When state Sen. Harry Brown presented a plan this week to change how the state distributes sales tax revenues, few understood that language in the legislation would cause about half of North Carolina’s cities and towns to lose money.
Brown, a Jacksonville Republican, acknowledged Friday that he is among them.
Brown’s bill, which has the support of Senate Republican leadership, was introduced late Monday along with a chart showing that about 90 of the state’s 100 counties would gain revenue over a five-year span under the change. The plan would distribute sales tax revenue based on each county’s population, instead of allocating it by where goods are sold.
Brown argues the proposal would address the problem of “two North Carolinas – one that is booming and one that is busting.”
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But details of how the bill would affect municipal budgets – not just the county budgets – were not immediately provided.
Those documents were released late Thursday, and they showed dramatic revenue shifts that would leave major cities such as Raleigh and Durham with multimillion-dollar budget gaps. Smaller towns were split between seeing either big revenue gains or sharp losses.
The statistics – prepared by legislative research staffers – showed that Raleigh, for example, would lose about $21 million, or 23 percent, of its sales tax revenue by 2019. Durham would lose $16 million, or 30 percent.
The Triangle’s biggest winner would be Archer Lodge, in Johnston County, where sales tax revenues would triple.
Statewide, the biggest municipal losers would be vacation communities with plenty of valuable homes but also small year-round populations.
On Friday, Brown said those projections represent unintended consequences, and he plans to revise the bill to ensure that cities and towns see revenue changes that largely mirror that of the counties they are a part of.
“I think there will be very little, if any, impact to the cities” in the final legislation, Brown said. “This is a complicated, major bill that’s going to take a lot of work.”
Brown says two provisions in the legislation he outlined are causing the cities and towns to show predicted revenue losses.
One is a change in how sales tax revenue collected by the state is then split between county governments and their municipal governments.
Currently, some counties divide the money based on each town’s population. But others use each municipality’s property tax base to determine how the money is divvied.
Brown’s bill calls for all counties to distribute revenue based on population. That shift would harm cities with valuable commercial property, while bedroom communities would get more money.
“Raleigh and Durham seem to be by far the most significantly impacted cities in the state,” Durham City Manager Tom Bonfield said, adding that his city’s loss “would be equivalent to a 3-4 cent property tax hike.”
Durham County as a whole is already a loser under the plan, with sales tax revenue to county government forecast to drop by 9.2 percent through July 2019.
Bonfield says he’s worried the legislation would scrap the city’s existing agreement with the county, which directs 42 percent of sales tax revenues to the city budget.
Beach towns – with high-dollar second homes – would lose the majority of their revenue under the current legislation. Indian Beach in Carteret County has a year-round population of just 119 people that booms to 7,500 with summer vacationers.
By basing revenue on population, Indian Beach would be projected to lose $400,000 by 2019, leaving it with about $23,000. That’s a 95 percent loss in its sales tax revenue.
“It could have some devastating effects because it would cause us to have a substantial increase in our (property) tax rate,” Town Manager Bryan Chadwick said. “It would not make it as desirable for people if they were purchasing second homes.”
The tweaks Brown promises to make would likely mean Indian Beach instead tracks Carteret’s projected 15 percent revenue loss. “Anything’s better than what the worst-case scenario would be,” Chadwick said.
‘Never the intent’
A few towns, however, had cause to celebrate the projected numbers from the plan. Archer Lodge, a town of 4,500 people scattered through newer subdivisions near Clayton, would see sales tax revenues jump from $329,000 to $988,000 under the initial projections.
“Holy smokes,” Mayor Mike Gordon said after hearing the numbers. “That is significant. That is amazing.”
Archer Lodge would instead see a smaller boost under the change Brown says he’ll make next week. He said he intends for counties to keep the power to decide how to share the revenue with municipalities. “It makes no sense for me to get into that fight,” Brown said.
Brown also said he’ll update another part of the bill that resulted in lower projected revenues for nearly all municipalities.
The current proposal would eliminate an exemption towns received several years ago when the state took back a portion of counties’ sales tax revenues. Under the so-called Medicaid swap, the state agreed to take on Medicaid costs that had been the responsibility of county governments. In return, counties gave up part of their sales tax revenues.
But since cities and towns never had Medicaid responsibilities, a “hold harmless” provision was written to make sure they didn’t lose any sales tax revenue.
Brown’s bill effectively deleted that exemption – something he says was an oversight made as staffers rushed to meet this week’s filing deadline.
“That was never the intent,” he said, adding that mayors around the state shouldn’t put much stock in the projections released this week.
Brown said Senate leaders are working on plans to broaden the state’s sales tax base – meaning fewer purchases would be exempt from taxes. That would create additional revenue that could soften the effect of the redistribution plan in urban areas, he said.
“If we do some type of expansion, that will really help some of those cities,” Brown said. “I don’t think there’s going to be much of an effect” on municipal budgets.
Regardless of the outcome, Bonfield says the uncertainty surrounding the issue makes it hard for city managers to develop their long-term budgets. Durham generally charts revenues and spending five years into the future.
Cities must finalize the next fiscal year’s budget by the end of June, and many are already struggling to replace revenue from business privilege license fees, which the legislature eliminated last year. In Durham, that means a $3 million hole.
“We had commitments from the (House and Senate) leadership and the governor that they would work this session to come up with some alternative revenue,” Bonfield said. “We haven’t seen any indication of that whatsoever.”
Staff writer Nash Dunn and database editor David Raynor contributed to this report