Plan to distribute new sales taxes comes into focus

Several urban counties, including Durham and Mecklenburg, would get a small share of additional revenue from new sales taxes, according to updated legislative projections released Wednesday.

A budget compromise that passed the Senate on Wednesday would add sales taxes on repair, maintenance and installation services – including vehicles, appliances and other personal property. About $84.8 million in new revenue from the tax would be divided among 79 suburban and rural counties for schools, community colleges and economic development projects.

The plan is a scaled-back version of a controversial Senate proposal to change how local sales taxes are distributed – a revenue shift from urban to rural counties. Senate Majority Leader Harry Brown said it addresses an unfair system in which rural residents leave their counties to shop and contribute their sales tax dollars to their wealthier neighbors.

About 21 urban and tourism counties, including Wake, Durham, Mecklenburg, Avery and Jackson, would get no money from the new $84.8 million fund. But a few of them could still see gains from the expanded sales tax.

House Rules Chairman David Lewis argues the 21 counties shouldn’t be considered losers under the change. While data distributed Tuesday showed no revenue for them from the repair and installation tax, Lewis provided a new document Wednesday.

The projections show seven of the 21 counties – Durham, Mecklenburg and New Hanover among them – getting a small cut of new money from the expanded sales taxes. That’s because those seven have an additional local sales tax beyond the standard 2 percent local rate charged in all 100 counties. In Durham and Mecklenburg, the extra tax was added through a voter referendum and funds transit projects.

Those extra taxes will be charged on repair and installation services, but their proceeds won’t be distributed to other counties.

“It does appear that certainly no county loses and nearly every county wins,” Lewis said. “The counties with the local-option sales tax will see an increase.”

In Durham, the new sales taxes would generate $1.01 million for the transit tax in fiscal year 2016-2017. Leaders there aren’t likely to cheer that news because the budget also caps state funding for light rail, which they say will kill a planned light rail service to Chapel Hill.

The new tax would generate far more revenue for urban and tourism counties if the current distribution formula applied. Based on the legislature’s projections, Mecklenburg would collect about $5.9 million in sales taxes on services, of which only $1.7 million would stay in the county and go to transit funds.

The 21 counties left out of the rural and suburban funds would, however, get a short-term boost this fiscal year. That’s because the new sales taxes would start on March 1, 2016, but the distribution plan wouldn’t begin until July 1. In those four months, Wake would collect $1.06 million from service taxes before the revenue gets redirected elsewhere.

Sen. John Alexander, a Raleigh Republican, said the proposal is far better than Brown’s original plan that would have cut millions from Wake County. “It appears to me that Wake County is going to come out OK,” he said. “There was a time that we were going to get hit pretty hard.”

State government would also get a boost from the service sales tax – the statewide sales tax of 4.75 cents per dollar in sales would apply. So it’s the standard 2-cent local sales tax that would be redirected to the 79 beneficiary counties.

Plan puzzles some

Details about the expanded sales tax have been difficult to obtain this week. When the plan was first announced Monday, Senate leader Phil Berger said “the expansion actually goes per the existing formula” where most revenue stays in the county where the sale occurred.

Berger declined then to provide details of how rural counties would receive extra revenue. “It’s a fairly complicated mechanism, probably a little more complicated than I can explain in the next 15 minutes,” he said.

The following day, Brown and House Finance Chairman Jason Saine each explained the formula to a reporter in about five minutes.

The sales tax changes only became part of the budget deal as negotiations wrapped up last weekend. For much of last week, House Speaker Tim Moore said the two chambers were struggling to agree on tax provisions and would put them in a separate bill. And Senate leaders had earlier announced that Brown’s proposed sales tax shift would be removed from budget talks and negotiated as part of an economic development bill.

Saine said Senate negotiators insisted on including the sales tax plan in the final budget. “Sen. Brown, quite rightly, wanted to make sure that something happened for rural areas,” Saine said. “This is where they dug in and said ‘we want to make sure it’s part of the budget.’”

Gov. Pat McCrory said he’s against putting a “a new tax scheme and redistribution scheme” in the budget, although he hasn’t addressed the legislature’s plan since it became public.

Sen. Josh Stein, a Raleigh Democrat, said he’s struggled to get information about the sales tax proposal. He said such a major policy change shouldn’t appear at the end of the session, days before it gets approved as part of a complex budget.

“It’s emblematic of what’s wrong with the process,” he said. “These are intensely complicated issues that deserve full debate, full vetting and full transparency, and we’re getting none of that.”

This story was originally published September 16, 2015 at 8:11 PM with the headline "Plan to distribute new sales taxes comes into focus."