Proposal to cap privilege license tax could cost Raleigh $6 million

smooneyh@ncinsider.comApril 9, 2014 

— A legislative study committee has given its OK to draft legislation that would cap at $100 annually the privilege license taxes that some cities and towns apply to businesses.

The approval of the draft bill, however, doesn’t mean that members of the Revenue Laws Study Committee will be on board with the proposal when it comes before the legislature later this spring. Some committee members argued Wednesday that lawmakers should completely ban municipalities from levying a privilege tax; others said the proposal will rob cities and towns of needed revenue.

The legislation would force some larger cities that now apply a gross receipts tax to some businesses to replace that tax with a flat fee of no more than $100.

It also would allow the tax to be applied to a larger range of businesses. Right now, cities cannot apply the tax to banks, medical practices and law firms. Other types of businesses, including auto dealers and building contractors, enjoy existing caps of less than $100.

Sen. Bob Rucho, a Republican from Matthews, said the aim of the proposed legislation is to have cities and towns treat businesses the same. The change, though, would mean a revenue hit of millions of dollars for a few cities.

Legislative staff estimates that the cap would cost cities and towns, combined, about $24 million. Raleigh could lose $6 million, by one estimate, while Charlotte could lose $14 million.

“We’ll either have to reduce expenses or raise fees to compensate for the loss effective next fiscal year (July 1, 2015),” said Raleigh City Manager Ruffin Hall. Revenue from the privilege tax goes to the city’s general fund.

Some committee members said even those numbers may understate the losses, noting that the projections assume city officials can track down and apply the tax to all the businesses that currently are not taxed.

“Right now, cities are going to be suffering this lost income and are going to get nothing in return,” said Democratic Sen. Floyd McKissick of Durham. McKissick and a handful of other committee members said legislation should include a means to keep cities from losing revenue.

Paul Meyer, executive director of the N.C. League of Municipalities, said hoping that legislators find other revenue sources for cities in future tax legislation, while moving ahead with the current draft bill, was “not a safe position” for those cities. The change would not take effect until July 1, 2015.

Some members showed little sympathy for the cities. Republican Rep. Bill Brawley of Matthews said that cities had abused their taxing authority, and he even questioned whether a gross receipts-type franchise tax is legal. He argued that any “hold-harmless” provision for cities should only involve keeping them from being sued for “past bad deeds.”

Rep. Tim Moffitt, an Asheville Republican, said inconsistencies in how the tax has been applied called for a complete repeal.

The proposal would also repeal county authority to levy privilege taxes. Current law restricts counties to levying the tax on only a few types of businesses. According to legislative staff, only 37 counties now levy the tax, bringing in about $500,000 a year. Municipalities currently raise about $63 million annually from the tax.

Staff writer Meredith Clark contributed.

Scott Mooneyham writes for the NCInsider.com, a government news service owned by The News & Observer. www.ncinsider.com

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