NC lawmakers move to limit local taxes, spurring opposition

jfrank@newsobserver.com ccampbell@newsobserver.comMay 20, 2014 

  • What a privilege tax cap would cost area cities

    A $100 cap on local business licenses taxes would cost local governments currently charging higher rates. Here’s an estimate at how much local cities lose:

    Cary: $303,666

    Clayton: $13,721

    Durham: $294,263

    Morrisville: $656,492

    Raleigh: $3.37 million

    Source: N.C. General Assembly Fiscal Research Division

  • How local municipalities are affected by a privilege tax cap?

     City  How much is the tax? Totalrevenues  What it pays for The impact
    DurhamThe tax varies depending on the type of business. Retail merchants are charged $50 for the first $15,000, plus 50 cents per each additional $1,000, while plumbers and electricians are charged a flat $50 fee.About $3 million a yearThe revenue supports general fund services – nearly half of which pays for public safety, such as police, fire and emergency services.The estimated revenue loss is about $295,000, according to legislative staff. If the tax is capped, city staff say they would need to reduce services or increase revenues through other means. One option is an increase in property taxes. The $3 million in privilege tax revenue equals 1.25 cents on the property tax rate.
    CaryThe tax varies. For some businesses, such as advertising, landscaping and software development, it’s a sliding scale based on gross sales or receipts. For others, such as car dealers, it is $25 per location.$1.7 millionThe money is sent to the general fund to support government services and operations.The town estimates a loss of $1.3 million to $1.4 million in revenue, though legislative staff estimates are closer to $300,000.
    RaleighThe tax ranges from a flat $2.50 for an ice cream business to a percentage of sales for big box stores such as Target and Walmart that caps at $20,000 a year. About half of Raleigh businesses pay $50 or less; 80 percent pay $500 or less.$7.9 millionThe money covers general government operations.The city estimates a loss of $3.5 million to $5 million, though legislative analysts estimate it would reduce revenues less than $3.4 million.
    SmithfieldThe town charges a flat $25 tax, except for Internet sweepstakes businesses, which pay $2,500 per location and $250 per machine. Roughly 35 percent of the total revenue comes from Internet sweepstakes businesses.$78,010The revenue goes into the general fund and pays for police, fire, parks and recreation, and other services. The town could actually make about $2,000 more, according to a legislative analysis, if it increases its tax to the $100 cap.
    ClaytonThe town charges anywhere from $2.50 to $2,500 for privilege license taxes. The rate is more than $100 for adult-oriented businesses ($200), cybergaming businesses ($2,500 and $350 per machine), fortune tellers ($200), pawn shops ($200), phrenologists ($200) and special firearms dealers ($200). About $124,372The money goes to the general fund and is not earmarked for any specific purpose.A legislative analysis estimates the loss of revenue at roughly $14,000. The town said it would have to look to other fees or taxes to recoup the loss.

    Staff reports

— A year ago, Republican lawmakers slashed taxes at the state level. Now they want to force cities to do the same at the local level.

Days into the legislative session, two contentious measures, one to cap the local taxes businesses pay cities and another to limit spending, are being fast-tracked even as the revenue implications of the major tax cuts approved in 2013 remain uncertain.

The House is pushing legislation – with a vote expected Tuesday – to cap local privilege taxes at $100, a move that would save some businesses hundreds of dollars but cost cities millions in lost revenue. It is tucked into a larger bill that fixes major problems in the state tax code.

The Senate is considering a measure, scheduled for committee debate Wednesday, to restrict county spending by limiting property tax revenues to 8 percent growth a year. That is tucked into a bill that green-lights shale gas drilling.

Republican leaders say the efforts are needed to free businesses from onerous taxes and spur job creation.

“It’s something that is definitely hurting economic development inside the cities,” said Rep. Julia Howard of Mocksville, the House Finance chairwoman who is pushing the privilege tax cap.

But local officials, who call them “nuclear option proposals,” decry the micromanaging of their finances and suggest the loss in revenue may lead to other tax or fee hikes.

Mayor Bill Bell of Durham, a Democrat, said the tax measures would have a “devastating effect” and continue a pattern of Republican leaders meddling in local affairs.

“I don’t think they understand the repercussions on local government and trying to provide the quality of life that makes your city great,” he said.

In the middle is Republican Gov. Pat McCrory, who served as Charlotte mayor for 14 years.

While at the city’s helm, McCrory expressed concern about losing privilege tax money in 2009 when Democrats wanted to repeal it, and he raised Charlotte’s rate in his 2005 budget proposal.

