Yesterday evening, members of the Senate Finance Committee gathered to consider a modified version of House Bill 1050 (HB 1050) which includes repealing the local privilege tax. A repeated claim by proponents of the tax repeal is that additional revenue from the local sales tax – resulting from the tax plan passed last year – will make up for the revenue lost from repealing the local privilege tax.

A closer look at a fiscal note provided by the General Assembly’s Fiscal Research Division, however, highlights that the math simply doesn’t add up to support this claim.

Fiscal Research estimates that a full repeal of the local privilege would result in nearly $63 million in less revenue for cities and counties across the state. Revenue from an expanded local sales tax is projected to bring in an about $10.9 million in additional annual local revenue and sales taxes from online sales via Amazon is expected to bring in around $2.9 million – for a total of $13.8 million in local revenue from an expanded sales tax.

Local Privilege Tax Repeal

It is clear that $13.8 million in additional local sales tax revenue is not sufficient to replace $63 million in lost revenue from the repeal of the local privilege tax. Less revenue means local governments will likely be further challenged with providing its residents with core public services and an attractive quality of life.

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.

Durham Public Schools (DPS) is expected to adopt a breakfast program at no cost to students and families, a recent Herald Sun articles reports. Under the program, all DPS students could eat breakfast at school at no cost, regardless of their family’s financial status.

In order to combat the stigma associated with receiving free or reduced breakfast, DPS plans to use a catchy slogan, “Breakfast is on us.”

By eliminating the stigma associated with the existing free and reduced meal programs offered only to students from low- and moderate-income families, students are more likely to participate in school meal programs, which can have a positive impact on their ability to succeed academically. The Herald Sun article notes that national data show that school districts that provide universal breakfast programs at no cost to students have higher test scores, fewer disciplinary problems and more focused students.

Many schools across North Carolina have the option to offer breakfast and lunch programs at no cost to students and families this upcoming school year. Nearly 300,000 students in high-poverty schools across North Carolina could potentially benefit from an initiative, known as Community Eligibility, which ensures every child in these schools receives two nutritious meals each day so that they are ready to learn all day. Read More

State policymakers return to Raleigh tomorrow challenged with addressing a budget gap of $335 million for the current fiscal year as a result of a huge forecasted revenue shortfall for the current fiscal year and a Medicaid shortfall. Next year, state policymakers face a budget gap of around $228 million, which could reach as high as $637 million based on higher costs estimated from the personal income tax changes.

In the face of underperforming revenue, today the General Assembly’s Revenue Laws Committee voted favorably to pursue changing an arcane tax policy that would FURTHER reduce annual revenue by $10 million next year, FY 2015, and by more than $23 million for FY 2016.

In pursuit of ultimately shifting to a single sales factor apportionment formula, today the Revenue Laws Committee voted to give greater weight to the sales component in determining the amount of state income taxes paid by corporations. The state’s current tax system uses a formula that considers a corporation’s property, payroll, and sales in North Carolina. The tax change would give two-thirds weight to the sales component.

This tax change would create winners and losers. Around 3,000 corporations would see their taxes decrease under the tax change while around 6,000 corporations would see their taxes increase, according to analysis by the General Assembly’s Fiscal Research Division.

Proponents of this tax change claim that doing so will improve the state’s business climate by making expansion of property and payroll in the state more attractive to businesses. Other states that have adopted an SSF formula based on this premise have not seen this happen, however, and there is no reason to believe that North Carolina will experience a different outcome.

Furthermore, reducing the amount of revenue available for public investment will make the self-imposed budget challenge resulting from the tax plan passed last year worse. And everyone will pay the price because this will require further reductions to investments in educating our children, maintaining our infrastructure and protecting the safety and well-being of North Carolina families—investments that are needed to support a strong economy.

When state policymakers convene next week for the 2014 legislative session the budget debate will likely be at center stage. The most recent consensus revenue forecast signal that boosting investment in critical public services will not be an option unless state policymakers take a new direction.

Today, the Budget & Tax Center released a report that highlights opportunities for legislators to begin bolstering investments in various areas of the state budget that help create pathways to the middle class, strengthen communities across the state, and alleviate the economic struggles of North Carolina families. These opportunities include boosting investments in education, workforce development initiatives, safe and healthy communities, and environmental protection.

The BTC report also highlights the significant challenge that legislators face if they choose to seize this opportunity to change the state’s direction and boost investments in North Carolina’s future. The tax plan enacted by policymakers last year reduces the amount of revenue for public investments in the years ahead. When policymakers return to Raleigh next week, they will have to address a budget gap of $335 million as a result of a forecasted revenue shortfall for the current fiscal year and a Medicaid shortfall.

The budget challenge continues beyond this fiscal year. Next year, state policymakers look to face a budget gap of at least $228 million according to the consensus revenue estimate. This budget gap, however, could reach as high as $637 million based on cost estimates that identify higher costs for the personal income tax changes in last year’s tax plan.

The reality is that policymakers must revisit the tax plan in order to bolster schools, health care, and other things that help strengthen North Carolina’s economy. Under the inadequate tax system created last year, every year going forward, policymakers are likely to struggle to fund these needed supports to a strong economy.