Politics & Government

Legislators float other plans for distributing sales tax money

As opposition grows to a Senate Republican plan to redistribute sales tax revenues to rural counties from urban ones, two competing bills have been filed – both with the goal of boosting rural revenue without leaving a hole in urban counties’ budgets.

In the Senate, Republican Sen. Bob Rucho has introduced his own version of a proposed sales tax redistribution that he says would prevent urban areas from losing money – by expanding services that are taxed.

Rucho’s Senate Bill 608 is similar to a proposal from Senate Majority Leader Harry Brown. Both bills would distribute sales tax revenues based on each county’s population – not by where the sales occurred. Both bills address only the local sales tax of about 2 percent, with the other 4.75 percent still going to the state budget.

Senate Republicans say the current system is unfair because rural residents are effectively supporting urban counties’ schools and services when they shop there.

But Rucho wants a provision that prevents counties from dropping below their fiscal year 2013-2014 revenue levels. And he’s calling for increasing sales tax revenue statewide by about $66 million to ensure that there’s more money to go around. That revenue could be generated by taxing some services like barbers and dentists, Rucho said, although his bill doesn’t outline exactly what additional services would be taxed.

Projections for Rucho’s plan show only five counties would see revenue drop over a five-year period. Wake, Durham and Mecklenburg aren’t among them. Those would see minor increases, under his plan.

“Our goal has always been to have 100 prosperous counties in North Carolina,” Rucho said.

A better way?

In the House, a bipartisan bill filed this week would allow all counties to raise local sales taxes by a quarter-cent – without a voter referendum in most cases. The bill is also backed by the N.C. Association of County Commissioners.

“We believe it’s a better way,” said Rep. Howard Hunter, an Ahoskie Democrat who co-sponsored House Bill 518 with two ranking Republicans, finance chairmen Jason Saine and Mitch Setzer. “Hopefully this way will be more convenient to all 100 counties.”

While Howard represents four northeastern North Carolina counties that would gain revenue in Brown’s plan, he says most leaders in his district don’t like the idea of taking money from urban coffers.

“That sends a message,” he said. “The bill that Brown has, you’re robbing from Peter and giving to Paul.”

But Brown says a local sales tax hike wouldn’t generate much revenue for rural counties, which have few retail options. His bill contains the same provision – but the quarter-cent hike is designed in Brown’s bill to help urban counties make up for losses.

The House bill “doesn’t really move the needle,” Brown said. “These small rural counties need more help.”

In Greene County, which would see revenues double under Brown’s plan, county commissioners passed a quarter-cent local sales tax hike several years ago. “It’s a negligible number,” schools superintendent Patrick Miller said. “It would not do for us what the Senate version would do.”

A quarter-cent hike in Greene would generate just $141,000, less than one percent of its annual budget, county manager Kyle DeHaven said. Brown’s plan projects a $2.6 million increase for Greene.

Brown says that while he opposes the House bill, he’s working with Rucho to find middle ground between the two Senate plans. He said the sales tax redistribution will be discussed in Republicans’ planned closed-door caucus meetings next week.

Senate leader Phil Berger said he’ll support whatever emerges from the caucus discussions. “Sen. Berger believes both Sen. Rucho’s and Sen. Brown’s sales tax bills address a concern that everyone – both Republicans and Democrats – can agree on: the current approach to distributing sales taxes is hurting North Carolina,” Berger spokeswoman Shelly Carver said in an email.

Rucho’s plan would allow urban counties – some of them losers under the Brown plan – to see increased revenue in the coming years. Wake County would see its sales tax revenue increase 9.8 percent by fiscal year 2018-2019, according to estimates from the legislature’s fiscal research staff.

Under Brown’s bill, Wake would see its revenue remain flat, rising just 0.8 percent over the same period, estimates show.

Durham County – estimated to lose 3.8 percent of revenue in the Brown plan – would see a 0.6 percent increase under the Rucho proposal.

Leaders from urban areas said Rucho is taking a step in the right direction.

“While the Metro Mayors are appreciative of Sen. Rucho's version and the fact that he seems to be trying to make a bigger effort to have a less dramatic effect on the counties and cities, the Metro Mayors continue to believe a solution must be to raise all boats,” said Huntersville Mayor Jill Swain, who chairs the Metropolitan Mayors Coalition. “We don't have a comfort level with any numbers yet and will be protective of the growth potential for all areas in North Carolina.”

New taxes ahead?

Rucho’s bill doesn’t outline how he’d generate the additional $66 million that would help urban counties. He said Senate Republicans are weighing a number of possibilities for adding sales tax on services that currently don’t include them. The extra revenue would also offset a series of personal and corporate income tax cuts Rucho and his colleagues have proposed.

One option, Rucho said, is to add taxes at businesses that offer both goods and services. A barber shop, for example, currently charges sales tax on a jar of hair gel but not for a haircut.

“The mechanism is in place, and it would be easier for that to occur” than at a service-oriented business that doesn’t already handle sales tax collections, he said.

He says making a population-based sales tax distribution work for urban counties will require more revenue statewide. “This does not work without base expansion,” he said.

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