Senate offers compromises on sales tax, economic development

Majority Leader Sen. Harry Brown, R-Onslow, pitched the bill as a compromise measure that would help rural counties without taking too much away from larger urban centers such as Raleigh.

"We simply believe that when someone spends their hard-earned tax dollars, those dollars should provide more benefit to their own families and their own communities," Brown told the Senate Finance Committee. "The current system forces North Carolinians from 83 counties to subsidize a select few. This compromise will help all parts of the state."

House Bill 117 is largely an economic development measure sought by Gov. Pat McCrory that has been stalled in budget negotiations for most of the year. It includes sales tax breaks for commercial airlines that buy jet fuel in the state and contains funding for the state's large economic development programs.

But the sales tax provision is an outgrowth of an urban-rural tussle that has overshadowed much of the General Assembly's work during the past five years.

Under current law, there is a 2 percent local sales tax that is divided among the counties. For every dollar raised from that tax, 75 cents stays in the county where a purchase is made, with the rest distributed to counties across the state based on their population.

Brown argues that distribution is unfair, giving an unfair advantage to fast-growing counties with big shopping areas, such as Wake and Durham counties, at the expense of rural counties with small populations. The current formula also benefits areas like the beach and the mountains where tourists spend heavily.

To address that imbalance, Brown's bill would change the sales tax distribution to a 50-50 split, with half of the revenue remaining in the county of sale. He said this would return the state to where it was eight years ago before the sales tax distribution formula "for whatever reason" changed.

Although Brown played down the impact to large counties, a summary sheet showed the new formula would curtail the growth of local sales tax collections by millions of dollars in Mecklenburg and Wake counties.

"What do we do with Mecklenburg and my folks that have made commitments on infrastructure and debt predicated on revenue?" asked Sen. Jeff Tarte, R-Mecklenburg.

Large counties, Tarte said, would have little time to adjust to newly created holes in their budgets.

For example, Wake County is projected to collect $156.8 million under current law. Under the 50-50 split proposed by Brown, Wake County would collect $6 million less in 2016-17. Large cities such as Raleigh would also be affected.

"Although the sales tax redistribution plan came about from the heartfelt concern to assist regions in need in North Carolina, the unintended consequences for tourism and job centers could prove harmful and costly," said Huntersville Mayor Jill Swain, chairwoman of the Coalition of Metro Mayors. "While we are relieved that the Senate has removed the issue from current budget negotiations, the Metro Mayors Coalition remains steadfast in our stance that addressing shortfalls and challenges for small, poorer counties must take place through state revenues and with a vision for the success of our entire state."

Brown and other backers of the change said the system in place before 2007 was more fair to rural areas who are having problems building schools and paying teachers because their sales taxes don't raise enough money.

But opponents of Brown's bill pointed out that the 2007 shift was made as a part of a deal to take over Medicaid costs that had previously been borne by the counties. That shifted the costs for a fast-growing and costly system entirely to the state, saving counties millions of dollars.

"Most of the small counties did extremely well," House Finance Chairman Rep. Bill Brawley, R-Mecklenburg, said of the Medicaid swap. "They are still benefiting from that."

Brawley said that he would oppose the change to sales tax distribution and pointed out that McCrory has said that he opposes similar measures. The Governor's Office did not immediately comment on the economic development bill.

The measure is expected to be heard on the floor of the state Senate Monday night.