RALEIGH — With the N.C. Senate and the House of Representatives reportedly miles apart on a 2015-16 budget and not yet even negotiating in earnest, local government officials still have no idea whether a controversial sales tax distribution makeover in the Senate will take effect.
What they do know is this: If the proposal by Onslow County Republican Sen. Harry Brown, the majority leader, does go into effect, Carteret County will have less state-shared revenue to work with in the future and will likely have to hike property tax rates to make up the difference.
“It’s especially harmful to tourism communities like Emerald Isle and Carteret County, including every town in Carteret County,” Emerald Isle manager Frank Rush said. “Emerald Isle could lose several hundred thousand dollars (per year) in the future if this provision is ultimately approved by the General Assembly.”
For county government, manager Russell Overman pegged the loss at as much as $2 million per year, depending on other provisions in the state budget.
In Dare County – the state’s coastal tourism capital – manager Bobby Outten said the loss could be as much $9-15 million annually.
Even Cedar Point, on Carteret County’s mainland but minutes from Emerald Isle on Bogue Banks, could lose, according to administrator Chris Seaberg.
A main reason would be a change from distributing sales tax revenue based 75 percent on the point-of-sale and 25 percent based on population, to a formula of 20 percent point-of-sale and 80 percent population. The idea is to provide more money to the state’s poorer, rural counties, such as Bertie and others in the northeastern corner.
Officials in the “winner” counties are lobbying hard for the change, while those in the “loser” counties are pushing back equally as hard.
The debate has triggered a war of sorts in the press between Sen. Brown and Gov. Pat McCrory.
Gov. McCrory called the legislation the “Tax Increase, Redistribution and Spending Act.” It’s the first time this session that the governor has promised a veto before a bill passed both the House and Senate. His spokesman also said he plans to veto the entire state budget if the sales tax provision is included.
In a widely reported news release a couple of weeks ago, the governor said the bill, “will result in a tax increase for millions of hardworking middle-class families and small business owners throughout North Carolina.
“Redistribution and hidden tax increases are liberal tax-and-spend principles of the past that simply don’t work. More importantly, this bill will cripple the economic and trade centers of our state that power our economy,” he said.
According to an Associated Press story, Gov. McCrory had criticized the plan before, but issued his formal rebuke on the same day that Sen. Brown brought leaders from 40 rural counties to the legislature to lobby for the tax change.
At that event, Sen. Brown said it was wrong to view his plan as a redistribution of sales tax dollars.
“This plan finally corrects that decades-long redistribution of wealth from poor areas to urban areas,” the Senate majority leader said, according to The Associated Press. “It helps ensure all North Carolina counties benefit from tax dollars.”
“I think a lot of the attention given to this bill has been focused on the exaggerated and the extreme,” he said. “We’ve heard it called a lot of unfair names like the Robin Hood plan.”
Asked about Gov. McCrory’s opposition, Sen. Brown called on the governor to propose a different solution to the state’s urban-rural divide.
The governor said his N.C. Competes jobs incentive plan would address the problem.
“The best thing the Senate and General Assembly can do for the less populated areas across our state is to pass and allow us to implement the N.C. Competes jobs strategy which will benefit travel and tourism, agriculture, manufacturing and nearly every economic sector in our state,” he said Tuesday.
N.C. Competes passed the House months ago, but the Senate wants to tweak the incentives program to direct a higher percentage of jobs funds to rural counties.
Sen. Brown was not hesitant to criticize the governor.
“I can’t figure out if Pat thinks he is the governor of Charlotte or the mayor of North Carolina,” he said at the legislative press conference. “Today, over 100 local officials from across the state came out in support of sales tax fairness. Sadly, the governor’s tone-deaf response to their overwhelming support is doubling down on a 2007 sales tax policy change that kicked rural North Carolina in the teeth.”
Big hit for Dare
Mr. Outten, the Dare County manager, said Thursday, “no one disagrees that the rural counties need help,” but added, “this just isn’t the way to do it.
“We’re hoping they (state elected officials) figure out a way to accomplish that goal of helping the poorer counties without hurting our tourism centers,” he added. “Tourism is the second largest industry in the state, and we here in Dare have sent a lot of sales tax money to the state. It’s about $80 million over the past 10 years.”
The $9 million to $15 million Dare County might lose from its $101 million budget would equate to an additional 8 to 13 cents on the county’s tax rate, Mr. Outten said. Although the county’s tax rate might be considered low by some at 43 cents per $100 of assessed valuation, that’s only true because the valuation of that land – especially along the oceanfront – is so high, Mr. Outten said. A hike of 8 to 13 cents would hurt, just as it would anywhere else, and the county couldn’t simply absorb the hit because it has to provide services not just for its 35,000 or so year-round residents, but for 300,000 in the summer months.
“You can’t cut your way out of a loss of 15 percent of your budget,” Mr. Outten concluded.
Emerald Isle’s losses
Emerald Isle’s situation is similar, with a year-round population of less than 4,000 that swells as high as 30,000 in the summer.
