A few urban counties could lose millions of dollars in tax revenue, while about 80 counties – many rural – would gain under a bill advancing in the legislature.
The Senate voted 34-15 Wednesday night to tweak formulas used to distribute a small portion of local-option sales-tax revenue – the 2 percent to 2.25 percent charged on every sale that goes to municipal and county governments.
Most of that revenue goes to the community where the sale occurred, but a small portion is distributed using a formula called “adjustment factors” that were set in 1988.
Senate Majority Leader Harry Brown’s bill would replace the “adjustment factors” with a formula based on the N.C. Department of Commerce’s poverty categories for each county. Low-wealth counties would receive the biggest share, while wealthy urban counties would get less.
Brown argues that the current system is unfair because it increases revenue to well-off counties like Dare, Durham and Orange, while rural Columbus County gets a smaller share than it would based on population alone.
“We’re sitting here today with an adjustment factor that hurts one of the poorest counties in the state,” Brown said. “This is more of a fairness issue than anything else.”
Brown said the counties that lose revenue under the change would soon make up the difference because sales tax revenue is growing rapidly after the state expanded taxes to services like auto repairs. He noted that his county – Onslow – is among those that would lose revenue.
“Sometimes we run bills not because they help our particular county, but because it’s the right thing to do,” he said.
Rep. Floyd McKissick, a Durham Democrat, pointed out that Durham city leaders are projecting a loss of $2.2 million if the bill passes. A staffer for the legislature’s nonpartisan Fiscal Research Division said Durham’s losses could be even higher: $5.4 million.
“I hope that we could look at helping these economically distressed areas without hurting our urban areas like Durham,” McKissick said.
Sen. Tamara Barringer, a Cary Republican, said she’s heard that Wake County is projecting a $4 million loss, but Brown said his estimates show only a $90,000 loss for Wake.
“It’s very important for me to understand how it’s going to affect Wake County,” said Barringer, who was among the senators who voted against the bill. Fellow Wake County Republican Sen. John Alexander also voted no.
Brown said legislative staff will soon release revenue projections for each county and municipality under the bill, but he said preliminary data shows about 80 counties will see revenue increase. Columbus County – the biggest loser under the current system – would gain about $800,000 if the bill passes. The city of Charlotte, which is at a disadvantage under the current formula, would gain $2.5 million, according to Brown.
Republican Sen. Bill Rabon said he backs the bill even though his Brunswick County district would see a drop in revenue. “Those that are losing, like my county, will actually gain because some of the counties around it are going to get a little money, and they spend that money in Brunswick County,” he said. “This bill will pretty much help everybody, and it is the right thing to do.”
Support and opposition to the bill crossed party lines as some senators sought to vote in the financial interests of their county’s government. On the Republican side, 27 senators voted yes and seven voted no. Seven Democrats voted yes and eight voted no.
The bill now goes to the House, which has been more reluctant to change sales tax distributions.
It’s Brown’s latest effort to change how the state distributes sales tax revenue. In 2015, he proposed a much more sweeping bill that would have distributed sales taxes based on each county’s population, instead of where the sale occurs – a plan that prompted outcry from urban counties that would lose money.
A drastically scaled back version of that plan passed the legislature later that year. It directed about $85 million in new revenue from an expanded sales tax on services to be divided among 79 suburban and rural counties.