMENT RENTALS TAX......

xiii.OCCUPANCY TAXES (LOCAL ACT REQUIRED)......

xiv.PREPARED FOOD TAXES (LOCAL ACT REQUIRED)......

xv.LOCAL REAL ESTATE TRANSFER TAX (LOCAL ACT REQUIRED)......

16.IMPACT FEES (LOCAL ACT REQUIRED)......

b.Available to Municipalities Only......

i.MOTOR VEHICLE LICENSE TAXES......

c.Available to Counties Only......

i.LOCAL SALES AND USE TAXES......

ii.TRANSPORTATION SALES AND USE TAX......

iii.COUNTY VEHICLE REGISTRATION TAX......

IV.State / County Shared Revenue Sources......

a.Available to Both Municipalities and Counties......

i.BEER & WINE TAXES......

ii.VIDEO PROGRAMMING SERVICES TAXES......

3.SOLID WASTE TIPPING TAX......

4.911 CHARGE......

b.Available to Municipalities Only......

i.LOCAL SALES AND USE TAXES......

ii.TRANSPORTATION SALES AND USE TAX......

iii.ELECTRIC TAX......

iv.TELECOMMUNICATIONS TAX......

v.PIPED NATURAL GAS TAX......

vi.MOTOR FUELS TAX (POWELL BILL FUNDS)......

c.Available to Counties Only......

i.STATE REAL ESTATE TRANSFER TAX......

ii.DISPOSAL TAXES......

V.Other Revenue Sources......

a.Available to Municipalities and Counties......

i.ABC STORE REVENUE......

ii.INVESTMENT EARNINGS......

iii.PAYMENT IN LIEU OF TAXES......

I.Introduction

One major responsibility for a county or municipality is to obtain sufficient revenue to cover the costs for the services it wishes to provide. Some local governments chose to provide the bare minimum in services and rely on the property tax and various federal, state (or county) shared revenues to fund the services. Many local governments, however, are providing an ever-increasing number of services to their citizens. For these units, it is important to understand the full range of revenue-raising mechanisms available to fund the programs and activities.

This publication summarizes the legal framework governing the principal revenue sources available to local governments in North Carolina.[1] For each revenue source, it first classifies the revenue-raising mechanism as a (a) local revenue source, (b) federal-, state- or county-shared revenue source, or (c) miscellaneous revenue source. A local revenue source is revenue from a tax or fee that a unit’s governing board assesses. Counties and municipalities are not required to levy any local tax or assess any fee, but county and municipal officials have an array of local option revenue sources. Federal-, state- or county-shared revenue derives from taxes or fees levied or assessed by another governmental unit, the proceeds of which are shared with the county or municipality. Counties or municipalities often have to meet special eligibility requirements to receive shared revenue. Miscellaneous revenue sources are those that do not precisely fit into either of the first two categories. The publication also identifies the type of local government (county or municipality) authorized to levy the tax or assess the fee, outlines the mechanics of raising the revenue, specifying any special eligibility requirements, and describes any restrictions on the use of the proceeds. Finally, it lists the applicableconstitutional, statutory,[2] and case law citations.

The publication serves as aquick reference guide to the basic legal authority for general county and municipal revenue sources.[3]As such, it does not detail all of the procedural requirements for each revenue-raising mechanism. Local government officials should review the applicable constitutional, statutory and case law citations and consult with local legal counsel before levying or assessing a particular tax or fee. Additionally, the publication does not address the policy or strategic considerationsessential to choosing any of the revenue-raising mechanisms. These additional considerations include, but are not limited to, how much money a revenue source is likely to raise and its ease of administration, the stability of the revenue source, as well as potential for growth over time, equity or fairness issues (who pays), and political feasibility. Thepolicy or strategic considerations are equally important as the legal restrictions; although possessing the legal authority to employ a particular revenue-raising mechanism, and complying with that authority, is a threshold requirement.

