Cities could lose revenue under tax reform

The measure is only a piece of a larger tax reform package that senators are planning to roll out later this spring. Members of the Senate Finance Committee picked through the measure Wednesday but did not hold a vote.

As laid out in Senate Bill 363, tax reform would eliminate a complicated system of state and local franchise and privilege taxes charged to businesses. In their place, the bill would put a statewide privilege tax system that applies to all businesses. Local governments, however, would not be able to levy these taxes for the privilege of doing business.

"It's a joke," Mark Prak, a lawyer with Brooks Pierce, said of the current privilege tax system. "You can't explain it to people. My liberal clients and my conservative clients dislike it equally. It's not fair. It's rife with exemptions that make no sense."

Republicans who control the House and Senate have said they will remake the state's tax system. Generally, they say, they will lower corporate and personal income tax rates, making up for some of the loss of revenue with broader sales taxes.

The issue with franchise and privilege taxes is something of a side issue in the larger discussion, but Sen. Andrew Brock, R-Davie, described it as paving the way for other pieces of the bill.

It seems to designed to entice business leaders with the promise of a simpler, and somewhat cheaper tax structure. However, it may offset a rise in other taxes, such as sales taxes. 

Andy Ellen, president of the North Carolina Retail Merchants Association, said that his members welcomed the changes in the bill. Grocery stores, he said, are currently liable for virtually unlimited local taxes based on sales in some locations. This would replace those charges with a more predictable tax structure.

But representatives of cities said they were concerned about the measure. 

"Cities have very few revenue sources in which they have control over the rates," said Karl Knapp, director of research and policy analysis for the North Carolina League of Municipalities.

The state should look to make privilege taxes more fair rather than eliminating them entirely, he said.

The city of Raleigh would lose about $7 million in revenue annually under the bill, or about 1 percent of its $672 million budget.

Roughly 300 cities and towns in the state charge some form of franchise tax, although only 20 cities collect more than $500,000 from the levy. Raleigh and Durham are two of seven cities where fiscal analysts say it makes up "a significant revenue source."

Some senators on the committee were concerned that the loss of privilege license taxes could send cities looking for revenue elsewhere.

"In the short run, is it going to force an increase in property taxes?" asked Sen. Austin Allran, R-Catawba. "That would be a bad outcome."

Cities cannot charge income taxes and are limited in what sales taxes they can raise. That leaves property taxes as a place to make up for lost revenue.

Sen. Bob Rucho, R-Mecklenburg, who has been overseeing the drafting of the broader tax reform bill, said that cities would be able to make up for the loss of privilege license taxes in other ways.

"It's all been worked out within the timing model," Rucho said, noting that the tax bill is being rolled out in pieces to let the public digest it better.

"This is really an opportunity for the business community to do some calculations," he said. "If it's not done in pieces, you kind of get lost in the fog."