Rural Counties Top Urban In Sales Tax Distribution In NC Senate Tax Plan

Jun 10, 2015

North Carolina Senate leaders have unveiled their new plan to overhaul how the state distributes sales taxes and provides tax incentives to businesses. It gives a bit of ground from a March proposal that drew outcries from the governor, House lawmakers, the Charlotte Chamber, and city officials, but still contains the key elements of that earlier proposal. That includes a big hit to Mecklenburg County’s budget. 

The North Carolina Senate Chamber
Credit Government & Heritage Library, State Library of NC

Senate leaders want to push state investment away from urban centers to rural areas, which are more economically distressed and haven’t snapped back from the recession the way cities like Charlotte have.

It would make it harder for wealthier counties to receive state incentive money and redistribute sales taxes. It also contains broader changes to corporate and personal income taxes, as well as an expansion of the sales tax. Below are the key parts of the plan.

New distribution:

  • Instead of most local sales taxes going to the county where the sale occurred, the state would distribute 80 percent evenly to counties based on population. The switch would take place over four years. The previous Senate proposal would have eliminated all point-of-sale distribution in three years.
     
  • Mecklenburg County said the previous bill would have cut its sales taxes by a third. The non-partisan Fiscal Research Division, using parameters set by the bill’s sponsors, says Mecklenburg County would receive 4 percent less sales taxes in 2019 than it did this year, even with the economy growing 3.5 percent each year.
     
  • Mecklenburg, Durham, and Orange Counties would be barred from raising their sales taxes. Other counties could recoup lost revenue by increasing sales taxes up to ½ cent, and earmarking them for “general use,” “transportation,” or “education.”
     
  • House lawmakers and Governor Pat McCrory have not endorsed a plan to change sales tax distribution.

This Fiscal Research Division chart shows the impact of the sales tax redistribution on Mecklenburg County and its cities and towns in its first year of full implementation. The chart assumes sales tax revenues continue to grow 3.5 percent each year.
Credit North Carolina Fiscal Research Division

Incentives:

  • The North Carolina’s main fund to lure businesses to the state, which has run dry this year, would receive $12.5 million immediately for the rest of the year, compared to about $22 million proposed by Governor McCrory and House lawmakers.
     
  • The Senate would extend the $15 million per year funding for two more subsequent years instead of the four years proposed by its counterparts.
     
  • The state could spend more money, up to $30 million, if it lured large companies to bring at least 2,000 workers and $750 million in investment to the state. It could promise those states reimbursement of up to 100 percent of withholding taxes for those employees for 20 years.
     
  • The bill no longer includes hard caps on how much incentive money could go to urban areas, but it raises restrictions for businesses locating in urban areas. In Mecklenburg, Wake, and Durham counties, specifically, a business would need to create at least 250 jobs to qualify for funding, rather than 20 under current law. Such a business could receive no more than 50 percent of withholding taxes in incentives, compared to 80 percent for the most economically depressed areas.
     
  • Stop factoring personnel and property into corporate taxes for large manufacturers.
     
  • To receive money from the state’s other incentive fund, the ONE NC Program, the richest counties would have to put in three times as much money as the state gives. So, instead of the current 1:1 match, it would be 3:1.

Other tax changes:

  • Lower the corporate tax rate to 3 percent by 2017, which is on track to happen any way as state revenue grows.
     
  • Lower the personal income tax rate from 5.75 percent to 5.5 percent.
     
  • Cut a business franchise tax by a third.
     
  • Broaden the sales tax base, including taking a larger share from large non-profits, such as hospitals, taxing veterinary services and personal property repair.
     
  • Increase sales tax rate on boats and aircraft, but exempt some personal aircraft and jet engine service contracts from sales taxes.

--TRANSCRIPT--

TERRY: What’s the big idea behind these changes?

BRADFORD: If you’re going to point to one overarching theme, Senate leaders want to push state investment away from urban centers to rural areas. They’re more economically distressed and haven’t snapped back from the recession the way cities like Charlotte have. Here’s a quote a couple months back from Senate Majority Leader Harry Brown.

