Mecklenburg County and its municipalities, including Charlotte, could lose $100 million a year under a legislative proposal to change how sales tax money is distributed, according to city budget projections.
The change, if approved by the General Assembly, could be a second budget shock to the city, which is already struggling to balance its budget for the coming year.
Local sales tax revenues today are mostly distributed based on the “point of sale,” a system that benefits cities and tourism areas such as Charlotte, which have shopping malls and other destination retail centers.
The proposal from Raleigh would distribute all local sales tax revenues based on population.
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That would benefit rural, poor counties, where residents often drive long distances to shop in cities.
A legislative staff analysis shows Mecklenburg County would be one of the biggest losers under the plan. Union, Anson, Lincoln and Gaston counties would all have significantly more sales tax revenue, and Iredell and Cabarrus would be up slightly.
The proposal comes as the city is trying to cope with the loss of the Business Privilege License tax, which the General Assembly repealed last year.
About 55 percent of Charlotte’s $585 million general fund budget – which pays for police, fire and garbage pickup – is from property taxes.
Sales taxes are the next biggest source of revenue. For the coming fiscal year, that’s projected to be about $86 million, about 15 percent of the budget.
City budget documents from January show the loss of sales tax revenue would be significant.
At that time, the city estimated it would lose $29 million annually if the sales tax formula were changed. To make up that revenue without cutting services, the city would have to raise the property tax rate by about 7 percent.
The city estimated that Mecklenburg County and its towns would lose $62 million. The sales tax makes up about 15 percent of the county budget, which funds schools, parks and social services.
The county declined to comment Tuesday, saying it needed to study the issue further.
The legislative proposal would phase in the change over three years.
Before the proposal was unveiled, Charlotte already was facing a difficult budget year, with a projected shortfall larger than what the city faced after the 2008 recession.
▪ The repeal of the business license tax is expected to cost the city $18.1 million. That tax had been criticized as being cumbersome and an unnecessary burden on businesses.
▪ The ongoing countywide property revaluation will also hurt the city. Because of a drop in taxable value among some commercial properties, the city is expected to lose about $14 million.
▪ The biggest impact would be the change in how sales taxes are distributed. The legislative proposal calls for the change to be phased in over three years, but the impact to Charlotte and Mecklenburg County would be significant in the first year.
If all three events occur, the loss of revenue could be anywhere from 7 to 11 percent of the general fund.
“The Great Recession or 9/11 never had anywhere near that impact,” said the city’s chief financial officer, Randy Harrington.
City Manager Ron Carlee has already proposed a wage and hiring freeze for the coming year. He also has suggested a 1 percent across-the-board budget cut for all departments, including police and fire.
Those two cuts would make up about $13 million of the shortfall.
The city has some good news. The growing economy has added new property to the tax rolls and also given the city about $6 million in new sales taxes. (That new sales tax money is under the point-of-sale distribution system.)
Winners and losers
Senate Majority Leader Harry Brown, a Jacksonville Republican, said the current tax system is responsible for what he said was “two North Carolinas” – a divide between prosperous cities and poor rural areas.
The counties that would lose the most are on the beach and are dependent on tourism. Urban counties would also fare poorly.
A legislative staff analysis predicts Mecklenburg’s sales tax revenues in 2018 would be 7.4 percent less in real dollars than they were in 2014. (The 2018 estimate already includes inflation.)
Other losers would be Durham County, which is home to The Streets at Southpoint, a high-end shopping center. Asheville’s Buncombe County, which relies on tourism, would lose 9 percent.
Harrington said Charlotte is already a “donor city,” meaning it gets back about 87 cents in services for every $1 it pays in state taxes.
He said a significant amount of the retail sales taxes come from either South Carolina residents or people from across the nation who are visiting.
“They come to Charlotte for food, family and friends,” Harrington said. “(Their taxes) are re-invested into infrastructure. (Visitors) are throwing trash away, getting into accidents, and needing medical services.”
The legislative proposal would allow counties to increase their sales tax by a quarter-cent to make up for the lost revenue. But there is a catch: If county voters rejected a similar tax in the last five years – as they did in Mecklenburg County last year – then the increase still needs voter approval.
Winners and losers
Under the new sales tax formula proposed by legislators Monday, here are the counties that would gain and lose revenue. The projection compares how much sales tax a county would receive in 2019 compared with how much it received in 2013-2014.
New Hanover -13.45%
Charlotte area counties