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Momentum
begins building for
NCCBI’s proposal to raise sales tax
as best way to solve budget problems
Reaction
has been mostly positive to NCCBI’s call last week for a
penny increase in the sales tax, with most leaders saying such
a move is necessary to preserve the financial health of both
state and local governments. The consensus view of those we
talked to is that, having cut state spending to the bone, the
legislature needs a revenue lifeline to begin rebuilding North
Carolina’s financial health. Many officials said they’re worried that the continued bad news about the state’s
budget woes may prompt Moody’s and Standard and Poors to
lower our treasured Triple A credit rating.
NCCBI’s initiative received prominent coverage in the major
daily newspapers and TV stations, most notably a Wednesday
story in the Raleigh News & Observer in which Gov. Mike
Easley indirectly endorsed the proposal. But the strongest
endorsements came from the cities and counties, which would
get a half-cent of the sales tax increase in return for
forfeiting continued reimbursements from the state for past
repealed taxes.
“I
believe that the vote of support from the NCCBI Executive
Committee exhibited real leadership toward resolving a very
difficult state financial situation,” Ellis Hankins,
executive director of the N.C. League of Municipalities, told
us. “At the same time it also helps resolve a related local
government financial problem,” he added.
Hankins said the cities will accept a condition attached to
NCCBI’s that they give up reimbursements from the state for
repealed inventory and intangibles taxes. The state for the
past few years has reimbursed local governments about $330
million annually for those repealed taxes, but the timing and
uncertain amount of the payments has made budgeting harder and
more uncertain for them. Local governments would apparently
come out around $60 million to the good in trading the new
half-penny sales tax for the state reimbursement, assuming
that the one-cent increase would generate about $790 million.
”Our membership has been discussing giving up the
reimbursement for months. Local governments, cities and
counties, need to have a secure, stable source of revenue
without the annual argument over the reimbursement money,”
Hankins said.
Ron Aycock,
executive director of the N.C. Association of County
Commissioners, echoed Hankins’ praise. “We’re pleased
NCCBI had the foresight to suggest a solution to both the
state and the counties’ budget dilemmas,” Aycock told us.
“We have had positive responses from the leadership of both
chambers (of the legislature to the NCCBI proposal) and
obviously the governor’s comments this week are positive.”
Aycock was referring to an
interview with the governor published by the N&O in which
he made his strongest comment yet in favor of helping local
governments raise additional revenue. “It is impossible for
local governments to budget unless they have reliable and
predictable sources of revenue,” Gov. Easley said. If the
governor could count on the extra sales tax revenue next year,
he would feel more confident about releasing the $95 million
in local government reimbursements he impounded in February at
the height of the budget crisis.
Given the encouraging signals from legislative leaders and the
governor, Aycock said he believes there is “a very good
chance” the NCCBI proposal will be adopted by the
legislature.
Something needs to be done to take the pressure off property
taxes to raise revenue for local governments, both Hankins and
Aycock said. ”More counties raised property taxes this year
than ever before,” Aycock said. Counties absorbed higher
costs for Medicaid and public schools – their two biggest
expense items – at a time when the slowing economy was
pinching revenues. “We must prepare for the future -- just
as NCCBI suggested in their letter,” Aycock concluded.
NCCBI waited patiently and approvingly as the General Assembly
spent the past few months analyzing every corner of state
government and made many difficult choices to cut spending as
much as possible. But the state’s financial reserves are
practically empty at the start of this new fiscal year;
another hurricane or court-ordered tax refund could send North
Carolina into a financial tailspin.
"With the slowdown in the state's economy and projections
that we will not experience the growth in revenues that we
have enjoyed during the past several years, we have concerns
that funds for the state's Rainy Day Fund and repairs and
renovations are not adequate," NCCBI said in the letter,
which was signed by President Phil Kirk and Vice President of
Governmental Affairs Leslie Bevacqua.
Concerns mounted further Thursday when lawmakers learned they
may have to lower their revenue projections in response to the
slowing economy and rising job loses. Many are looking long
and hard at figures showing most other southeastern states are
predicting 4.5 percent growth rates while North Carolina is
assuming 5.4 percent, on which both the House and Senate
budgets are roughly based. If they’re right and we’re
wrong, North Carolina potentially could be looking at another
$140 million in spending cuts or tax increases. In light of
that, Senate leader Marc Basnight said something must be done
and he sees a sales tax increase as the most politically
viable option.
NCCBI did not recommend any increase in the state's corporate
income tax because North Carolina's rate already is higher
than the surrounding states of South Carolina, Virginia,
Georgia and Tennessee. "Because corporate tax revenues
are down by 30 percent and because of high unemployment, now
is not the time to add to the financial burdens which so many
of our employers face today," the letter from Kirk and
Bevacqua says.
NCCBI realizes that many legislators, mostly House
Republicans, signed a pledge last fall not to increase taxes.
Republicans made clear before the House adopted its budget
that they wanted no tax increases included in the proposal.
But as House and Senate negotiators begin working on a
compromise spending plan (see “Budget Conferees Appointed”
below), opposition to some form of revenue enhancement seems
to be wavering, particularly if it would go to shoring up the
Rainy Day Fund and other reserves. The focus centered on the
Senate’s plan to raise $190 million in revenue by closing
various tax loopholes, mainly new taxes on out-of-state long
distance calls, satellite television and fertilizer and seed
purchased by non-farmers.
Some of the loophole proposals are aimed at corporations. One
is aimed at companies that set up holding companies in
tax-haven states like Delaware and Nevada, then charge off
corporate income earned here by applying it all to royalty or
trademark fees owed the holding company. Another is designed
to get at dividend income, while a third would begin imposing
the state franchise tax on some corporations that had changed
their organizational structure in order to avoid the tax.
House Minority Leader Leo Daughtry (R-Johnston) said
"we'll look at all of these loopholes with an open
mind."
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