How will “Tax & Tag Together” Impact Revenue Budgeting?

ChrisMcLaughlinBy Chris McLaughlin, UNC School of Government

Originally Posted at Coates’ Canons: NC Local Government Law (Hosted by UNC School of Government)

It’s almost budget time again for local governments across North Carolina, and tax collectors need to be involved.  Collectors have the responsibility of estimating the property tax collection rate for the current fiscal year (2013-2014), which is the maximum collection rate a local government may use when budgeting property tax revenues for the coming fiscal year (2014-2015).  For more details, see this post.

This year the task of estimating the property tax collection rate is more difficult due to the switch in September 2013 to the new registered motor vehicle (“RMV”) property tax collection system known as “Tag & Tax Together.”

As I describe here and here, under the new system RMV property taxes are collected at the time of registration or renewal.  Previously there was a three-month lag between registration or renewal and the billing of RMV property taxes.

In recognition of the delayed billing, G.S. 159-13(a)(6) permitted tax collectors to include only nine months of RMV tax billings but 12 months of RMV tax collections when estimating the collection rate for budget purposes.

Although the three-month delay in RMV tax billing disappeared with the roll out of the Tag & Tax Together program, the language in G.S. 159-13(a)(6) remains unchanged.  Tax collectors are still permitted to include (estimated) RMV tax collections for the full twelve months (July 1, 2013 to June 30, 2014)  in the numerator of the tax collection percentage calculation but only nine months of RMV tax billings (July 1, 2013 to March 31, 2014) in the denominator.  This approach increases the local government’s RMV collection rate and thereby increases the overall collection rate.

But I don’t recommend that tax collectors adopt this approach, because it no longer reflects reality.  With RMV taxes now collected immediately upon registration or renewal, there is no longer a lag between billing and collection.  Using nine months of RMV tax billings and twelve months of RMV tax collections will artificially inflate the unit’s collection rate for budget purposes and distort anticipated revenues for next year.

Instead, tax collectors should estimate both their RMV billings and collections for the full twelve months of fiscal 2013-2014 in their tax collection rate calculations for budget purposes. This approach will produce a lower collection rate than the twelve-month/nine-month approach described in G.S. 159-13(a)(6), of course.  But the rate it produces will be more accurate and still be perfectly legal.

G.S. 159-13 does not require a particular calculation for the budgetary tax collection rate.  It simply sets a maximum for that rate.  A local government has always been permitted to budget for next year using a collection rate that is lower than the rate it is currently experiencing.  Being more conservative in budgeting is wise and legal; being overly optimistic is not.

Local governments should take care to estimate next year’s RMV tax billings and collections based on the new reality of Tag & Tax Together and not on historical figures under the old system.  In other words, base the RMV tax collection projections for April, May and June of 2014 on what the unit received for RMV taxes in January, February and March 2014.  Similarly, when forecasting the 2014-2015 RMV tax base assessors should use recent history under the new system rather than data from the old system.

A number of my NC tax collector friends are reporting a bit of a dip in RMV tax revenue under the new system.  Wake County, for example, saw its RMV registrations and renewals drop by several percentage points as compared to the same months last year, although these numbers are improving.

It’s not clear what’s causing this dip. Late renewals are nothing new, of course; last year under the old RMV tax system more than two million vehicle owners renewed late.  When faced with the prospect of paying their RMV taxes up front under the new system, perhaps more RMV taxpayers are delaying their registration renewals than in prior years.

There are too many variables to make a good comparison of renewals and revenue under the old and new RMV tax systems midway through the fiscal year.  To help, the Department of Revenue promises additional RMV financial reports in late March and a webinar about how to use them early this April.

Despite the current fiscal uncertainty, it seems likely that as taxpayers become accustomed to the new system registrations and renewals will return to their normal levels.  And when that happens, RMV revenue should rise as compared to prior years because the collection rate will be nearly 100% thanks to the requirement that taxes be paid at time of registration or renewal.  (Under the old system, RMV tax collection rates consistently hovered around 87%.)

When thinking about the RMV tax collection rate under the new system, it’s important not to confuse the renewal rate with the tax collection rate.

Each month, the Division of Motor Vehicles sends out “invitations to renew” to the owner of every motor vehicle for which a registration is set to expire two months later.  That invitation lists both the registration fees and the property taxes owed on the vehicle for the coming year.

As most commonly used, the term “renewal rate” refers to the percentage of RMV owners who respond to those invitations and renew their registrations in a timely fashion.  Under the old system, roughly a third of all RMV owners renewed their registrations late.  The same has been true under the new system, with perhaps a slight uptick in late registrations as mentioned above.

But the fact that only 60% or so of RMV owners are renewing their registrations on time does not mean that the RMV tax collection rate is near 60%.  Quite the contrary.

Essentially 100% of owners who renew their registrations under the new system are paying their RMV taxes due to the requirement that taxes be paid at time of registration.  The only renewals for which taxes will not be paid immediately are those from the very small number of taxpayers who file for bankruptcy after their registrations expire and before they renew.  See this post for more details.

Two things appear to be true at this early stage of Tag & Tax Together.  First, the collection rate for RMV taxes under the new system will be very close to 100%, regardless of where the renewal rate falls.  Second, it will take a complete fiscal year (or more) to accurately measure the new program’s impact on RMV tax revenue.

Chris McLaughlin is Assistant Professor of Public Law and Government at the UNC-Chapel Hill School of Government.

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