Slower sales-tax growth could squeeze transit

You’re reading Charlotte in Motion, a biweekly newsletter that examines how the Charlotte region is dealing with bumper-to-bumper traffic, rising housing costs, crowded schools and other challenges that come with the ultimate Charlotte story of growth. Charlotte in Motion is produced in partnership between The Charlotte Ledger and WFAE.

by Steve Harrison
WFAE

Before and after the pandemic, Mecklenburg County’s half-cent sales tax for transit was booming.

During much of the first Trump administration, transit tax revenues grew by an average rate of 8% a year. Revenues fell during Covid, but they surged again as the economy opened back up. Receipts grew by a whopping 20% from 2021 to 2022, then 11% from 2022 to 2023.

That surge gave transit boosters confidence that a new, one-cent transportation sales tax would generate enough money to pay for a long list of projects: more bus service, the Red Line commuter train to Lake Norman, the east-west Silver Line light rail and extensions to the Blue Line and Gold Line streetcar.

During last fall’s campaign to convince voters to back the new tax, boosters said it would generate nearly $20 billion over the next 30 years. They projected that the tax would grow by an average rate of roughly 4%.

But the sales tax has recently sputtered:

The Charlotte Ledger on Wednesday examined the possible reasons for the sluggish performance. This story looks at the impact on the Charlotte Area Transit System and the new Metropolitan Public Transportation Authority, whose ambitious plans depend almost entirely on the sales tax.

Are the last three years just a hiccup, an inconsequential slowdown given the earlier boom years? If so, people will spend again as inflation recedes and they feel better about the economy. The transit tax is not levied on most groceries, which may be taking up a larger share of people’s spending. 

Or do the last three years represent a new normal as Mecklenburg County nears buildout and population growth slows? Under that scenario, much of the population growth lands in neighboring counties, and new residents buy things closer to home instead of driving into Charlotte. 

The Charlotte Area Transit System said it’s not concerned.

“Any 30‑year financial plan is conservative by nature, and ours uses long‑running average rates of growth specifically to avoid significant over‑ or under‑estimating future market conditions,” the transit system said in a statement. “Even with recent slower growth, we’re not currently seeing indications that would require major changes to the long‑term direction of the transit plan. That said, we continually update our revenue projections and assess how different economic scenarios could affect future program and capital planning.”

The new one-cent transportation tax took effect July 1. In the current fiscal year, which will run through June 2027, the tax will likely generate between $328 million and $335 million.

Forty percent of that money is dedicated to roads. The rest is for transit.

The financial model shows the tax steadily growing over the next three decades, generating $800 million annually, then $1 billion a year in the late 2040s and 2050s. In all, the tax is projected to generate about $19.4 billion. (Another $5 billion for the long-term plan would theoretically come from federal transit grants.)

Local officials have long assumed that the sales tax would continue strong annual growth, with the exception of recessions. In 2021, a financial consultant for CATS, Amanda Vandegrift, assured City Council members that 4.4% annual sales tax growth would be on the low end of what Charlotte could expect: “You’re likely to see higher growth, but we don’t know until we’re there.”

But let’s look at a hypothetical: If the tax grows at an annual average rate of 3% instead of 4%, it would generate $3 billion less. A growth rate of 2.5% would wipe out nearly $4.5 billion in expected revenue.

On the roads side, a drop in the sales tax revenue isn’t a big deal. Less money than expected just pushes projects farther into the future. Since the tax never expires, an intersection improvement project or a new sidewalk that was scheduled for, say, 2035 might get pushed to 2039. 

The impact on transit is different – and potentially more severe – for two reasons.

The first: CATS spends most of its money paying the people who drive its buses and trains. Those operating dollars are recurring costs, and historically those expenses have grown at a rate faster than inflation. If the sales tax underperforms, the transit system has to start using money penciled in for capital projects to keep the system running.

(Charlotte In Motion wrote a detailed look here about whether CATS is overoptimistic about its operating budgets over the next five years.)

The second: The capital projects are big-ticket items. The proposed Silver Line from the airport to Bojangles Coliseum is projected to cost $3.3 billion. The main segment of the Silver Line – from the airport to uptown – can’t be broken into smaller segments because it would be unlikely to qualify for federal funding. 

So if there isn’t enough money to build it next decade, the project could become farther and farther out of reach if construction costs exceed the growth of the tax.  

Peter Rogoff, the former head of the transit system in Seattle and the Federal Transit Administration, said many transit systems nationwide rely on sales taxes.

“I have heard some grumbles of sales taxes underperforming projections in certain jurisdictions,” he said. “A lot depends on how aggressive agencies have been in their projections.”

The new MPTA is in the process of taking over transit operations from CATS, expected to conclude in January. 

MPTA board members have mostly been focused on improving safety and fare enforcement after last year’s murder of Iryna Zarutska on the Lynx Blue Line.

The board’s monthly agendas include reports on the sales tax – but members haven’t had any big-picture discussions about the slowing revenue.

Steve Harrison is a reporter with WFAE, Charlotte’s NPR news source. Reach him at [email protected].