Local elected leaders are supporting legislation that would allow cities and towns to levy a sales tax – a change that some say would help restore revenue lost by new state laws.
House Bill 900 would allow cities and towns in North Carolina to ask voters for permission to collect an extra quarter-cent in sales tax. Money collected could only be used for infrastructure and economic development projects.
For some Triangle leaders, the bill is seen as a chance to bring in extra money for things like roads and business recruitment. It could also give local government more autonomy. Currently, only the state and counties can levy sales tax.
“Quite frankly, some of the bills that have passed and that have yet to be passed do tend to be perceived as limiting resources for our towns,” Holly Springs Mayor Dick Sears said. “As these kinds of bills accumulate, the towns are going to be in a position to say, ‘Look, either we maintain our revenue streams or we have to raise (property) taxes.’ We don’t want to raise taxes, but we may have to.”
In 2015, the General Assembly stripped municipalities of their ability to charge businesses privilege license fees. Lawmakers said the fees varied too widely from town to town and from business to business. Raleigh lost $7.1 million in annual revenue as a result; Durham lost $2.9 million.
A new state tax on repair and installation services, approved in 2015, is distributed across rural counties and then given to towns. But the state’s biggest counties, including Wake, “end up getting zero money back,” said Whitney Afonso, a professor in the UNC School of Government.
The legislature has made other changes since 2010 that scaled back municipalities’ authority. Laws have limited zoning and annexation practices, made more local elections partisan and limited municipalities’ ability to pass nondiscrimination ordinances.
While there is clearly support for a new local sales tax to provide a more consistent revenue stream, some say it could have negative effects.
Regardless of your income, we all pay the same amount of sales tax ...
Chris McLaughlin, an associate professor at the UNC School of Government
Businesses often worry new sales tax will drive shoppers away, said Chris McLaughlin, an associate professor at the UNC School of Government.
“There’s also concern in that sales taxes are somewhat regressive,” McLaughlin said. “Regardless of your income, we all pay the same amount of sales tax and arguably you’re paying a higher percentage if you’re a low-income person, because a purchase might be a higher percentage of your income.”
An analysis by the North Carolina League of Municipalities of four Wake County towns – Raleigh, Apex, Wake Forest and Knightdale – suggests the annual revenue from a quarter-cent sales tax would be equivalent to a 3 cent property tax increase for residents.
A bill nearly identical to HB 900 was proposed in 2015 as a replacement for privilege license fees, though it didn’t require a ballot referendum as HB 900 would. Analyses that year showed that Raleigh would get about $20 million annually from a quarter-cent sales tax, and Durham would get $10 million.
HB 900 received a favorable recommendation from the House Finance Committee last Wednesday, making it further into the legislative process than the 2015 bill. But it’s unclear whether HB 900 will become law.
North Carolina counties can hold sales tax referendums, as Wake County did last fall when voters approved a half-cent sales tax hike to fund an increase in bus and train service. Currently, the sales tax rate in Wake County is 7.5 cents.
Municipal advocates say too little of the money generated by sales tax goes to towns and cities, where the bulk of the tax is paid at retail stores. Groups like the North Carolina League of Municipalities have made expanding their members’ financial flexibility a top legislative priority over the last two years.
“That’s what we’ve been getting less and less of from the General Assembly,” Cary Mayor Harold Weinbrecht said. “So it’s refreshing to hear they’re trying to help us out.”
Scott Mooneyham, a spokesman for the League of Municipalities, said a wave of local economic development and revitalization efforts might have convinced legislators that new sales tax revenue would be money well spent.
“I don’t think you can overemphasize the momentum some towns have in trying to reinvent their economies,” he said. “I’m sure legislators see that, and they want to help.”
New money, new risks
Municipalities are being asked to take on more and more responsibilities, and yet a lot of those responsibilities don’t come with funds from the state.
Cary City Council member Jennifer Robinson
New revenue streams can be especially important for struggling towns. HB 900’s primary sponsor is from Burlington, where property values and populations have suffered from factory closures and recession, Mooneyham said.
Cary City Council member Jennifer Robinson, who attended the House committee hearing last week, said it’s unclear whether Cary would want to implement a sales tax, but she would appreciate having the option. Cary has seen major growth over the years.
“Municipalities are being asked to take on more and more responsibilities, and yet a lot of those responsibilities don’t come with funds from the state,” Robinson said. “All of us are running on really lean budgets for our community and trying to do what we can with the limited resources we have.”
Governments are more likely to implement a sales tax when it’s less convenient for shoppers to cross local boundaries for a lower rate nearby, according to research from the UNC School of Government. In suburban Wake County, where many towns flow seamlessly into one another, it would be easy for many shoppers to cross into another tax district.
“What we don’t want to do is put Morrisville at an economic disadvantage by being the only town around with a sales tax,” said Mark Stohlman, the town’s mayor. “Even when Mecklenburg (County) had those different sales tax rates in the past, you had people who stop going to that area because they don’t want to pay the extra tax. It all depends on what tools we’re given by the General Assembly at the end of the day.”
Gargan: 919-829-4807; @hgargan