II.Overview of Local Government Revenue Sources

Local Revenue Sources
Both Municipalities and Counties / Municipalities Only / Counties Only
Property Tax / Service Districts / Motor Vehicle License Taxes / Local Sales and Use Taxes
Privilege License Taxes* / Transportation Sales and Use Tax
Rental Car Gross Receipts Tax / County Vehicle Registration Tax
Animal Taxes
General User Fees
Public Enterprise Fees
Regulatory Fees
Statutory Fees
Franchise Fees
Special Assessments
Heavy Equipment Rental Tax
Occupancy Taxes (local act)
Prepared Food Taxes (local act)
Local Real Estate Transfer Tax (local act)
Impact Fees (local act)
StatE/County-Shared Revenue Sources
Both Municipalities and Counties / Municipalities Only / Counties Only
Beer & Wine Taxes / Local Sales and Use Taxes / State Real Estate Transfer Tax
Video Programming Services Taxes / Electric Tax / Disposal Taxes
Solid Waste Tipping Tax / Telecommunications Tax
911 Charge / Piped Natural Gas Tax
Motor Fuels Tax (Powell Bill)
Transportation Sales and Use Tax
Other Revenue Sources
Both Municipalities and Counties / Municipalities Only / Counties Only
ABC Store Revenue
Investment Earnings
Payment in Lieu of Taxes
Rental Payments

*Authority expires for taxable years beginning July 1, 2015.

III.Local Revenue Sources

a.Available to Both Municipalities and Counties

i.PROPERTY TAX(AD VALOREM TAX)

1.Basic Legal Requirements:
  • A county’s or municipality’s governing board is authorized to adopt a property tax, also known as the ad valorem tax, that is levied against the real and personal property within its jurisdiction.
  • The property tax rate must be uniform throughout the county’s or municipality’s jurisdiction (with the exception of service districts). (N.C. Const. Art. V, Sect. 2(5)).
  • The General Assembly may exclude or classify property for tax purposes, but such exemptions and classifications must apply on a statewide basis. (The constitutional authority for exemption and classification is Article V, sections 2(2) and 2(3). The statutes implementing that authority are found at G.S. 105-275 through 105-278.9).
  • A county or municipality may not exempt, classify, or otherwise give a tax preference to property within its jurisdiction.
  • Once adopted, the property tax rate may not be altered during the fiscal year, except under limited circumstances.(G.S. 159-15).
  • A county or municipality is not required to levy a property tax, but it is required to adopt a balanced budget each fiscal year, whereby the sum of estimated net revenues and appropriated fund balance is equal to appropriations in each fund.
  • To the extent that a unit’s estimated revenue from sources other than the property tax plus appropriated fund balance do not equal appropriations, a unit must levy a property tax at a sufficient rate to balance the budget. (G.S. 159-13(c)).
  • The following table describes how to calculate the property tax rate:

2.Restrictions on Use of Proceeds:
  • There is an indirect restriction on the use of property tax proceeds.
  • The General Assembly has divided local government activities into three groups for purposes of expending property tax revenue. The statutes place each function of county or municipal government into one of the three groups, and a unit’s legal capacity to levy property taxes and expend the proceeds differs as to each group. (G.S. 153A-149 (counties); G.S. 160A-209 (municipalities)).
  • For Group I Activities, a unit may levy property taxes without voter approval and without restriction on the property tax rate. There are very few activities included in Group I.

For municipalities, the most important activity is debt service on general obligation debt.

For counties, Group I activities include the most important state-mandated activities, such as courts, elections, jails, social services, and public schools, as well as debt service on general obligation debt.

  • For Group II Activities, a unit may levy property taxes without voter approval but subject to an overall rate limitation on taxes for activities within the group of $1.50 per $100 valuation.

A unit may modify this limit in two ways—it may conduct a referendum to raise the limitation amount above $1.50, or it may conduct a special referendum to approve a tax for any activity within Group II. If a tax is approved by the voters for a specific activity it does not count against the $1.50 limitation.

Group II Activities include most county or municipal activities that are not otherwise listed in Group I.

  • For Group III Activities, a unit may not levy property taxes to fund these activities unless it receives voter approval.

Group III activities include any activities that are not otherwise listed in Groups I or II.

  • The following chart details the restrictions on the use of property tax proceeds:

