Asheville City Council’s tax dilemma

Some of the biggest news in city government this week isn’t happening at Asheville City Council’s formal meeting, but at a presentation to the Finance Committee at 2 p.m. this afternoon. There, staff will lay out the effects of rising property values in the city, and the details of Council’s challenges will become more clear.

Initial property revlautions done by the Buncombe County Tax Assessor’s office show that values within the city rose an average of two percent. That means that if the city just leaves their property tax rate where it is — 42 cents per $100 — it will make more money.

So far, Council members have remained quiet on that news, asserting that they still need to know more about the overall budget situation before they can comment.

The city could certainly use those extra funds. A 2010 white paper by city staff illustrated their view of the financial dilemma Asheville faces: an influx of tourists and county residents means that the city’s services have a much higher daytime population to deal with relative to the number of taxpayers footing the bill for those services.

Ways to raise revenue are further constrained by the state, which has been reluctant to allow city taxes on hotel occupancy or prepared food and beverage, both traditional money-makers for governments in tourist towns. The Sullivan Acts of 2005 constrained the city’s ability to use water to grow its borders, and 2011 legislation made it much more difficult for municipalities to annex new areas.

Asheville’s voters, over multiple elections and community forums, have made it known that they want improvements in everything from transit to the city’s aging infrastructure. City workers also made it quite clear last year that they want raises after enduring stagnant wages for much of the economic downturn.

So from one perspective, more money from rising property values would help the city deal with some of these issues.

But it also means the average Ashevillean will pay more taxes. Given that neighborhoods like downtown and West Asheville saw particularly sharp increases in their property values, for some homeowners it will be a lot more. Historically, Council, like many municipalities, has sought to avoid increasing the tax burden in still-tight economic times.

So local governments often choose a “revenue neutral” option, adjusting the tax rate to take in the same amount of funds — plus new construction — as they did the year before, and the average Ashevillean sees their tax bill remain the same. The other option, “revenue positive” means that the city sees its coffers grow, but the taxpayers have to shell out more to local government

Last time Council faced this issue, in 2006, it tried to go revenue neutral.

But, to further complicate matters, the decisions of other local governments also have an effect. While property tax is the primary source of revenue for the city, sales tax also makes up a significant portion; almost 20 percent this budget year.

The state allows counties to use two formulas for distributing sales tax. The one Buncombe County uses, ad valorem, doesn’t provide as much revenue for dense cities as the other method, per capita, does. That’s often been a source of complaints from city officials, who assert that Asheville generates the lion’s share of sales tax revenue in the area, but sees relatively little of it return. Ad valorem’s defenders argue that using another method would leave other areas of the county starved for funds.

The ad valorem method also allocates sales taxes based on how much property taxes different entities within the county — from municipalities to fire districts — take in. If one entity keeps its revenue flat while another raises its rates, the former will lose a chunk of its sales tax revenue.

In 2006, the county commissioners didn’t go revenue neutral, meaning that if Asheville had, they would have lost significant sales tax revenue. The city opted to set the rate as close to revenue neutral as it could without seeing a substantial drop in their other main revenue stream.

This time around Buncombe County, unlike Asheville, saw a 2.4 percent drop in its average property values, leaving the commissioners with their own set of hard choices. How they resolve those could affect the options Council has.

On top of all that, it’s an election year. Finance Committee Chair Esther Manheimer has already announced that she’s running for mayor, and three Council seats are up. Expect fights over revenue and the city’s needs to become a major campaign issue, especially as the budget takes shape during the coming months.

Asheville City Council’s Finance Committee meets at 2 p.m. this afternoon on the first floor of City Hall. Asheville City Council’s formal meeting is at 5 p.m. on the second floor.