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Charlotte says Senate tax bill will cost city $31 million a year

By Rick Rothacker
rrothacker@charlotteobserver.com sharrison@charlotteobserver.com

RALEIGH and Steve Harrison

Charlotte is lobbying against the state Senate’s tax reform bill, saying it would cost the city at least $31 million a year in lost revenue and possibly require a property tax increase.

Cities and towns could lose nearly $150 million in revenues when the tax bill is fully implemented in fiscal 2019 because it eliminates the local food tax and local privilege license tax and requires local governments to pay sales taxes, according to an analysis by the N.C. League of Municipalities.

“This is money our city manager would have to come up with to keep things running,” Dana Fenton, Charlotte’s intergovernmental relations manager, told the Observer. “We don’t know what we would have to do to address that issue in 2019. It could be property taxes or cuts to services.”

The Senate Finance Committee approved the sweeping tax bill last week, and the full Senate is set to take it up next.

On Tuesday, Senate President Pro Tem Phil Berger postponed action on the legislation until Wednesday and said lawmakers are in negotiations with Gov. Pat McCrory and the House on a compromise.

Fenton sent an email this week to the city’s House delegation urging lawmakers not to accept the Senate version of the bill. The House version doesn’t include the provisions that would cost municipalities, he said.

North Carolina counties could lose $88 million under the Senate plan, with the elimination of some taxes offsetting an increase to their tax base, said Johanna Reese, director of government relations for the N.C. Association of County Commissioners.

The legislation imposes a flat income tax rate, phases out corporate income and business franchise taxes, repeals the estate tax and closes loopholes. Supporters say the plan will make the state’s tax code fairer and more attractive for business.

Critics on the left have said the proposal shifts the tax burden from corporations to the middle class, while some on the right say it doesn’t do enough to shed unfair tax breaks.

Sen. Bob Rucho, a Matthews Republican who was pushing his own tax reform bill, last week resigned as co-chairman of the Senate Finance Committee to protest the plan. But a spokeswoman for Berger said the Republican leader has not withdrawn Rucho’s appointment.

“At this moment, I’m not anything, in my judgment,” Rucho told the Observer, saying it would be “inappropriate” for him to be part of the leadership team and “opposing what the Senate pro tem is doing.”

Rucho had proposed lowering income and corporate tax rates while expanding the sales tax to cover a number of services that are currently sales-tax exempt. His plan was rejected.

“I think there is a better way of doing it, and I’m continuing to work for that direction,” Rucho said. “Real tax reform means you have to change the way you do business. Tax reform is not just about rates.”

Under the current Senate tax reform plan, the N.C. League of Municipalities estimates the city could lose $31 million in revenue by fiscal 2019, but Fenton said it could be as much as $34 million in a less conservative estimate. To make that up, the city says it would need a real property tax increase of as much as 3.6 cents for every $100 of taxable property.

A tax increase of that size would cost the owner of a house with a taxable value of $200,000 an additional $72 a year.

And it would come on top of a property tax increase passed by the City Council last week, and one that is already being considered for fiscal year 2015.

The City Council last week voted to increase the property tax rate by 3.17 cents to pay for $800 million in capital projects through 2020. And City Manager Ron Carlee has said the city may have to increase the tax rate by another 0.8 cents next year to cover a projected $5 million budget shortfall. That deficit is because of the loss of revenue from people successfully appealing their property evaluations made by Mecklenburg County.

If the city had to pass a tax rate increase to cover the loss of money from the Senate bill, the city’s tax rate could increase by 17 percent over a four-year period – from 43.7 cents for every $100 of taxable value to 51.27 cents.

Mecklenburg County commissioners on Tuesday approved a property tax increase of 2.35 cents for the coming year.

Berger: Cities have options

In the Senate plan, the biggest hit for the city in the tax bill would be the repeal of the privilege license tax that cities impose on certain businesses. The loss of this levy would cost between $17 million and $18 million a year when fully implemented.

The business privilege tax is levied on all businesses, trades and professions operating inside Mecklenburg County. The minimum tax is $50. The maximum is $10,000.

The city could also lose $15 million per year if it loses refunds on sales taxes that it pays to the state, plus an additional $10 million from the elimination of the local sales tax on food. The lost revenue would be partially offset by an additional $11 million in revenues from additional taxes that nonprofits such as hospitals would pay.

Berger spokeswoman Amy Auth said the Senate’s tax reform plan incorporated feedback from people across the state, including constituents, businesspeople, other legislators and the governor. In particular, a vast majority said the state should not tax food, she said.

Local governments have other options for raising money for local services and infrastructure, including impact fees, water fees and other local taxes, Auth said. Governments could make up for lost sales tax by reinstating the food tax, or they could reduce spending, she said.

As for privilege taxes, Auth called them a disincentive for business to move to and create jobs in North Carolina and noted municipalities will have five years to prepare for the change.

According to the League of Municipalities analysis, Charlotte would lose the largest amount of revenue in the state, but other communities would face steeper tax increases. The Edgecombe County town of Leggett, for example, would need to raise property tax bills by 849 percent to make up for $83,584 in lost revenue.

Among Charlotte-area communities, Monroe would take a $2.2 million hit, Gastonia would lose about $2 million and Mooresville would come up $1.1 million short.

Fenton, the city of Charlotte lobbyist, said the only large North Carolina city that would benefit from the Senate tax plan is Durham. Because an exemption on sales taxes on nonprofits would be lifted, both Duke University and Duke Medical Center would be generating revenue for Durham, he said.

“This is not a good plan for cities and towns,” he said.

Brian Francis, a lobbyist for Mecklenburg County, said the county doesn’t receive revenue from the business privilege license tax and wouldn’t be as affected by the Senate plan as cities would.

But he said he doesn’t anticipate the Senate plan will be passed as it currently stands. He believes a compromise will be reached with a House tax plan that doesn’t impact municipalities as much.

Rothacker: 704-358-5170 Twitter: @rickrothacker
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