An effort to overhaul North Carolina’s tax system has caused tension between municipal governments and the state government. Several members of the Burlington City Government fear losing revenue as a result of the reform.
Certain aspects of the proposed legislation would direct more tax revenue to the state and less to the local governments, according to Harold Owen, Burlington’s city manager and professor at Elon University. The elimination of franchise taxes, a new state-shared tax on beer and wine and a one cent reduction on food sales tax would trigger a net loss of $2.75 million for Burlington’s municipal government.
State legislators claim the loss of municipal government revenue will be offset by increases in state sales tax, but Owen is not convinced.
“We’re talking about a complete change in tax reform,” he said. “It appears that there’s a conversation about going more towards sales tax and going away from a state income tax. That would be money we just wouldn’t be getting.”
Owen and others from Burlington met with state legislators, including local representatives Ross and Ridell, April 3 to discuss the proposals. The city council also discussed the matter at its annual retreat April 1.
“We just only hope that they would recognize the impact tax reform would have on the cities and the services they provide,” he said.
Last fiscal year, North Carolina raked in approximately $10 billion from personal income taxes, $1 billion in corporate income taxes and $5 billion in sales and use taxes. The majority of the corporate income taxes go directly to the municipality in which individual corporations are chartered, a major source of revenue for local governments, according to Owen.
The proposed budget changes could force the Burlington municipal government, and other local governments, to restructure its budget midway through the fiscal year, which runs from July 1 to June 30.
“I find it in no way possible for this to be done on the timeline that is being considered now,” Owen said. “Doing something in the middle of the fiscal year would be difficult at best.”
In particular, the elimination of franchise taxes would decrease municipal revenue, according to Owen.
“Franchise taxes from natural gas and electricity have always come back to the cities,” he said. “One of the bills speaks to redirecting these taxes to the state.”
It comes down to the working relationship between state and local governments, Owen said.
“Cities are basically created by the state, so obviously what happens in state government has significant impact in terms of laws that they set,” he said.
According to Jason Husser, assistant director of the Elon Poll, much of the debate about the role of state versus municipal governments reflects larger ideological trends that have traditionally divided conservatives from liberals. At the core, though, the state holds the most power.
“Ultimately, the state is in charge here,” he said. “It’s not a fair fight. It’s up to the state’s digression.”
Burlington and other municipalities are limited in terms of their influence on the state government, according to Husser and Owen. Much of it comes down to a waiting game. Owen said he and others have already sat down with state legislators to push the best possible course of action, in their eyes one that would minimally affect Burlington’s revenue stream.
Husser said municipalities play an important role in determining local laws and agendas, especially in large, diverse states.
“When a state is as big as North Carolina, there’s a lot of attempts at a one-size-fits-all,” he said. “But priorities are different in Appalachia than they are on the coast.”
Hands somewhat tied by the system, Owen stressed the importance of not rushing to a decision on tax reform, whatever the legislation itself might look like and entail.
“I would hope that everyone would just sit down and talk and try to determine an approved course of action going forward that both the state and the cities can manage in an effective manner.”