Auto repairs could soon become more costly under a budget provision that would add sales taxes on repair, maintenance and installation services. The new revenue from the tax would go to poorer areas of the state.
The sales tax plan is a scaled-back version of a controversial Senate proposal to change how local-option sales taxes are distributed – a revenue shift from urban to rural counties.
It’s tucked into a 429-page, $21.74 billion budget compromise rolled out late Monday night and approved by the state Senate hours later. The House will vote Thursday on the bill, which includes provisions for spending on education, transportation and some government reorganization, among other items. The budget proposal could become law Friday if Gov. Pat McCrory signs it. The governor, however, has said he opposes any budget that includes a sales tax “redistribution scheme.”
Instead of altering the formula for all local sales tax dollars, the new budget provision would create an $84.8 million fund – funded through the new sales taxes – that would be distributed through percentage formulas set for each county.
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The fund would come from adding sales tax to repairs, maintenance and installation services on vehicles, appliances and other personal property, items not traditionally subject to sales taxes. House negotiators killed an earlier Senate proposal to also tax pet care, veterinary services and advertising contracts. Legislators say taxing repairs makes sense because the businesses involved also sell parts and equipment, which are already subject to sales taxes.
About 21 urban and tourism counties, including Wake, Durham, Mecklenburg, Avery and Jackson, would get no money from the new tax. The money could only be used for schools, community colleges and economic development projects.
Senate Majority Leader Harry Brown said the new plan will still address an unfair system in which rural residents leave their counties to shop and contribute their sales tax dollars to their wealthier neighbors. The Jacksonville Republican proposed the original sales tax shift.
“While it wasn’t what I wanted in the beginning of the session, the plan in this budget will ultimately help struggling counties,” he said.
The additional revenue for 79 counties and their municipalities would vary widely, from $26,000 a year for coastal Hyde County to $3.87 million for Harnett County south of the Triangle. Harnett is the home of House Rules Chairman David Lewis, who helped negotiate the deal.
Brown said the funding will be a big boost to counties that struggle to build high quality schools and infrastructure to attract jobs. During Tuesday’s debate, he turned to Sen. Jane Smith, a Democrat who represents rural Columbus and Robeson counties.
“Sen. Smith, it’s $2 million a year in both of your counties that you didn’t have,” Brown said. “I think that can build a school.”
Smith voted against the budget Tuesday, along with every other Democrat in the Senate.
Brown said the totals mirror the new revenue counties would have received under his earlier plan. That proposal would have evenly split sales tax revenue between the county where sales occur and a population-based formula.
But Sen. Josh Stein, a Raleigh Democrat, said he hasn’t gotten a clear understanding of the budget’s revenue formula. “No one’s giving me an answer as to why some counties are winners and some counties are losers,” he said. “I don’t know what the long-term implications are of the shift. I can’t give you an opinion of how it will affect Wake County down the road.”
And while Stein and other Democrats still have concerns, some who lobbied against the earlier sales tax shift are supporting the new plan. Among them is the Metropolitan Mayors Coalition, which represents the state’s largest cities and towns.
“The Metro Mayors are encouraged that the legislature found a way to address small, poor county needs without creating unnecessary challenges in our urban and tourism economies,” coalition director Julie White said.
House Republicans who opposed the original proposal say they’ve now reached a workable compromise. “We did not want to harm urban areas,” said House Finance Chairman Jason Saine, a Lincolnton Republican. “In order to do that, we had to find a source of revenue that wasn’t from existing sales tax.”
Asked if the change still represents a revenue redistribution, Saine said, “We’re all concerned that that could be the case, and we’re going to monitor that very closely. It’s far from perfect, but it can be adjusted.”
A veto threat?
McCrory hasn’t yet spoken publicly about the new plan, but he’d earlier promised a veto.
“Just confirmed that Governor McCrory will veto the budget if it includes a sales tax redistribution provision,” spokesman Graham Wilson wrote on July 21.
McCrory strongly opposed the earlier version of Brown’s sales tax plan, which appeared in a separate Senate bill. “Redistribution and hidden tax increases are liberal tax-and-spend principles of the past that simply don’t work,” he said in a July news release.
McCrory again voiced concerns on Saturday as legislative leaders finished negotiating the budget’s tax provisions. He told The Associated Press that he’d heard they were “reopening a new tax scheme and redistribution scheme behind closed doors.” He also said he doesn’t favor adding sales taxes to services.
But as the budget rolled out on Monday, McCrory’s office issued a more muted statement, saying he “will thoroughly review the proposal to ensure it is fiscally responsible and aligns with our state’s priorities.”
With the House expected to take its final budget vote at 12:01 a.m. Friday morning, a gubernatorial veto would require an override vote within hours, or legislators would have to extend the temporary budget a fourth time. If they don’t, state government would face a shutdown starting Saturday morning.
New tax, new cuts
Republican legislators said the new sales tax on repair and maintenance services shouldn’t be considered a tax increase. They stressed that the change will be offset by about $400 million in income tax cuts.
The budget would drop the personal income tax rate from 5.75 percent to 5.499 percent in 2017. And the standard deduction would increase, meaning a married couple filing jointly wouldn’t owe income taxes on the first $15,500 in income starting next year.
Republicans have been shifting gradually away from relying on income taxes for revenue, moving instead toward more sales taxes. They argue that sales taxes are a less volatile source of revenue for the state.
“Expanding the base has always been a goal of ours in tax reform,” Saine said. “Tied into that is the cut in the personal income tax, and it’s pretty significant. When you’re still paying less, it’s a tax cut.”
But Democrats said the income tax cut would be minuscule for the state’s poorest residents – and the savings would be wiped out by a single trip to a mechanic.
“For somebody who earns less than $20,000, it’s a difference of $5,” Stein said. “It’s just not meaningful. I have a general concern with their entire tax shift, which is moving the burden off profitable corporations and placing it on the middle-class families of North Carolina.”
Wake County Commissioner John Burns, a Democrat, has mixed opinions about the new sales tax plan. He’d spoken out against Brown’s tax shift, which would have cost Wake millions of dollars in revenue.
“I think it’s better than the original plan, though I personally don’t like increasing the sales tax on things working folks need,” he said Tuesday. “The services targeted for tax expansion are telling. Car repair and appliance installation but not high-dollar services?”
Counties left out of new revenue
Alamance, Avery, Brunswick, Buncombe, Cabarrus, Carteret, Catawba, Currituck, Dare, Durham, Forsyth, Guilford, Iredell, Jackson, Macon, Mecklenburg, Moore, New Hanover, Surry, Wake, Watauga