A McCrory spokesman said the office was “still evaluating the impact this proposal would have on local and state government.”

Local privilege

More than 300 cities and towns across North Carolina levy an annual privilege tax, generating $60 million a year statewide, legislative analysts report.

It is a significant revenue source for major cities such as Charlotte, Raleigh, Greensboro and Durham, which use the money to pay for essential government services such as police, fire and road maintenance. A legislative analysis suggested cities and towns statewide could lose between $11.4 million and $24.6 million, though critics suggest that’s a low estimate.

To further complicate matters, the General Assembly inadvertently repealed the business tax in 2013 as part of the tax overhaul measure that cut personal and corporate income taxes. The omnibus tax measure – House Bill 1050 – would reinstate it effective July 1 and help resolve murky legal issues about whether municipalities can collect the revenue for the first half of the year under the revision.

But in doing so, lawmakers want to impose the cap. Under the proposed legislation, municipal leaders could charge up to $100 for each business location, effective July 1, 2015.

In Raleigh, the privilege tax ranges from $2.50 for an ice cream business to $20,000 for big box stores such as Target and Walmart that post millions in sales. About half of Raleigh businesses pay $50 or less; 80 percent pay $500 or less, according to the city.

A number of businesses are exempt under current state law, such as attorneys, doctors, breweries and private detectives. Those exclusions would disappear under the proposed legislation.

Major changes possible

The privilege tax system brings in about $7.9 million a year for Raleigh, said Robin Rose, the city’s deputy chief financial officer. She estimates the legislation could cut those revenues by anywhere from $3.5 to $5 million. A legislative analysis put the impact at $3.37 million.

Raleigh City Councilman Russ Stephenson said the bill could force major changes in the city budget. “In order to make up that gap, we’ll have to raise taxes elsewhere or cut services,” he said.

Stephenson says the system could be improved, but “I would prefer an approach that’s not a one-size-fits-all.”

Backers of the bill have pointed to a shuttered Kroger grocery in Southeast Raleigh as a potential victim of the privilege tax. Craig Ralph, who developed the shopping center, said he asked city leaders for some tax relief a few years before Kroger closed. He wasn’t successful.

“It was only a matter of time before they left,” Ralph said, adding that Kroger was saddled with millions of dollars in property, sales and privilege taxes. He didn’t know how much the grocery chain paid in privilege taxes.

The store now sits vacant, creating a “food desert” that forces residents to travel a couple miles to the nearest grocery. Several grocery companies and a drug store have expressed interest in the site, Ralph said. “No matter who goes in there, they’re going to need some help,” he said. “Something’s got to give.”

Ambassador Cinemas owner Bill Peebles pays a $200 tax to the city for each movie screen he operates in Raleigh. With 14 screens, he said it adds up quickly.

“I’ll take anything they can give us,” he said, particularly after the 2013 tax bill raised sales tax on movie tickets.

In Cary, the town council approved a resolution pushing for a simpler privilege tax system.

The current schedule is complicated, taxing some businesses nothing and others up to $5,000 based on their gross receipts. The town collected $1.6 million from the tax last year.

But some on Cary’s Town Council are vocal proponents for the cap.

“It’s a bogus fee,” said Councilman Don Frantz, who owns and operates an auto repair shop in town.

“We’re kind of the engines of the economy. Why should we be taxed at all?” he said. “They need to fix the system.”

The town may not need to recoup the revenue elsewhere, Frantz added. “We’d just tighten our belt a little bit.”

Revenue growth cap

The legislation also repeals the county’s ability to charge a privilege tax, though it would affect just 37 of the state’s 100 counties, a collective dent estimated at $500,000.

For counties, the Senate’s move to put an 8 percent limit on property tax growth is more concerning. It is part of Republican lawmakers’ efforts to smooth the way for companies to drill for natural gas in North Carolina.

Not all Republican legislative leaders support the provision, and it may not emerge in the updated energy bill this week.

Johanna Reese, a lobbyist for the N.C. Association of County Commissioners, said it represents a new level of intrusion into local affairs for state lawmakers.

“This one is really a little different than the other things we have seen,” she said. “We have seen a number of efforts to limit more substantive type ordinances, zoning and the environment. This is the first attempt we’ve really seen to limit the ability of local government to manage their own finances.”

Staff writers Paul A. Specht, Paula Seligson, Aliana Ramos, Nash Dunn and Jim Wise contributed to this report.

Frank: 919-829-4698

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