BROWN: When you consider that Mecklenburg, Wake and Durham counties were awarded over 85 percent of the state incentive funds last year, even as they already receive a disproportionate share of sales tax revenue, it seems most of the state is set up for failure by the status quo.

BRADFORD: Brown says it creates a cycle of poverty where rural areas can’t fund schools, have to raise property taxes, and then can’t lure businesses. Cities, on the other hand, say they’re being unfairly attacked when they create jobs.

TERRY: So, he’s once again proposing to change both how the state awards incentives to businesses and how it distributes sales taxes. Let’s start with sales taxes. What does he want to do, and how is it different from the last proposal?

BRADFORD: It’s basically a slightly scaled back version. Right now, most sales taxes go to the county where the sale happened—that’s concentrated in urban areas with the big malls, shops, and businesses. Only a quarter gets distributed evenly by county population. Brown’s plan would essentially flip that formula, so 80 percent gets distributed to counties per capita. It would go into effect slowly over three years. Originally, he wanted it to be 100 percent per capita in three years.

TERRY: Do we have an idea of how much this would cost cities?

BRADFORD: Yes. Some. It’s complicated. Mecklenburg County said the last plan would reduce its sales tax receipts by about a third. So, this plan would ostensibly have 20 percent less impact. The state’s non-partisan Fiscal Research Division had a different way of looking at it, using parameters from the Senators who wrote the bill.

They assume people spend 3.5 percent more each year. So, with the economy and sales taxes growing, Mecklenburg would have 4 percent less sales tax money to work within four years than it has right now. Under the last bill, it was 7 percent less. But the new proposal would also remove the county’s ability to raise its sales tax by a quarter-cent. Almost every other county could raise the tax to recoup lost revenue.

TERRY: Have we heard any reaction yet?

BRADFORD: We heard immediately from the North Carolina chapter of the conservative advocacy group Americans for Prosperity. They sent out a press release in support at the same time as the Senate announced the plan, so they were clearly already plugged in. Otherwise, y’know it’s a dense bill, and the lawmakers we spoke with said they’re still going through it.

What I would say is that the bones of the plan are the same. And here’s what Governor Pat McCrory said about it last time:

MCCRORY: I don’t know how much that proposal has legs, but I think it’s a mistake, and it’s classic class warfare.

BRADFORD: I don’t see anything that would drastically change that position. On the other hand, the Senate did package this sales tax redistribution with a big McCrory priority—tax incentives.

TERRY: You mean the state’s funds to lure businesses to the state. Let’s talk about that. The Commerce Department has used essentially all of the money from the main incentive fund. The Governor and House lawmakers want it refilled this year and then extended. Would the Senate plan do that?

BRADFORD: Well, more than last time. It would essentially make $12.5 million available immediately—instead of none—but it’s about half what the Governor and House lawmakers want.

TERRY: Why is that?

BRADFORD: Some of it is ideological. The Senate is more conservative than the House, has a bit more of a Tea Party make-up . They’re opposed to promising tax breaks to businesses, whereas more establishment Republicans tend to look at it as a “necessary evil.” Also, it goes back to this rural/urban divide—the Senate, because of how it’s districted, has a much more rural make-up--and you heard Senator Brown a few minutes ago say that almost all of the state’s incentive money goes to urban areas.

So, it would stop the incentive program from expiring for two years, but also make it more difficult for businesses wanting to locate in urban areas to get tax breaks. In Mecklenburg, Wake, and Durham specifically, an employer would have to promise at least 250 jobs, instead of the current 20.

TERRY: As you said, it’s a big bill—are the other changes worth noting?

BRADFORD: There’s some other major tax changes. The Senate wants to slightly cut personal income taxes and again expand the sales tax to include things like veterinary services and repairing furniture. But, I think you really have to look at this bill as a bargaining position with the House and the governor, who didn’t like the last proposal. So now the Senate has come in a bit toward the other positions. They can say they’ve given ground, ask their counterparts to do the same, or dig in their heels if they don’t. 

Updated 6/11/15 9:55 a.m.