Use of Property Tax Proceeds:
Group / Voter Approval Req’d? / Rate Limitation / Explanation / Authorized Activities
I / Never / None / See G.S. 153A-149 (counties); G.S. 160A-209 (municipalities)
II / Sometimes / $1.50 /
  • Voter approval is not required if combined rate limitation for all activities is less than or equal to $1.50.
  • $1.50 rate limitation may be increased with voter approval.
  • A property tax may be levied for any particular activity with voter approval. Any voter-approved tax for a specified activity does not count towards the $1.50 rate limitation.
/ See G.S. 153A-149 (counties); G.S. 160A-209 (municipalities)
III / Always / N/A / See G.S. 153A-149 (counties); G.S. 160A-209 (municipalities)

ii.SERVICE DISTRICTS

1.Basic Legal Requirements:
  • A municipality’s or county’s governing board is authorized to impose an additional property tax (ad valorem tax) in a defined area within its jurisdiction to provide certain services if:
  • the governing board makes statutorily required findings; and
  • if the area needs the services “to a demonstrably greater extent” than the rest of the municipality or county or if the services are not provided at all in the rest of the municipality or county. (N.C. Const., Art. V, Sect. 2(4); G.S. 153A-302 (counties); G.S. 160A-537 (municipalities)).
  • The tax rate imposed, when combined with the unit’s general tax rate may not exceed the $1.50 per $100 valuation limitation, unless specifically approved by a majority of voters in the district.
  • The following chart details the purposes for which service districts may be created:

Purposes for which Service Districts may be Created:
Counties / Municipalities[4]
  • Beach erosion and flood and hurricane protection works
/
  • Beach erosion control and flood and hurricane protection works

  • Fire protection
/
  • Downtown revitalization projects

  • Recreation
/
  • Urban area revitalization projects

  • Sewage collection and disposal systems of all types
/
  • Transit-oriented development projects

  • Solid waste collection and disposal systems
/
  • Sewage collection and disposal systems of all types

  • Water supply and distribution systems
/
  • Drainage projects

  • Ambulance and rescue
/
  • Off-street parking facilities

  • Watershed improvement projects
/
  • Watershed improvement projects

  • Cemeteries

  • No voter approval is required before levying an additional property tax within a service district, but the governing board must hold a public hearing and satisfy certain notice requirements.
  • Once a service district is established, services must be provided, maintained, or contracts let within a reasonable time, not to exceed one year.
2.Restrictions on Use of Proceeds:
  • The proceeds of the additional property tax levied in a service district must be used to support the particular service within the district which the tax was levied to fund.

iii.PRIVILEGE LICENSE TAXES

1.Basic Legal Requirements:
  • FROM MAY 2014 – JULY 1, 2015:
  • Privilege license taxes are imposed on the privilege of carrying on a business or engaging in certain occupations, trades, employment, or activities.
  • A municipality that imposed a privilege license taxes in FY 2013-2014, may impose the same taxes in FY 2014-2015. (G.S. 160A-211)
  • The taxing authority is limited to entities that are physically located within the municipality.
  • A county may only impose a privilege license tax as specifically authorized by law. (G.S. 153A-152; G.S. 153A-152.1)
  • AFTER JULY 1, 2015
  • All privilege license tax authority is repealed.(S.L. 2014-3)
  • A county and municipality may “regulate and license occupations, businesses, trades, professions, and forms of amusement or entertainment and prohibit those that may be inimical to the public health, welfare, safety, order, or convenience.” (G.S. 153A-134 (counties); G.S. 160A-194 (municipalities))
  • A local unit may charge a reasonable regulatory fee to obtain the license.
2.Restrictions on Use of Proceeds:
  • FROM MAY 2014 – JULY 1, 2015:
  • The proceeds may be used for any public purpose.
  • AFTER JULY 1, 2015:
  • There is no authority to levy new privilege license taxes. Proceeds remaining from prior years may be used for any public purpose.

iv.RENTAL CAR GROSS RECEIPTS TAXES

1.Basic Legal Requirements:
  • Municipalities and counties may levy a gross receipts tax on the short-term lease or rental of vehicles at retail to the general public.(G.S. 160A-215.1 (municipalities); G.S. 153A-156 (counties)).
  • The tax rate cannot exceed 1.5%.
2.Restrictions on Use of Proceeds:
  • The proceeds may be used for any public purpose.

v.ANIMAL TAXES

1.Basic Legal Requirements:
  • An animal tax is a tax on the privilege of keeping an animal within the jurisdiction.
  • Municipalities may impose an annual license tax on the owner of any domestic animals, including dogs and cats. (G.S. 160A-212).
  • Counties may impose an annual license tax on the owner of any dogs or other pets.(G.S. 153A-153).
  • The tax rates may vary based on the sex of the animal or whether or not the animal has been spayed or neutered.
2.Restrictions on Use of Proceeds:
  • The proceeds may be used for any public purpose.

vi.GENERAL USER FEES

1.Basic Legal Requirements:
  • User fees are charges assessed for the voluntary receipt of certain government services or the use of certain government facilities.
  • Typically, there are no restrictions on the amounts that may be assessed as user fees.
  • Common local government services funded (at least in part) through user fees include:
  • Recreation and Cultural Activities
  • There is no specific authority to charge user fees for recreational or cultural activities, but there likely is implicit authority to charge the fees pursuant to the statutory authority to provide the services. (G.S. 160A-353).

