RALEIGH — The state’s new tax plan is projected to increase revenues for North Carolina municipalities.
By expanding the current state sales tax and canceling tax holidays on retail items, the deal reached by Republican leaders boosts municipal revenues a total of $5 million this fiscal year and $16.4 million in fiscal year 2018-2019, according to an estimate by the League of Municipalities, a nonpartisan advocate for cities, towns and counties.
This year, revenues in Raleigh and Cary are expected to grow $500,000 and $170,000, respectively, while revenue increases in other Wake County towns will range from $46,000 in Apex to about $4,600 in Rolesville. In announcing the consensus plan earlier this week, Senate President Pro Tem Phil Berger encouraged local governments to leverage their newfound earnings with reductions in property taxes.
While local leaders are relieved by their reversal of fortune – previous tax overhaul proposals might have cost municipalities more than $160 million by 2018 – they’re skeptical of budgeting for long-term gains because a directive in the overhaul bill sets up more debates over popular tax streams. The bill directs the Revenue Laws Study Committee to consider eliminating the franchise tax and the privilege license tax by the end of next year’s short session.
“If they turn around and do away with privilege taxes, we’ll be right back where we started,” said Zebulon Mayor Bob Matheny. Zebulon is projected to earn $5,600 in additional revenue this year, but could lose more than $20,000 if legislators take away the town’s ability to levy a privilege license tax.
Franchise taxes are fees assessed by local governments on power, water and sewage companies. Privilege license taxes are fees local governments impose on other businesses. Last year, North Carolina municipalities collected $60 million in privilege taxes and more than $200 million in franchise taxes.
Legislators in the Senate, especially, have taken aim at those particular taxes, saying they’re unfair to businesses because they’re largely unregulated. With the exception of certain businesses such as barbershops, local governments can charge privilege taxes at any rate they wish.
“We’re pleased that (the privilege tax) is part of the discussion within the committee, and generally pleased with the package overall,” said Andy Ellen, a lobbyist with the N.C. Retail Merchants Association, who pushed to repeal the privilege taxes.
Privilege vs. sales
Sen. Bob Rucho, co-chair of the Revenue Laws Study Committee, is a critic of franchise and privilege taxes. The Charlotte Republican on Thursday said his goal is to institute flat franchise and privilege tax rates or repeal them and keep municipal budgets balanced by expanding the sales tax. But he did not commit to keeping municipal budgets whole.
“I don’t have a lot of sympathy for cities that cheat by bending the law,” Rucho said, referring to cities such as Raleigh, Durham and Charlotte that base privilege tax rates on gross receipts. He then addressed municipal leaders who “threatened” to raise property taxes as a result of previous tax overhaul proposals.
“(Municipal leaders) can’t say we would cause property tax increases by reducing their revenues, and then not reduce (property taxes) when we give them more,” Rucho said. “We gave a special windfall to these municipalities, and they should be sharing that with the taxpayers.”
He continued: “And don’t tell me they need to spend every cent they have in their city budget. I don’t believe that.”
In Raleigh, a $500,000 increase in revenues equals about a tenth of a penny on the city’s property tax rate. Mayor Nancy McFarlane said she’s waiting for city staff to evaluate the tax plan and legislators to pass a budget before “counting money we don’t have.”
She noted that the state budget could reduce funding in areas that affect Raleigh. For instance, the General Assembly cut the Capitol Police by about 50 percent in 2011. This year, the Raleigh Police Department has spent $69,000 assisting Capitol Police with arrests and security at the weekly “Moral Monday” protests. McFarlane has asked the General Assembly to reimburse Raleigh.