To lower local taxes on businesses, state lawmakers may force cities and towns onto a $62 million fiscal cliff.
The state Senate on Wednesday voted 37-9 to give preliminary approval to a wide-ranging tax bill that includes a provision to revoke the authority of municipalities to levy privilege taxes on businesses beginning July 1, 2015.
It’s a significant step further than the version approved by House lawmakers last week. Their version capped privilege taxes at $100, but House members are expected to agree to the Senate’s changes.
The move could lead to substantial cuts to government services – layoffs, closed parks or potholed roads are possible, critics say – or to higher property taxes. The cut is particularly tough for major cities: Charlotte pulls in $18 million from privilege taxes, Raleigh $7.6 million.
“The only tool we have to make that up is to increase property taxes,” said Raleigh Mayor Nancy McFarlane. “So the bottom line is that the General Assembly is saying that businesses don’t have to pay, but people have to pay more.”
$62 million at stake
The legislation, House Bill 1050, is a sequel to the tax overhaul Republican lawmakers pushed in 2013 to cut income taxes, a move that will cut state spending by $2.4 billion over five years.
The measure also includes a provision to put a 5-cent-per-milliliter tax on the liquid used in e-cigarettes, a levy requested by Winston-Salem-based tobacco giant Reynolds American that is much lower than the 45-cent-per-pack tax on cigarettes.
In a quirk, the bill must first restore the privilege tax.
It was inadvertently eliminated in the 2013 tax law, and the legislation is needed to restore it for the current and next fiscal years.
Sen. Bill Rabon, a Southport Republican sponsoring the measure, said lawmakers would look for new revenue sources for municipalities to offset the hit to local budgets in fiscal year 2016. But he didn’t identify any specifics.
Without it, more than 300 cities and towns would lose a combined $62 million in fiscal year 2016.
“It could have a devastating impact,” said Sen. Floyd McKissick, a Durham Democrat, whose city would lose $2.5 million. “We need to provide them more than an idle promise that we will (hold them harmless) in the future because unfortunately some of those promises don’t come to fruition.”
Sen. Tommy Tucker, a Waxhaw Republican, said the year’s notice gives cities time to plan. “If there is a loss in revenue, you have another choice besides raising taxes: You could reduce your budget accordingly … and still be able to operate,” he said.
Tiered approach rejected
Republicans have argued that the privilege taxes – ranging from a few dollars to tens of thousands of dollars, depending on the type of business – hurt economic development.
Both parties agree that the taxes are levied inconsistently across the state, but they disagree about how to address the problem.
Senate Republicans shot down repeated attempts by Democrats to tweak the legislation in amendments.
Sen. Joel Ford, a Charlotte Democrat, proposed a tiered approach in which businesses with fewer than 26 employees pay a flat $100 tax, those with up to 75 employees pay $200, and larger companies pay $1,000.
“It removes this cliff that we have placed cities on after this next year,” he said.
The N.C. League of Municipalities, which represents cities and towns, supported a tiered approach that would still allow some privilege taxes.
But Republicans dismissed Ford’s amendment in a 16-32 vote, saying it required more study.
The Senate is expected to take a final vote on the legislation Thursday and then send it to the House, where Finance Chairwoman Julia Howard of Mocksville said Republicans will vote to concur.
Gov. Pat McCrory remains a wild card. The Republican relied on privilege taxes as Charlotte mayor for 14 years and fought to preserve them.
The governor’s office said Wednesday that it is still evaluating the measure’s effects on local governments.