Note, however, that a local government cannot charge for the use of a public library. (G.S. 153A-264)

  • Ambulance / Rescue Services (G.S. 153A-250(b) & (c)).
  • Art Galleries and Museums
  • There is no specific authority to charge user fees but there may be implicit authority to charge the fees pursuant to the statutory authority to provide the services. (G.S. 160A-488).
  • Auditoriums, Coliseums and Convention Centers
  • There is no specific authority to charge user fees but there may be implicit authority to charge the fees pursuant to the statutory authority to provide the services. (G.S. 160A-489).
  • Airports (G.S. 63-53(5)).
  • Note that there also is authority to charge user fees for airports under the public enterprise statutes.
  • Cemeteries (municipalities only) (G.S. 160A-348).
  • Certain Public Health Services (G.S. 130A-39(g)).
  • Certain Mental Health Services (G.S. 122C-146).
2.Restrictions on Use of Proceeds:
  • Public health and mental health fees are earmarked for public health or mental health purposes, respectively.
  • Generally, the proceeds from other user fees may be used for any public purpose.

vii.PUBLIC ENTERPRISE FEES

1.Basic Legal Requirements:
  • A public enterprise is an activity of a commercial nature that could be provided by the private sector.
  • The following chart details the services counties and municipalities are authorized to provide as public enterprises:

Authorized Public Enterprise Services:
Counties / Municipalities
  • Water supply and distribution
/
  • Electric power generation, transmission, distribution

  • Wastewater collection, treatment and disposal (including septic systems)
/
  • Water supply and distribution

  • Solid waste collection and disposal systems and facilities
/
  • Wastewater collection, treatment and disposal (including septic systems)

  • Airports
/
  • Gas production, storage, transmission and distribution

  • Off-street parking facilities
/
  • Public transportation systems

  • Public transportation systems
/
  • Solid waste collection and disposal systems and facilities

  • Stormwater management systems
/
  • Cable television systems

  • Off-street parking facilities

  • Airports

  • Stormwater management systems

  • Subject to a few restrictions, a local government has broad discretion in setting rates, rents, charges, fees, and penalties (collectively, fees) for public enterprise services as long as the fees are not arbitrary or discriminatory. G.S. 160A, Art. 16 (municipalities); G.S. 153A, Art. 15 (counties).
  • Public enterprise fees may vary based on different classes of services provided by the unit.
  • Local governments may not vary rates unless there is a valid, utility based reason for doing so. For example, units may not provide lower rates for senior citizen customers or low income customers because varying the rates in this manner is not supported by a valid, utility based rational.
  • Different rates may be assessed for public enterprise services furnished outside the unit’s territorial boundaries.
  • There are no restrictions on rates set for services provided outside the unit’s territorial boundaries.
  • There are special statutory restrictions on fees assessed for stormwater management systems and solid waste collection and disposal systems.
  • Generally, these fees may not exceed the costs of providing the services.
2.Restrictions on Use of Proceeds:
  • All public enterprise fee revenue must be used to cover public enterprise expenses first, including capital and operating costs and debt service obligations. (G.S. 159-13)
  • Generally, after all public enterprise expenses are covered (including debt service payments and capital reserves), the remaining revenue may be transferred to the General Fund to use for any public purpose.
  • The fees for stormwater and certain solid waste services may not exceed the costs of providing those services. Thus, revenue generated from these services may not be transferred to the General Fund.

viii.REGULATORY FEES

1.Basic Legal Requirements:
  • Regulatory fees are assessed to cover the costs of certain regulatory activities performed by counties or municipalities.
  • There is no explicit authority to assess regulatory fees, but the authority has been implied by the power of the local unit to engage in the regulatory activity.(Homebuilders Ass’n of Charlotte v. City of Charlotte, 336 N.C. 37, 442 S.E.2d 45 (1994)).
  • Regulatory fees must be reasonable and may not exceed the costs of funding the regulatory activity.

2.Restrictions on Use of Proceeds: