Senate bills would rob cities of a popular business tax

aspecht@newsobserver.comMarch 30, 2013 

  • Triangle privilege license revenue from fiscal 2009-2010

    Raleigh: $7.3 million

    Durham: $2.7 million

    Cary: $1.6 million

    Morrisville: $620,000**

    Chapel Hill: $137,000

    Garner: $61,000

    Knightdale: $56,000**

    Wake Forest: $49,000

    Holly Springs: $39,000

    Fuquay-Varina: $39,000

    Zebulon: $16,000

    Rolesville: $11,000

    Apex and Wendell do not levy a privilege tax. These are the most recent available figures from the N.C. League of Municipalities.

    **Updated amounts are reflected in the story.

As part of a movement to reform North Carolina’s tax codes, a pair of Senate bills aim to eliminate two business taxes that local governments say they depend on.

Davie County Republican Sen. Andrew Brock’s SB363 and Charlotte Democratic Sen. Daniel Clodfelter’s SB394 would do away with municipal privilege license taxes and franchise taxes for utilities.

Franchise taxes are fees assessed on power, water, and sewage companies. North Carolina cities and towns would lose $75 million in franchise taxes under Brock’s bill, according to an analysis by the legislative staff.

Privilege license taxes are fees imposed on other businesses operating in cities and towns. North Carolina municipalities would lose between $60 million and $70 million if privilege taxes are repealed, according to the N.C. League of Municipalities.

Privilege taxes are especially valuable to local governments because they’re some of the state’s least regulated. Local governments can use privilege tax revenue however they wish – and tax certain businesses on any scale they wish. Some charge a flat annual fee, while others tax businesses based on their gross income.

However, privilege tax laws are considered to be some of the state’s most arcane because they’re inconsistent and complex, and because the state provides exemptions and caps on certain businesses.

For example, privilege taxes under state law are prohibited from taxing gas stations more than $12.50 a year or taxing barbershops more than $2.50 per employee. Meanwhile, nonexempt businesses such as retail stores are sometimes taxed hundreds or thousands of dollars.

“It does not take into account whether you take a profit at all,” said Andy Ellen, president of the N.C. Retail Merchants Association, which has lobbied to reform the tax. “There’s no rhyme or reason to it.”

Brock and Clodfelter consider the taxes frivolous. They point to a decision by Wilkesboro’s town government in 2012 to raise more than $60,000 in new revenue by changing its privilege tax structure.

“These taxes were originally intended to let towns know how much they needed in police and fire protection,” Clodfelter said. “In recent years, towns have used it as an unlimited revenue source based on (a company’s) income.”

Clodfelter’s bipartisan bill is an effort to overhaul tax law. It would lower personal and corporate income taxes while expanding the number of taxable services under the sales tax, which he also aims to reduce. The bill also changes the current three-tiered income tax structure to a 6 percent income tax rate.

Brock and Clodfelter say their bills would help retail businesses and the middle class. As for local governments, the senators say privilege taxes would be replaced by another form of revenue as part of a broader tax reform package. But leaders of local towns – most of whom are in the process of drafting a budget for next year – aren’t convinced.

“They don’t say how we’ll make it up, and they’re not part of one package,” said Seth Lawless, Knightdale’s town manager. “So it’s hard to know what’s going to happen.”

Knightdale, which has collected $81,000 so far this year, expects to attract a slew of new businesses after July when it opens a 70-acre park in its now-desolate downtown. Repealing local privilege taxes would pare the town’s 2 percent growth projections for the next fiscal year, Lawless said.

Morrisville, which collected about $700,000 in privilege license taxes last year, would lose about 3 percent of the town’s $24 million annual budget if either of the senators’ bills becomes law.

Clodfelter says towns are “moaning because they want an unlimited right to tax income.” But Morrisville Mayor Jackie Holcombe says that town’s privilege tax is necessary to maintaining a certain level of service.

“Regardless of where our revenue comes from ... we have to be able to fund that service,” Holcombe said.

Holcombe said a 3 percent reduction in revenue equals 2 cents on Morrisville’s property tax rate.

Karl Knapp, director of research and policy analysis for the League of Municipalities, said the freedom associated with the privilege tax allows towns to shift the tax burden from residents when municipalities are enduring tough economic times.

Regardless of the tax’s usefulness, supporters of the privilege tax see the Senate bills as an affront to their authority and judgment.

“We’re very careful about our expense line and keeping a balanced budget,” Holcombe said. “We think we know what that balance is better than the state of North Carolina does.”

Specht: 919-829-4826

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