Raleigh, N.C. — Raleigh Mayor Nancy McFarlane was paying close attention Thursday when Gov. Pat McCrory was talking about holding lawmakers' feet to the fire on the privilege license tax.
If no changes are made to state law, the tax cities charge to businesses that set up shop within their boundaries expires next summer, knocking holes in local budgets around the state.
"It's a huge deal," McFarlane said after McCrory finished speaking.
Raleigh figures that the privilege tax brings in $7.5 million. That doesn't sound like a lot in terms of the city's $754 million budget, but $7.5 million is more than the city spends on grants to arts, human services and economic development groups combined.
Pretty much every city leader sitting in the room during the North Carolina League of Municipalities legislative goal-setting conference could tell a similar story, which explains why McCrory got a round of applause for noting that lawmakers had promised to help local governments replace the lost revenue.
"We're interested in figuring out how to make up that revenue and how to give you more options at the city and county level," McCrory said, adding that Finance Committee chairmen in the House and Senate had pledged to work with the cities to find a replacement for the privilege tax money.
"We're hoping the state comes back and makes good on that pledge," McFarlane said.
And quick. Cities have to finish work on their budgets by June 30, which means they begin figuring out how much money they will have to work with in February or March.
"I'm assuming that most municipalities are going to do their budgets assuming that money is lost," McFarlane said.
It certainly seems unlikely to return as a privilege tax.
"I see it as a completely irrational tax because it has nothing to do with ability to pay or benefits received," Rep. Paul "Skip" Stam, the House speaker pro tem, told the same gathering. "I'm hopeful we can replace the revenue without renewing the privilege tax."
Stam, R-Wake, didn't say what might replace it, although various ideas have been floated.
"I don't think we'll see a reinvention of the privilege tax," said Paul Meyer, executive director of the League of Municipalities.
McCrory noted that during his speech that when he signed a recent tax bill dealing with privilege licenses got a promise from Rep. Julia Howard, R-Davie, and Sen. Bill Rabon, R-Brunswick, two of the senior finance chairmen in the legislature, to work on the issue.
"We've talked about it," Howard said Friday. "There are several things that we're looking at."
None of the proposals, she said, are quite ready for a public unveiling because details are being worked out. However, one possibility, she said, would be an effort to plug loopholes in sales and occupancy tax collections that exists when travelers book hotel rooms via online travel sites. She also noted that Senate leaders have talked about expanding the sales tax base to include services. That idea was debated fiercely during the 2013 tax reform discussions but did not make the final bill. If it did come back, not only would it allow the state to drop income tax rates, but would boost local collections.
But those are only potential changes, she said, and it's far from clear what direction the legislature may go.
"We're just not ready to bring anything out," Howard said.
And, of course, city privilege license tax is far from the only finance issue on state leaders' plates next year. Revenue officials report collections running about $190 million behind forecasts and a host of pent-up needs put off during the great recession.
"I do need to let you know that we're all looking for new revenue," McCrory said, adding that he was looking at the state's cash flow in advance of next year's budget. "I'm going to be coming out with some major proposals in December and in January ... My cabinet team is looking at transportation funding for the future, looking at health and human services funding for the future."