by The Insider, March 30, 2015.
When Sen. Harry Brown presented a plan last week to change how the state distributes sales tax revenue, few understood that language in the legislation would cause about half of North Carolina’s cities and towns to lose money. Brown, a Jacksonville Republican, acknowledged Friday that he is among them. Brown’s bill, which has the support of Senate Republican leadership, was introduced late March 23 along with a chart showing that about 90 of the state’s 100 counties would gain revenue over a five-year span under the change. The plan would distribute sales tax revenue based on each county’s population, instead of allocating it by where goods are sold. Brown argues the proposal would address the problem of “two North Carolinas — one that is booming and one that is busting.” But details of how the bill would affect municipal budgets, not just the county budgets, were not immediately provided.
Those documents were released late Thursday, and they showed dramatic revenue shifts that would leave major cities such as Raleigh and Durham with multimillion-dollar budget gaps. Smaller towns were split between big revenue gains or sharp losses. The statistics prepared by legislative research staffers showed that Raleigh would lose about $21 million, or 23 percent, of its sales tax revenue by 2019. Durham would lose $16 million, or 30 percent. The Triangle’s biggest winner would be Archer Lodge, in Johnston County, where sales tax revenue would triple. Statewide, the biggest municipal losers would be vacation communities with plenty of valuable homes but small year-round populations.
On Friday, Brown said those projections represent unintended consequences, and he plans to revise the bill to ensure that cities and towns see revenue changes that largely mirror that of the counties they are a part of. “I think there will be very little, if any, impact to the cities” in the final legislation, Brown said. “This is a complicated, major bill that’s going to take a lot of work.” Brown says two provisions are causing the cities and towns to show predicted revenue losses. One is a change in how sales tax revenue collected by the state is split between county governments and their municipal governments. Currently, some counties divide the money based on each town’s population. But others use each municipality’s property tax base to determine how the money is divvied. Brown’s bill calls for all counties to distribute revenue based on population. That shift would harm cities with valuable commercial property, while bedroom communities would get more money. “Raleigh and Durham seem to be by far the most significantly impacted cities in the state,” Durham City Manager Tom Bonfield said, adding that his city’s loss “would be equivalent to a 3-4 cent property tax hike.”
Beach towns with high-dollar second homes would lose the majority of their revenue under the current legislation. Indian Beach in Carteret County has a year-round population of 119 that booms to 7,500 with summer vacationers. By basing revenue on population, Indian Beach would be projected to lose $400,000 by 2019, leaving it with about $23,000. That’s a 95 percent loss in its sales tax revenue. “It could have some devastating effects because it would cause us to have a substantial increase in our (property) tax rate,” Town Manager Bryan Chadwick said. “It would not make it as desirable for people if they were purchasing second homes.” The tweaks Brown promises would likely mean Indian Beach tracks Carteret’s projected 15 percent revenue loss. “Anything’s better than what the worst-case scenario would be,” Chadwick said.
A few towns, however, had cause to celebrate the projected numbers from the plan. Archer Lodge, a town of 4,500, would see sales tax revenue jump from $329,000 to $988,000 under the initial projections. “Holy smokes,” Mayor Mike Gordon said after hearing the numbers. “That is significant. That is amazing.” Archer Lodge would see a smaller boost under the change Brown says he’ll make this week. He said he intends for counties to keep the power to decide how to share the revenue with municipalities. “It makes no sense for me to get into that fight,” Brown said.
Brown also said he’ll change another part of the bill that resulted in lower projected revenue for nearly all municipalities. The current proposal would eliminate an exemption towns received several years ago when the state took back a portion of counties’ sales tax revenue. Under the so-called Medicaid swap, the state agreed to take on Medicaid costs that had been the responsibility of county governments. In return, counties gave up part of their sales tax revenue. But since cities and towns never had Medicaid responsibilities, a “hold harmless” provision was written to make sure they didn’t lose sales tax revenue. Brown’s bill effectively deleted that exemption, something he says was an oversight made as staffers rushed to meet the filing deadline. “That was never the intent,” he said, adding that mayors around the state shouldn’t put much stock in the projections released last week.
Brown said Senate leaders are working on plans to broaden the state’s sales tax base, meaning fewer purchases would be exempt from taxes. That would create additional revenue that could soften the effect of the redistribution plan in urban areas, he said. “If we do some type of expansion, that will really help some of those cities,” Brown said. “I don’t think there’s going to be much of an effect” on municipal budgets.
Regardless of the outcome, Bonfield says the uncertainty surrounding the issue makes it hard for city managers to develop long-term budgets. Durham generally charts revenue and spending five years into the future. Cities must finalize the next fiscal year’s budget by the end of June, and many are struggling to replace revenue from business privilege license fees, which the legislature eliminated last year. In Durham, that means a $3 million hole. “We had commitments from the (House and Senate) leadership and the governor that they would work this session to come up with some alternative revenue,” Bonfield said. “We haven’t seen any indication of that whatsoever.”(Colin Campbell, THE NEWS & OBSERVER, 3/28/15).