NC Budget and Tax Center

Tax law change further reduces revenue for investment in local communities

The Senate Finance Committee is scheduled to convene at 7 PM tonight to consider a modified version of House Bill 1050 (HB 1050), which includes a provision that would restrict the ability of local governments to manage their budgets and public investments in their respective communities.

One provision, among many, within HB 1050 would repeal the local privilege tax beginning next year. State law currently permits local governing authorities to levy a local privilege tax on various businesses that engage in significant economic activities in their respective locales. Repeal of the local privilege tax would result in nearly $63 million in less revenue for public investments in cities and counties across the state.

State policymakers point to the tax plan passed last year as a way to offset the lost local revenue from repealing the local privilege tax. Particularly, proponents expect the expansion of the sales tax base to some services to generate additional revenue.

The proposed repeal of the local privilege tax means businesses would get a tax cut that will be paid for largely by middle- and low-income North Carolinians who pay more of their income in sales tax than higher income taxpayers. And if the local sales tax fails to generate sufficient revenue to make up for lost revenue from repealing the local privilege tax, local governments will either have to find revenue in other places (e.g. increase local property tax rate), reduce the level of services provided to residents, or a combination of both.

Cities and counties, like the state, faced tough budget decisions during the economic downturn and recovery. They are relying on revenues to catch up and keep up with the needs of their residents. This bill puts that progress at risk.

Changes to the local privilege tax could have been made in a way that held local governments harmless, as was done in tax modernization proposals back in 2009 and earlier; however, policymakers chose this path. Under this tax change, local governments could become further challenged with providing its residents with core public services and an attractive quality of life.

4 Comments

  1. LayintheSmakDown

    May 27, 2014 at 6:14 pm

    Not sure why the hysteria, the localities will just make it up with their own tax increases….which should go over well here since you have never met a tax increase you did not support. And the good news is it will be done at the local level where the local commissioners are most accountable to their neighbors.

  2. ncsense

    May 27, 2014 at 6:57 pm

    Well, Layinthesmakdown tell us why local accountability works for other tax decisions, but not privilege license taxes. (And of course the other part of the legislative one-two punch is the Senate proposal to also limit property tax increases. Maybe the Honourables should tell us how they propose to fund city streets, water systems, sewer systems, bus service, local parks, stormwater drainage and other basic local infrastructure. Or maybe they think N.C. can attract companies and jobs without all that silly stuff.

  3. Alan

    May 28, 2014 at 7:27 am

    Yet more reflexive response in support of the state GOP. Is there ANYTHING they are doing that you don’t agree with, anything?

    The hypocrisy is laughable. “And the good news is it will be done at the local level where the local commissioners are most accountable to their neighbors”. Does that same love of local control extend to include, for example, Asheville water?

  4. LayintheSmakDown

    May 28, 2014 at 6:03 pm

    Well, if it is a state authorized tax similar to the sales tax then that is how it is different. Remember the democrat party set up all these complex laws with varying authority. The good thing is the locality will be able to make their decision and the business climate will be enhanced…thus increasing their sales tax revenue, so it is potentially and unfortunately a win all around for government.