Finance Director Laura Rotchford said that the town could easily lose $200,000 per year – the state’s estimate back in June – and might lose as much as $450,000 a year by the time the change is fully implemented in 2020. The disparity is in part because the town thinks the state has underestimated growth in sales tax revenue here. Covering the loss would require a tax hike of at least 1.75 cents.
In a letter to Phil Berger, President Pro Tem of the Senate, and Tim Moore, the House Speaker, Mr. Rush said:
“This is a critical issue for many local governments in North Carolina, and it’s especially unfair to Emerald Isle and other tourism communities that are always shortchanged by ‘per capita’ revenue distribution formulas. The ‘official’ population estimates used by the State don’t factor in the significant number of second homes, vacation rental units, and annual visitors that make significant contributions to the state and local economy, pay significant sales tax to the State and local governments, and that place significant demands on local services.
“Thus, Emerald Isle only receives ‘credit’ for our ‘official’ population of approximately 3,800, with no ‘credit’ for the approximately 10,000 – 40,000 people in our town at any given time during the year.”
Mr. Rush said he felt losing this money to other parts of the state would significantly harm the town’s ability to continue its services and maintain its current quality of life.
Like Mr. Outten, Mr. Rush said Emerald Isle supports the goal of helping the rural counties and towns grow and prosper, but he urged the legislative leadership “not to achieve this goal at the expense of other local communities across North Carolina, including Emerald Isle.”
Cedar Point’s view
Mr. Seaberg, the administrator in Cedar Point, said that even though his town doesn’t have tremendous numbers of tourists staying within its corporate limits, it faces a problem similar to that of Emerald Isle. In fact, many of those who stay in Emerald Isle drive through Cedar Point to get there, impacting roads.
“We might gain a little bit of revenue in the first year or two of the change, but as it is phased in, we’d lose,” he said.
The tax-and-spending plan retains the 2014-15 property tax rate of 6.25 cents per $100 of value – a penny lower than the revenue neutral rate in the wake of the most recent countywide property revaluation – and totals $588,164, which is $16,662 higher than in 2014-15.
Manager not convinced
Mr. Overman, the Carteret County manager, said the state has projected that the county could eventually gain a couple million dollars a year under the change, but he’s by no means convinced, because the things that might enable that increase are not nearly as certain as the loss of the state-shared sales tax.
For example, one thing that the state has touted, Mr. Overman said, is that the change would allow counties to increase the local portion of their sales tax up to two times, by a quarter of a penny each time. But the county tried that last year, and a referendum for a quarter-cent hike to fund waterway dredging failed.
Although there has been talk of allowing local governments to implement those two .25-cent sales tax increases by resolution instead of referendum, Mr. Overman said, there is no guarantee.
In addition, the manager believes the state is underestimating sales tax revenue growth, putting the county in the position for greater loss.
Ultimately, Mr. Overman said he and others think it’s much more realistic to project the county will lose $2 million or so a year rather than gain a like amount.
Like Mr. Outten and Mr. Rush, Mr. Overman said he hopes the state can find a way to help the poor counties. He noted that he had years of experience as a manager in that northeastern corner before coming to Carteret.
“I know what it’s like,” he said. “I was in that position for 28 of the 32 years I’ve been in this field, and if I was in their position, I’d probably be lobbying for this change, too. But deep inside, I think I’d also be thinking that this isn’t really the way to do it.”
Mr. Overman said he had read of at least one rural county manager saying he’ll use an additional burst of sales tax money to pay off school bonds and maybe even decrease the property tax rate.
Indeed, during Sen. Brown’s press event, officials in some of the rural counties cited school needs, including low teacher pay supplements in Hyde County and high use of trailers at schools in Robeson County. A Scotland County commissioner mentioned his county’s high tax rate.
But Mr. Overman said that isn’t his reading of what the change would be intended to do for those less-well-off local governments: The intent, he said, is to improve services. If the state or county wants to fund school construction, it has other options.
The state lottery, Mr. Overman said, was initially supposed to send up to 40 percent of its net proceeds for school needs. That figure could now be as high as $200 to $300 million, but the legislature has capped it at $100 million, the manager said.
“I’m not saying this is the Carteret County position on this, but we and others were supposed to have been getting some of that money all along.”
If the state wants to help the poorer counties, Mr. Overman added, why not consider removing that cap instead of taking revenue that is crucial to the urbanized and tourist-center counties.
Mr. Outten said he’s still hopeful that the formula will stay the same, or that a compromise can be reached. And Mr. Rush said he knows there is likely to be plenty of debate when Senate and House budget negotiators finally get together. The state is operating on a continuing resolution until Friday, Aug. 14, but at some point the two houses must work out their differences. He’s counting on the town and county legislative delegation.
“Rep. (Pat) McElraft (R-Carteret) and Sen. (Norm) Sanderson (R-Pamlico) have indicated their support for the town’s position, and Gov. McCrory has also indicated his intent to veto any such provision if enacted. We are thankful for their support and will continue to monitor this closely,” Mr. Rush said.
The Associated Press contributed to this report.
Contact Brad Rich at 910-326-5066 (office) and 252-864-1532 (cell); email brad@tidelandnews.com or follow on Twitter @bradccnt.
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