Local leaders may feel sting in tax reform

aspecht@newsobserver.comJune 16, 2013 

Rick Hardin, Zebulon town manager, looks on as Sen. Chad Barefoot explains the Senate's proposed budget plan in his office on May 21.

PAUL A. SPECHT - ASPECHT@NEWSOBSERVER.COM Buy Photo

  • Local losses

    Here’s how Sen. Phil Berger’s tax plan would affect local governments in fiscal year 2018-2019, when it would be fully implemented. The table shows the loss or gain in revenues, the property tax rate increase required to offset the loss, and the percentage the property tax rate increase amounts to when compared to current local rates.

    City Loss/gain in revenue Property tax rate increase* Percentage of tax rate increase
    Apex$723,9001.43 cents4.2 percent increase
    Cary$4.1 million1.79 cents5.4 percent increase
    Chapel Hill$1.1 million1.39 cents2.8 percent increase
    Clayton$515,8003.26 cents6.2 percent increase
    Durham$8.6 millionno increase
    Fuquay-Varina$331,0001.33 cents3.5 percent increase
    Garner$296,7000.77 cents1.6 percent increase
    Holly Springs$753,7002.18 cents5.3 percent increase
    Knightdale$177,8001.18 cents2.9 percent increase
    Morrisville$1.13 million3.23 cents8.8 percent increase
    Raleigh$19.5 million3.74 cents10 percent increase
    Rolesville$44,0000.72 cents1.6 percent increase
    Smithfield$448,9004.24 cents7.4 percent increase
    Wake Forest$603,0001.41 cents2.8 percent increase
    Wendell$108,4002.12 cents4.3 percent increase
    Zebulon$125,6001.40 cents2.8 percent increase

    *per $100 of property value

    Source: The N.C. League of Municipalities

Municipal leaders say the tax overhaul tentatively approved in the Senate last week would cut so much local government revenue that, to balance their budgets, they’d ultimately have to raise property taxes.

Senate President Pro Tem Phil Berger, who is sponsoring the plan, touts it as a break for most taxpayers because it flattens the income tax rate, repeals the estate tax, and eliminates the 2 percent local food sales tax, among other changes.

But, by repealing the food sales tax, the local privilege license tax and a sales tax reimbursement to local governments, Berger’s plan cuts more than $150 million in annual revenue from local government when fully implemented in 2018, according to the N.C. League of Municipalities, a nonpartisan advocate for cities, towns and counties.

Those losses “were not offset by other tax changes that keep municipalities (financially) whole,” Paul Meyer, the league’s director of government affairs, said Saturday.

Berger’s hometown of Eden, for instance, would need to raise property tax rates 6.91 cents per $100 of property value – an 11.3 percent increase – to compensate for $650,000 in revenue it’s estimated to lose in fiscal year 2018-2019.

Raleigh, meanwhile, would need to raise property tax rates 3.74 cents – a 10 percent increase – to compensate for $19.5 million in revenue it’s estimated to lose in fiscal year 2018-2019. Raleigh Mayor Nancy McFarlane disputes the notion that local government can become leaner while still providing the level of service residents expect.

“It’s so easy to say you can just cut, but there comes a time when cities start to deteriorate,” McFarlane said. “Raleigh has a triple-A bond rating. I think we have the second-lowest costs in the entire state for services. We’re already incredibly lean and that’s why we’re successful.”

Amy Auth, Berger’s deputy chief of staff, suggested local government can turn to other revenue streams to support local services: “For example impact fees, water fees and other local taxes,” she said Friday.

Auth also pointed out that Berger’s plan allows counties to reinstate the 2 percent food sales tax in 2015.

“We heard folks loud and clear: the vast majority of North Carolinians believe the state should not tax food,” Auth said. “But if local governments think it is appropriate to tax food in order to maintain that revenue, they have the option to reinstate a tax. The legislature should not collect a food tax if local governments receive the revenue.”

Unlike the tax reform bill passed by the House, Berger’s tax reform plan revives a debate over privilege taxes, which some in the Senate have sought to repeal since 2009.

A privilege tax is an annual fee municipalities levy on businesses for operating within their jurisdiction. Repealing it would cost N.C. municipalities about $70 million, the League of Municipalities says.

Local leaders value privilege taxes because they’re some of the state’s least regulated. But opponents say the tax’s malleability makes it easier for local governments to abuse.

“We believe the high privilege taxes being levied by some local governments are archaic and unfair,” Auth said. “They are a disincentive for businesses to move to and create jobs in North Carolina.”

Although national conservatives like Grover Norquist, president of Americans for Tax Reform, praised Berger’s plan for providing relief to North Carolinians, leaders of struggling towns like Zebulon can’t promise cheaper living.

Zebulon, still reeling from the effects of the recession, is already planning a 1.25-cent property tax increase to balance the fiscal year 2013-14 budget. The increase will bring the town’s tax rate to 52.5 cents per $100 of property value – the highest in Wake County.

Berger’s plan, when fully implemented in 2018, strips Zebulon of $125,600 in revenue, according to the League of Municipalities. That’s equal to a 1.4-cent tax increase.

To prevent further tax increases, the town plans to freeze four vacant positions between the Zebulon Public Works and police departments. The town also postponed the purchase of three police cars, finance software, street paving, a data server, and a drainage project at Zebulon Elementary.

Zebulon Mayor Bob Matheny said he was insulted by the lack of concern for municipalities. It wasn’t even a month ago that Matheny and Rick Hardin, Zebulon’s town manager, drove down U.S. 264 to Jones Street, where they lobbied legislators to keep revenues balanced.

“I think (the tax plan) is brutal to municipal government and illustrates that the legislature apparently doesn’t care about municipal government,” Matheny said. “And when I say that, I mean the citizens that live within a municipal government’s corporate limits.”

Specht: 919-829-4826

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