State Senate Majority Leader Harry Brown recently proposed changing how the state distributes local sales tax collections in a way that would benefit millions of North Carolinians and nearly all of the state’s counties.
Currently, the state collects and distributes local sales taxes back to county governments. Half of the money is distributed on a per capita basis. The other half is distributed based on the point of sale, in other words, the county where the sale took place. A series of “adjustment factors” shift the per capita distribution toward a handful of select counties. Brown has proposed changing the distribution to a pure per capita basis.
Sales taxes are highly regressive. Simply put, poor people pay a higher percentage of their incomes in sales tax than wealthy people do. This regressive nature is mirrored at the county level, too. As retail becomes increasingly concentrated in wealthier metro areas, residents of poorer surrounding counties must travel to those areas to shop. These residents leave behind their local sales tax dollars to the benefit of wealthier metro counties.
Brown’s plan is based on sound research. In 2012, I co-authored an academic article in Journal of Public Budgeting, Accounting, and Financial Management examining North Carolina’s local sales tax policy. My research found that North Carolina’s current system reinforces inequality among counties. Shifting to a per capita system, as Brown proposes, would benefit poorer counties’ budgets more than it hurts wealthier counties’ budgets.
Counties that benefit under North Carolina’s current system have better bond ratings, higher median incomes and lower household and child poverty rates. Shifting to a per capita distribution would benefit counties with lower bond ratings, lower median incomes and higher household and child poverty rates.
The argument of metro governments challenging Brown’s plan boils down to
“we created the retail developments and should keep the sales tax.” Politely stated, this is hogwash! Such arguments ignore the strategic investments all taxpayers in North Carolina have made in our metro areas. North Carolina’s economic development policies have tilted toward benefiting our state’s metro areas, particularly Charlotte and the Research Triangle, over the last two decades.
While evaluating the state’s economic development programs for the General Assembly, we found that the state spent over a billion dollars in tax credits and that 50 percent of those tax credits went to businesses in the state’s top 20 economically prosperous counties. Just this year, The News & Observer reported that over 80 percent of the $300 million that Gov. Pat McCrory promised through the JDIG program would go to companies in Wake and Mecklenburg counties. Only 10 percent would go to the state’s poorest counties.
Brown’s plan represents a lifeline to nearly all of North Carolina’s counties. The plan could be staged with a gradual percentage increase in the per capita sales-tax distribution. This would ease the budget planning of the handful of counties that would see a decrease in revenue. Additionally, the plan should preserve the authority of county governments to determine how sales revenue is distributed to their municipalities. Doing so minimizes disruption and, more importantly, preserves local government control of how to distribute these new dollars.
The progressive folks marching on Raleigh should pay attention, as should state senators and House members of both parties. Brown is heroically challenging the status quo to support widely shared prosperity and balanced growth across North Carolina. It’s what we used to do in the state. He should be applauded. His bill should pass with bipartisan support. Millions of North Carolinians will be better off.
G. Jason Jolley, Ph.D., is a native North Carolinian and assistant professor of Economic Development at Ohio University. He formerly worked as senior research director at the UNC-Chapel Hill Center for Competitive Economies, where he co-led a study of the state’s incentive programs for the N.C. General Assembly.