A proposal outlined in the state Senate this week that would add sales taxes to services such as pet grooming and auto repairs drew immediate concern at The Soapy Dog in downtown Knightdale.
“It would have a big impact,” said owner Rhonda Scarboro, who has been grooming dogs for 22 years.
She worries that adding Wake County’s 6.75 percent sales tax could mean dogs visit less often for a trim and a bath, which typically runs about $45. “We can’t charge a whole lot as it is, for the time and care that it takes,” Scarboro said.
The plan, backed by Senate leader Phil Berger, would tax a variety of services that are currently exempt from charging sales tax: veterinarian visits; pet grooming; and repair, maintenance and installation on personal property such as cars.
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The taxing would begin Oct. 1 and would generate an estimated $202.9 million for the state in fiscal year 2016-2017.
It’s part of a massive Senate economic development and tax proposal that also includes personal and corporate income tax cuts – the next step in a Republican-led effort to shift more of the tax burden from income to sales taxes.
James Melcher, owner of A1 Expert Autocare in Angier, said a sales tax on services amounts to a double tax on small-business owners who already pay income taxes on what they earn from working on cars.
“You’re taxing twice on the same amount of money,” Melcher said Friday. “That would really hurt our business. That’d make people back up a long ways.”
The plan to tax services would be coupled with a sweeping change in how the state allocates sales tax revenues among counties. The current formula directs most of the money to the county where a sale occurred – an approach that favors urban counties where rural residents typically do their shopping.
Senate Majority Leader Harry Brown unveiled a plan months ago that would instead divide the revenue based on each county’s population. The proposal would offer a boost to small, rural counties, while urban counties could lose millions.
By taxing services such as auto repair and pet grooming, the state would increase sales tax collections and soften the blow of the new distribution plan in urban counties.
“That is to help balance some of those counties that may give up a little bit in the transition,” Brown said. “That’s what took so long to get this out – trying to find a balance where we can help the rural counties but still try to protect the urban counties as much as possible.”
Brown argues the current distribution system means residents of smaller counties are effectively financing their larger neighbors when they go shopping. He also wants to eliminate a decades-old “adjustment factor” that weights the formula in favor of some counties.
“Was that a fair system?” he said. “I think most would argue that it wasn’t. I think even the urban counties would tell you it’s probably not a fair system.”
Brown’s plan would still create winners and losers. Projections from the legislature’s nonpartisan staff show that 17 counties would have less sales tax revenue by 2020 than they would under the current system that year.
The change would be phased in gradually from July 2016 to June 2020. By 2020, tiny Jones County in Eastern North Carolina would see its share of sales tax income double to $2.4 million. Like many rural counties, Jones struggles to pay for school improvements and other county services.
Wake County would take in an estimated $5.5 million – or 3.4 percent – less in fiscal year 2019-2020 than it likely would under the current system, the legislative report shows.
Sales taxes make up about 11 percent of Wake’s general fund budget revenues. Depending on the size of the revenue drop, Wake County Commissioner John Burns said property tax hikes or service cuts would be possible.
“You’ve got to figure out how to make that up,” he said. “I’m confident that other voices in the legislature will defeat that sales tax reapportionment.”
The Senate bill offers counties a third option for making up any revenue losses: Raise their county-level sales tax through a ballot referendum.
If the legislation passes, counties could seek up to two quarter-cent sales tax hikes for education or transit or to boost their overall budget. Each quarter-cent increase would have to occur in separate elections. And no county could have a local sales tax higher than 2.5 percent – although Orange and Durham counties could keep their current 2.75 percent rate.
Projections released by the Senate show that only Dare County couldn’t generate enough money from sales tax hikes to make up losses from the new distribution formula. But three counties – Durham, Orange and Mecklenburg – wouldn’t be allowed to raise sales taxes because their rate is already at or above 2.5 percent.
Durham County would see an estimated revenue drop of $5.6 million, or 6.3 percent, in 2019-2020 compared with the current system.
Wake would take in an additional $78.9 million if it raises its local sales tax rate from 2 percent to 2.5 percent – more than making up for any losses, according to legislative documents.
Julie White, director of the N.C. Metropolitan Mayors Coalition, said rural counties should get assistance without taking from urban counties and pushing them to raise local taxes.
“There are better ways to help address small poor county infrastructure and economic development needs that don’t pit communities against one another through redistribution,” said White, who represents dozens of the state’s largest municipalities.
She offered an alternative: “The state can use the proposed sales tax base expansion to establish a fund to address small poor county needs.”
And Scott Mooneyham, a spokesman for the N.C. League of Municipalities, said towns and cities are concerned that county governments could keep all revenue from hiking local sales taxes – without sharing the proceeds with municipal governments, as they do under current law.
“That’s unprecedented,” he said.
Brown said that while he expects to hear criticism, he believes the Senate plan would have a minimal impact on urban counties while helping the state’s poorest counties improve schools and infrastructure.
Without a change in the distribution formula, he argues, urban counties would get the bulk of the additional revenue from the expanded sales tax.
“That’s why it’s important that you also come up with a plan to distribute the tax differently if you expand the base,” he said. “It’s working two things at one time to make it fair for all.”
But legislators can expect to hear outcry from businesses affected by the new tax. Since the proposal was part of a 46-page bill featuring everything from jobs incentives to income taxes, many business owners are only beginning to learn about the potential tax change.
Melcher, the Angier auto shop owner, was unaware of the tax plan until a reporter called him Friday.
“They should drop that proposal quick,” he said. “That’s ridiculous. I don’t think you should have sales tax on labor.”
New sales tax revenue
Here’s how much money new sales taxes would generate per year, according to legislative projections:
Installation, repair and maintenance of personal property, such as cars: $152.2 million
Veterinary services: $40.2 million
Other pet care services: $5.3 million