NC Budget and Tax Center

Budget uses new method to shift local sales tax revenues around, to much the same effect as previous proposals

A provision in the budget will, if enacted, will change the way sales tax is distributed. The budget creates a new pot of $84.8 million to be distributed to county and municipal governments for economic development, public education, and community college purposes.

Similar Senate proposals earlier this session met a frosty reception in the House and a promise from Governor McCrory to veto any budget that included such a move. On the surface, what’s in the budget looks very different from earlier proposals, and there are important distinctions, but the cumulative impact is actually quite similar to what we have already seen.

Before getting into the details on how the new system would work, a few top-level points should be underscored:

  • It is good to discuss how we can help struggling local communities to meet the economic and educational challenges that they face: This proposal is rooted in a very real fact. Many local communities, particularly in rural North Carolina, are strapped. Regardless of what you think about the proposals floated this session, it is good to see the legislative leaders acknowledging that many local communities don’t have the resources to build a strong economy or provide a sound education.
  • This proposal won’t fix the economic problems in rural North Carolina: None of the proposals to date would generate enough revenue to meet the economic and educational challenges that many communities face. In fact, the legislature has contributed to the problem in recent years by limiting how local governments can raise funds and by cutting back on what the state passes along to the local level. The budget proposal would set aside almost $85 million for suburban and rural counties, which isn’t chump change, but still not enough to make up for years of under-investment.

The actual budget mechanism for shifting funds around is a bit complicated, and we won’t know the real effect for some time, but the cumulative impact is likely to be similar to proposals we’ve seen already:

  • New pot of local sales tax revenue created, distributed differently than current law: The budget provision would set aside a pot of money totaling $84.8 million to be distributed differently than the rest of the local sales tax revenue. Most of this new pot ($67.2 million) is projected to be raised by other changes in the budget that would start charging sales taxes on services like auto repair, having appliances installed, and other maintenance. The rest ($17.6 million) would come out of the state’s general fund. The bill specifies how much of this pot each county would receive.
  • May result in dipping into pre-existing local sales tax revenues: We can’t actually know the cumulative impact on local revenue because most of the funds are projected to come from expanding the sales tax base. However, it is fiendishly difficult to accurately project how much revenue will come from expanding what is covered by the sales tax, as many other state have found out. However, the new pot of moneys to be distributed to suburban and rural communities is set at $84.8 million regardless of how much new revenue comes in. If expanding the sales tax base does not produce the expected new revenues, the rest will come out of the existing funds.
  • Counties that stand to gain from the new system would have seen roughly the same thing from earlier Senate proposals: If you compare how much each county would gain from the budget provision, the numbers are strikingly similar to what would have occurred under proposals made earlier in the session. Earlier proposals did not include expanding the sales tax base, so it was clear that funds were being moved out of urban counties and into suburban and rural ones. The only meaningful difference is that now the state will kick $17.5 million into the pot that will flow to suburban and rural communities.

Estimated County Sales Tax Revenues to be Distributed According to the Formula Laid out in the State of North Carolina’s Budget Section 32.10(b)

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