Budget to Have Sales Tax “Option”

As Gov. Mike Easley prepares to release his budget proposal for 2002-03 today, aides say he will eliminate $333 million a year in reimbursements to cities and counties and instead back an optional half-cent increase in sales taxes that could raise $400 million a year for local governments.

“There are no state tax increases,” said Cari Boyce, a spokeswoman for Easley. For local governments, “It’s an option…. It puts the decision-making in their hands.”

As he encountered budget shortfalls that approached $1 billion or more in each of the past two years, Easley has withheld the reimbursements to local governments for repealed taxes. Boyce said that cities and counties have pushed for higher local sales taxes.

“We don’t know at this point which counties will do what,” she said. “This gives them a reliable and stable revenue source so they won’t have to rely on the reimbursements. I don’t think any of us want to go through this again. And that’s what the local governments want – they want certainty in budgeting.”

Under a tax increase that legislators adopted last year, the swap of a half-cent local sales tax for the local reimbursements was originally scheduled for July 2003, when a half-cent state sales tax adopted last year is set to expire.

But under Easley’s plan, local governments and the state would both get a half-cent of sales-tax money until the state’s half-cent expires in June 2003.

And some say that although the move might not be a tax increase for the state, it could very well amount to a statewide tax increase as each county raises local sales taxes. Shoppers across the state could see the sales-tax rate rise from 6 1/2 percent to 7 percent on their purchases for the next year.

“It’s a tax increase no matter which way you cut it,” said Jonathan Hill of N.C. Citizens for a Sound Economy, an anti-tax group. “The whole point is when you go buy something and you’re paying 7 percent instead of 6 1/2, it’s a tax increase.”

Boyce said that Easley does not plan to recommend a change in the expiration date for the state’s half-cent sales tax, so the state’s half-cent tax would still end in July 2003.

“You’ll be paying 7 percent temporarily, because the state tax is still scheduled to go away in a year,” she said.

And not every county or city will necessarily increase its sales-tax rate, she said.

“They could also choose to raise property taxes. They could choose to cut,” she said. “It won’t necessarily be an additional half-cent in all counties.”

After two years of withheld reimbursements, she said, some counties are already preparing budgets for 2002-03 with no expectation of reimbursements from the state.

But others also aren’t sure whether local officials will have an “option” not to increase taxes if Easley keeps $333 million a year in reimbursements. “You can’t pawn it off on the locals,” said John Hood, the president of the conservative John Locke Foundation. “None of them will say no. They’ll all do it. Even the most conservative county will do it. Because they’ve been forced to do it, they would say.”

Hill, of Citizens for a Sound Economy, said that Easley is setting the stage for a statewide tax increase, even if he says there is no state tax increase in his budget.

“That’s absurd. It’s a tax shift,” he said. “It’s a mirage. He’s stolen $209 million and then put the option on the counties to say, ‘OK, you raise the taxes.’

“The state won’t say we’re having a state tax increase, but basically that’s what they’re doing by taking the (reimbursement) money.”

Ron Aycock, the executive director of the N.C. Association of County Commissioners, said that city and county officials are asking legislators to approve a higher local sales tax outright rather than presenting it as an option for local officials to enact. But he said that about one-third of the state’s 100 counties have either already approved a higher sales tax starting in July 2003 or have begun the process to do so.

The reason? “Security and stability,” Aycock said. “For two years running, we haven’t had security in the budget.”

As for assertions that counties could increase property taxes instead, Aycock said, “We have: 70 counties in the last year, and 90 at least one time in the last three years.”

Kim Cartron, an analyst at the nonprofit N.C. Budget & Tax Center, said that the proposal for higher sales taxes would hurt some of the very people Easley said he would fight for during his campaign two years ago. Sales taxes claim a larger share of the income of the poor and working poor than of the income of people in higher income brackets, she said.

The state ranks 39th in the country in property taxes as a percentage of personal income and 19th in sales taxes, she said.

Because all 100 counties currently impose the entire 2 percent sales tax that the state authorizes for them, Cartron said, “The Budget & Tax Center has every reason to believe that the taxpayers – and particularly low-income taxpayers – will experience a tax increase. Bottom line, the governor’s decision in all likelihood will result in a regressive tax increase.”

Easley also intends to postpone $69 million in tax breaks that were adopted last year.

And despite the fact that cities and counties are both pushing for higher sales taxes, legislative leaders say they’re not yet convinced.

“I don’t see it happening,” said Sen. David Hoyle, D-Gaston, a co-chairman of the Senate Finance Committee. “I don’t intend to put any additional taxes out there, state or local, right now”

Hoyle said he pushed legislators for a bigger tax increase last year, but he hinted that another isn’t likely in an election year.

“We had our chance to do something a year ago,” he said.