Senate’s sales tax bill would hurt Rowan’s cities and towns

Published 12:10 am Friday, March 27, 2015

By Josh Bergeron

A bill introduced this week in the N.C. General Assembly that intends to shift more sales tax dollars to rural areas is a a mixed bag for Rowan County and its municipalities.

The bill is a net gain for Rowan, but estimates show a loss in sales tax for every municipality in the county because of a shift in sales tax distributions that occurred in 2007.

Introduced this week, a bill in the State Senate is projected to boost Rowan County’s sales tax revenue by millions annually. The same bill would also mean thousands of dollars less annually for every Rowan municipality, according to estimates released Wednesday by the General Assembly’s Fiscal Research Division and the N.C. League of Municipalities.

The bill, called the “Sales Tax Fairness Act,” aims to boost revenue for rural counties by tying sales tax distribution to a county’s total population. Currently, the formula for tax distribution doles out a majority of proceeds to the location where the sale occurred. A smaller percentage under the current method is distributed based on population. The sales tax bill has drawn sharp criticism from state senators representing metropolitan areas, while legislators with rural districts hail the plan as a fair distribution of taxpayer dollars.

Both Sen. Andrew Brock, R-34, and Sen. Tom McInnis, R-25, support the change in tax distribution, as most counties in their districts would see an increase in sales tax revenue. McInnis is a co-sponsor of the bill and Brock, when asked, said he supports the measure in its current form because tax dollars are distributed in a fair manner.

Rowan is expected to receive $7.78 million, or 44 percent more sales tax revenue annually by the 2018-2019 fiscal year, according to the legislature’s Fiscal Research Division.

The sales tax redistribution plan was introduced this week by Senate Majority Leader Harry Brown, a Republican who represents Jones and Onlow counties.

“We’re all net winners in this plan,” Brock said. “We know our tax strategy is working and our overall tax plan is working. Along the way, we will need tweaks, and this is just one of them.”

Losing municipal money

Most municipalities in the districts represented by Brock and McInnis face a starkly different outcome than counties under the proposed legislation.

In Rowan, every municipality would lose money. Projections by the Fiscal Research Division of the General Assembly are slightly different than estimates by the N.C. League of Municipalities, but both tell the same story — a net decrease in municipal sales tax revenue.

As the largest municipality in Rowan, Salisbury would lose the greatest amount of sales tax revenue under the legislature’s bill, according to estimates. The N.C. League of Municipalities estimates the loss at about $230,000 and the legislature’s fiscal research division projects the loss at $248,000.  The league’s estimates show a 3.8 percent reduction in each Rowan municipality’s sales tax revenue. The actual dollar amounts decrease in proportion with each city’s population. Fiscal Research Division estimates show a similar decrease.

The N.C. League of Municipalities attributes the loss of sales tax revenue for cities across the state to a “city hold harmless payment.” In 2007, a half-cent sales tax was stripped from counties when state government took on responsibility for paying medicaid costs — previously it was the county’s responsibility. The state allowed cities to keep receiving the half-cent tax because municipalities were never required to pay the cost of medicaid.

The league, in an email to its members, also expressed opposition to the fact that the bill would change the way local sales tax is controlled. The league, in its emailed statement, said the bill would put city sales tax distribution under state control and subject to the annual appropriations process. The North Carolina Association of County Commissioners, a lobbying group for county governments, has similar hesitations about the bill.

At its core, the bill would allow the state to control the sales tax rate, meaning that county officials wouldn’t be able to control whether sales taxes increase or decrease. If a sales tax decrease results in a budget shortfall for county governments, one alternative to balance revenues and expenditures would be increasing property tax.

Leaking retail dollars

The bill is intended to fix a problem commonly known as “retail leakage,” Brock said.

“In Rowan, Davie and Iredell, we do our shopping in more urban areas,” Brock said. “In Davie we go to Winston-Salem, some go to Statesville. In Rowan County and Salisbury, people go to Concord Mills.”

However, county officials say the bill would essentially result in a cap on sales tax revenue for Rowan, especially as commissioners look to boost the economy.

Although millions of dollars each year are spent in surrounding metropolitan counties, Rowan is in a “sweet spot,” said County Manager Aaron Church. He cited the development of a retail complex on Julian Road that will include Dick’s Sporting Goods as an example of a development that would boost the amount of shopping conducted locally. The burgeoning shopping complex on Julian Road and one located a half mile away have the potential to draw in locals and residents from outside of Rowan to shop locally.

“The legislation is good, and it could help us now, but in five or 10 years it may be a wash,” Church said. “Rowan County may have grown so much that we would have been getting that amount anyway.”

Rowan County commissioners Chairman Greg Edds said an increase in retail stores may not necessarily result in a larger population base in Rowan. Because sales tax would be tied to population, a stagnant base and growing retail economy could mean Rowan is generating more sales tax revenue for the state than it received.

Church said Rowan County’s future is bright with a potential for retail growth.

“In my opinion, Rowan is set on a growth path because of its geographic location,” he said. “Some counties don’t have that potential for growth.”

Budgetary impact

Rowan County government’s sales tax revenue is expected to jump tremendously.

Initial projections showed Rowan County and its municipalities receiving a larger percentage of sales tax revenue than the latest estimates from the N.C. League of Municipalities and the Fiscal Research Division. The initial estimates included an annual 3.5 percent increase in sales tax revenue.

“It’s like we’re out of the recession getting ready to boom into outer space,” Church said about the initial estimates. “They’re projecting that economy is going to take flight.”

The initial estimates, provided by Brown’s office, showed Rowan’s economy jumping 57 percent by the 2018-2019 fiscal year. Rowan’s sales tax revenue would jump from about $17 million to nearly $27 million. The estimates also projected Rowan County could drop its property tax rate by eight cents.

With that large of a boost, Church said a property tax rate drop at a lower total number is possible.

“I think the most likely scenario is, if the county continues to grow with big box retail stores, then in five years we’ll be even (with the projections),” Church said.

The sales tax bill still has a lengthy path to becoming law. So far, it’s only been referred to the senate’s committee on finance. Brock said significant changes could occur during in committee. The N.C. House of Representatives would also have to pass a bill.

Contact reporter Josh Bergeron at 704-797-4246