The city is looking to replace millions of dollars that will vanish when a local tax on businesses goes away next summer. Property owners could see their tax bills increase as a result.
With next year’s budgets in their earliest stages of development, planning staff in cities and towns across North Carolina are asking how they might make up for revenue loss when they can no longer collect a “privilege license” tax, a fee on various businesses that the legislature abolished last summer.
“It was a $7 million income source, and that’s significant,” said Joyce Munro, budget director for Raleigh. “That is not a drop in the bucket for our general fund.”
The lost revenue represents about 1.4 percent of the $500 million general fund. Come July 1, the tax will disappear.
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The breadth and speed of the change, however, may leave Raleigh with some tough choices, Mayor Nancy McFarlane said.
“The message that a lot of the cities received (from legislators) was, ‘Well, your property taxes aren’t that high, so you can raise your property taxes,’ ” McFarlane said.
The capital city would have to increase property taxes about 4 percent, or 1.5 cents per $100 valuation, to make up the loss completely, according to finance staff. That’s an additional $45 on a house valued at $300,000.
City officials say it’s unclear what the final answer will be, but Raleigh will have few options besides a tax hike or reduced services, unless the legislature follows through on a promise to help.
Clash of philosophies
Critics of the business fees contend that they are inequitable among cities – Apex, for example, doesn’t charge them – and even within cities.
For some Raleigh business owners, the cost is relatively trivial: A bowling alley pays $10 per lane in Raleigh, an armored car service $15 per vehicle, a dry cleaner $50 annually.
For others, it adds up. “Electronic gaming” outfits pay up to $3,500 per machine. Businesses not listed in the hodgepodge of specific fees, such as grocers, can pay up to $20,000, based on their revenues.
“When you get into a low-margin business, it really hurts,” said Mack McLamb, president of Carlie C’s IGA, which opened a Southeast Raleigh branch last year.
The bills are “significant” for his Raleigh store, he said.
“.. But if I have a million-dollar business that sells ice cream, I pay $5.”
In fact, ice-cream-based businesses pay only $2.50 annually in Raleigh. The difference in fees is a result of a series of ordinances passed pver many years.
McFarlane said she was amenable to change, but she’s not happy that the legislature passed such broad legislation so fast.
The new law strikes at one of the ways the city maintained the infrastructure that businesses use, she said.
“I think, in Raleigh, businesses understood that they were part of a growing community, and they paid it,” she said.
Fiscal reality sets in
Philosophies aside, the law’s fiscal realities are figuring large in early budget plans.
The current budget includes $5 million from privilege tax revenue the city expected to collect during the 2015 calendar year.
“If we would have reacted and taken that $5 million out, it would have really put the budget in a fair amount of disruption,” said Perry James, chief financial officer for Raleigh.
The city had projected receiving about $7.1 million for the next fiscal year. It must balance that budget now and needs to make up for that hole.
State leaders, including Gov. Pat McCrory, have promised to look for replacement money for the cities. In some previous cases, the state has handed cities extra sales-tax dollars to make up for budget-busting changes.
Yet no specifics have materialized in advance of the legislative session in January – and if they don’t, Raleigh might have to pay for this year’s hole out of its savings.
The city has the spare change to do that, but it’s not Raleigh’s first choice.
“It has implications, in that it’s money out the door we’ll never get back,” James said.
It’s even less clear how the city will replace the lost money in the long run.
“I think a lot is dependent on the state legislature and their ability to work with us to be able to identify replacement funds,” Munro said.
In all, business fees made up almost 2 percent of the city’s general-fund revenues in recent years; in 2001, they made up just under 1 percent of the fund’s income.
Among some businesses, all this talk brings a sigh of relief.
Elizabeth Robinson, director of government relations for the N.C. Retail Merchants Association, argued that privilege taxes were never meant to be a money-maker, and that municipalities have only in recent years begun to milk them for cash.
“Our fear has always been the longer it goes without being sort of controlled, that it was only going to be a bigger and bigger problem – more and more areas were going to look it at as a revenue stream,” she said of the law dropping the tax.
“There was a sense that it stopped the bleeding.”