Politics & Government

Sales tax plan helps some, hurts others

Alexa Jain and her mother, Astrid, of Charlotte shop at the Carolina Panthers' team shop at Bank of America Stadium on August 7, 2014. A North Carolina Senate proposal could mean that sales tax collected in Mecklenburg County would go to less prosperous areas of the state.
Alexa Jain and her mother, Astrid, of Charlotte shop at the Carolina Panthers' team shop at Bank of America Stadium on August 7, 2014. A North Carolina Senate proposal could mean that sales tax collected in Mecklenburg County would go to less prosperous areas of the state. mhames@charlotteobserver.com

Franky Howard and Donald Duncan run local governments on opposite sides of the state. Now they’re on opposing sides of one of the biggest issues dividing N.C. lawmakers, one that could cost Mecklenburg County tens of millions of dollars.

Howard is the county manager of Jones County, a quiet stretch of forests and farmland not far from New Bern.

Duncan is city manager of Conover in Catawba County, a town with enough manufacturing and retail that its daytime population is three times its night-time size.

Each would see their communities fare differently under a provision of the Senate budget that would shift sales tax revenue from where it’s collected to generally less prosperous areas.

While there are different estimates of the impact, Mecklenburg County officials say it could mean a loss of more than $200 million over four years. Commissioners Chairman Trevor Fuller called the plan “draconian.”

Often portrayed as a sort of Robin Hood plan, taking from the rich and giving to the poor, the reality is more complicated. Not all the would-be recipients are poor. Not all donors are affluent.

I really haven’t sensed a lot of support in the House for it.

Tim Moore, House Speaker

The Senate plan faces resistance in the House.

“I really haven’t sensed a lot of support in the House for it,” says Speaker Tim Moore, a Kings Mountain Republican. “But it’s all part of a larger discussion.”

It was a discussion begun by Senate Majority Leader Harry Brown, an Onslow County Republican whose district includes Jones County. He argues that asking prosperous areas to share the wealth will strengthen the state as a whole.

“This is how you help everyone, by just giving a little,” Brown says. “It’s a fair exchange. If you don’t do anything, the divide will just get bigger.”

Brent Lane, director of the University of North Carolina’s Center for Competitive Economies, says Brown has a point given the state’s changing economic geography.

Retail has grown more concentrated as big box stores such as Walmart increasingly lure shoppers – and their money – from rural counties. People in Jones County, for example, do 71 percent of their retail spending elsewhere.

“People are spending more of their money outside of their home county than they used to,” Lane says. “It’s a trend that’s exacerbating revenue problems for rural counties.”

Boon for some is bad for others

Howard, the Jones County manager, understands that.

With expanses of national and state-owned forests, his county has the second-smallest property tax base of North Carolina’s 100 counties. Brown’s plan would give it additional sales tax revenues of nearly $1.4 million by 2019, a 115 percent increase.

That’s a lot of money in a county with aging schools, a stagnant economy and a property tax rate about as high as it can go.

“This is a huge deal,” Howard says. “It would take a lot of budget constraints off the county.”

This is a huge deal. It would take a lot of budget constraints off the county.

Franky Howard, Jones County manager

While Jones County would see a relative windfall, Conover would take a hit, like Hickory and other municipalities in Catawba County.

Every day, around 30,000 people come to the town of 8,200 to work at factories and shop at the Super Walmart and other stores. To accommodate them, Duncan says, Conover has to invest in the roads and other infrastructure to support them. Sales tax revenue takes the burden off property taxes.

“The net effect (of the change) is the homeowner becomes the sole source of revenue for all services,” Duncan says. “To maintain the same level of services, we have to supplement with property taxes. And no one wants to do that.…

“It kind of makes you wonder why we’re using the tried-and-true economic development strategy promoting industry and commerce when we’re going to be penalized for it.”

Eric Heberlig, a UNC Charlotte political scientist, says governments count on sales taxes to offset the cost of development.

“Cities have invested in this kind of economic development strategy over the last generation to replace the loss of manufacturing,” he says. “And now they’re risking their ability to pay off that investment if they can’t get the sales tax those types of investments have created.”

Unintended consequences

Tax revenue collected in Conover would go not only to Jones but to counties such as Union, which has little industry but a fast-growing collection of affluent Charlotte suburbs.

Places that would lose money include tourist-heavy coastal counties such as Dare.

Rep. Bill Brawley, a Matthews Republican who co-chairs the House Finance Committee, says local officials would be wary about seeking new businesses.

Any time you make a significant change like this, I don’t think you can account for all the changes that would occur. This is a dramatic change in our sales tax structure.

Kevin Leonard, executive director of the N.C. Association of County Commissioners

“Every small community that hosts a Walmart that draws from the area will lose big time,” he says. “The irony is that the new tax plan will make it less economically possible for a poor county to recruit … new business, new retail. They will lose most of the benefit of the increased sales tax revenue.”

Kevin Leonard, executive director of the N.C. Association of County Commissioners, says that there could be up to 30 “loser” counties.

“Any time you make a significant change like this, I don’t think you can account for all the changes that would occur,” he says. “This is a dramatic change in our sales tax structure.”

The sales tax proposal will be negotiated with the rest of the state budget by House and Senate lawmakers.

“Sen. Brown’s aims are noble and worthwhile,” Brawley says. “But I’m shocked at the unintended consequences that we are creating … and how many counties will be hurt.”

But Lane, of the UNC Business School, says counties are being hurt now.

“Certainly a change in the distribution of sales tax is going to have winners and losers,” he says. “But the change in the economy is going to have winners and losers as well.”

What proponents say

Supporters like Republican Sen. Harry Brown of Onslow County say sharing sales tax revenues would help even the playing field for poorer, less developed counties.

Richer counties such as Mecklenburg, he says, will continue to grow and prosper regardless.

“If you don’t do something the divide will just get bigger,” he says.

What critics say

Shifting revenues would not only hurt large cities such as Charlotte and Raleigh, but mid-sized and even small communities like Conover, population about 8,200.

The change would create an incentive to grow population more than jobs.

“Every small community that hosts a Walmart that draws from the area will lose big time,” says Rep. Bill Brawley, a Republican from Matthews.

What’s next?

The tax plan is part of the Senate budget, where it will be one more item to be negotiated in coming weeks with the House.

At this point, it doesn’t appear to have a lot of House support, according to Speaker Tim Moore of Kings Mountain. And Gov. Pat McCrory has called the proposal “class warfare.”

But in the legislature, nothing is final until the session officially ends.

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