Leaders in the state Senate are crafting a plan that would shift millions in sales tax revenues from urban and coastal counties to more rural areas across North Carolina, according to interviews and documents.
The full plan has not been disclosed publicly, but the Senate’s majority leader, Harry Brown, a Jacksonville Republican, said in an interview that he expects to file legislation soon that would change how the state parcels out a portion of taxes collected when people buy clothing, building materials and other goods.
The change would have significant ramifications for budgets in towns, cities and counties statewide, creating winners and losers and likely forcing a debate about the state’s urban-rural divide.
As it is now, a part of sales tax collections are funneled back to counties under a formula based largely on where the sale occurs. Counties with more retail operations – often in more urban settings – benefit from this. When shoppers from outlying areas visit malls in Wake, Durham or Mecklenburg counties, for example, those counties get to keep a larger share of the sales tax money, and it is used for their schools and other services.
The Senate plan would aim to change that, emphasizing instead a distribution of the sales tax based on where people live.
“I think over time we’ve started to develop two North Carolinas,” Brown said. “We’ve got to find a way to make this thing fair.”
Under the current system, he said, “You’ve got about 20 winners and 80 losers.”
Brown said he expects to file legislation as soon as this week.
He would not discuss many details of the plan, but provided a document authored by legislative staff that details a system that distributes the money based on population. The document says its “parameters” were set by the office of Senate leader Phil Berger.
His plan would give more to those 80 poorer counties – and leave multimillion gaps in the budgets of some others.
Under a per-capita plan, many higher-poverty, more rural counties such as Greene, Caswell and Jones, would see their sales tax revenues more than double.
Mecklenburg County and its towns and cities would lose about $35 million, a 16 percent drop.
Wake County and its cities and towns would collectively see a drop of about $18 million, or 13 percent, according to the projections by legislative staff.
Raleigh’s share of the loss would be about $8 million, according to documents.
Raleigh City Councilwoman Mary-Ann Baldwin said the council could be forced to increase property taxes as a result. The legislature’s previous elimination of business privilege license taxes cut a source of income to the city that had been about $7 million.
“It’s really a redistribution of taxes,” said Baldwin, a Democrat.
She said the point-of-sale distribution system makes sense.
“We’re building the infrastructure and everything that goes into development,” she said. “If somebody is coming here to purchase clothing, we’ve invested to enable that.”
Wake County Commissioner John Burns, a Democrat, said the plan is “an unwarranted offshoot of an urban-rural divide that some in North Carolina politics are seeking to exploit rather than resolve.”
The N.C. Association of County Commissioners is already considering a proposal that would allow counties to increase their own sales tax rates to address a variety of needs.
‘Huge for us’
Leaders in rural counties say a population-based system would address school funding inequities driven, in part, by a lack of local sales transactions to tax.
“We just don’t have that many retail stores, period, in Greene County,” said Patrick Miller, the schools superintendent there. He says most residents shop in nearby Kinston, Wilson or Greenville, adding to sales tax receipts for those schools.
According to a study by Public School Forum of North Carolina, Greene County spent about $705 per student in 2013. Wake County, by comparison, spent about $2,022.
The disparity is apparent at Greene Central High School, built in 1961 amid farmland on the outskirts of Snow Hill, about an hour east of Raleigh. The gym doesn’t have air conditioning and can be “unbearable” in the summer, Miller said. The roof leaks. Classroom air conditioning units are 15 years old and occasionally break down.
If the state switches to a population-based sales tax system, Greene and its three towns would see their share increase from $2.28 million in 2014 to $5.1 million – a 123 percent increase, according to legislative projections.
“That would certainly be huge for us,” Miller said. “Not only would we be able to better take care of our buildings, we would be able to set aside more dollars to help offset the costs of a new school. We’ve been chipping away at the fund balance, and we’ve got very little left.”
Tiny towns, like Hookerton, population 400, would also get a share of the new revenue. April Baker, the clerk in the town 80 miles east of Raleigh, said in an interview the town has a long list of unfunded infrastructure and other projects aimed at drawing new homes and businesses.
Hookerton once had a variety of shops. Town leaders were thrilled to attract a Family Dollar store, which opened last week. “We’re constantly going after something,” Baker said.
Miller says Greene County used to see more sales tax revenue, but money available for school construction was cut in half about five years ago as allocations changed.
An obscure factor
It’s not just a lack of shopping that hurts places like Greene County.
Already, 25 percent of the local sales tax money is distributed based on population, with the other 75 percent going to the county where the products were sold or delivered.
But the portion now based on population isn’t a pure one: A county with 10 percent of the state’s population doesn’t actually get 10 percent of that piece of the money.
That’s because of a formula written into state law, called the “adjustment factor,” that recalculates that part of a county’s share. It’s deep in the state’s 600-page chapter of laws about taxes.
The adjustment factor adds a multiplier to the amount each county would receive based purely on its population.
The effect of the formula is that it alters what each county receives, magnifying the outcomes.
Winners, losers in formula
Dare County has the highest multiplier in the state – its share of the sales tax based on population is boosted by 49 percent under the adjustment factor.
Columbus County, with the lowest multiplier, receives just 81 percent of what it would have received based on population.
About 20 high-poverty counties have a negative adjustment factor – meaning they receive less sales tax money than they would under a purely population-based formula.
“I would bet you nobody has an idea about that,” Brown said.
The adjustment factor was created when none of the state’s sales tax revenue was distributed based on population. For years, it all went to the county where goods were sold – even if the goods were delivered to another county.
In 1987, North Carolina changed that to a “point of destination” system, meaning that the distribution accounts for where products – building materials, for example – were delivered. The adjustment factor addressed concerns that some counties were primary sellers of materials that were delivered to their neighbors.
A 2007 House bill to eliminate the adjustment factor system died in committee.
“This formula should have went away at that time because you no longer needed it,” Brown said. “I don’t know if that was political.”
‘Got to get up to Raleigh’
County commissioners in Dare have been hearing of the possible change. They say they’re opposed to it and this month they hired three lobbyists, in part, to challenge the Senate plan.
“It’ll be a huge impact,” said the commissioners’ chairman, Robert Woodard. “We’ve got to get up to Raleigh to talk to the legislators about it.”
Legislative estimates show Dare would be the biggest loser in a population-based system, with sales tax revenue dropping by 64 percent, or $10.6 million. The county’s 43-cent property tax rate would have to be increased to 51 cents per $100 valuation to make up the difference.
A legislative document has calculated how much each county would have to increase its property tax to not see a change.
In Wake, it’s about 1 cent on the property tax rate.
In Mecklenburg, it’s about 3 cents.
The majority of urban or coastal counties would need to raise property taxes by 1 or 2 cents to make up for the loss.
Brown said that when his bill is filed, he expects it will get bipartisan support and bipartisan opposition.
“I hope some of the bigger counties will at least see how fair this is to the rest of the state,” he said.
At a glance: Changing a tax
The majority of North Carolina counties have a 6.75 percent sales tax rate.
Of that, 4.75 percent of each sale helps fund state government, while 2 percent goes to counties and towns.
The state uses a formula for distributing to local governments the money generated by that 2 percent tax.
Currently, 25 percent of that local sales tax money is distributed based on population, while 75 percent goes to the county where the products were sold or delivered.
The population-based 25 percent isn’t based only on a per capita basis. It is adjusted using a multiplier that varies by county, resulting in some counties getting a larger share. Others get less than they would under a per capita system.
Now, Senate leaders are looking to change how that local share is doled out.
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