John Locke Update / Research Brief

Should Lawmakers Grant Local Option Sales Tax Flexibility?

posted on in Fiscal Insight, Spending & Taxes
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In 2011, Buncombe County commissioners and the president of the Asheville-Buncombe Technical Community College promised voters that, if passed, a quarter-cent tax increase on the ballot that year would pay for new and upgraded facilities at the school. Michael Sanera of the John Locke Foundation and others warned that there was no way to guarantee that the new taxes would actually go to the school, so voters were giving county commissioners a “blank check.” Seven years later, interim manager George Wood found that county commissioners indeed had diverted tax money from A-B Tech to pay for other expenses.

House finance committee chairs John Szoka, Julia Howard, and Jason Saine and Democrat Howard Hunter have introduced a bill (House Bill 667) that would give most counties another way to increase the sales tax. Counties could put a referendum before voters for a sales tax increase specifically for schools or community colleges. The new tax could be either a quarter-cent or a half-cent, but the overall sales tax rate after the increase could be no more than 2.75 percent in Durham, Forsyth, Guilford, Mecklenburg, Orange or Wake counties and no more than 2.5 percent in any other county.

All counties have enacted three sales taxes totaling 2 percent of the price of a product or service. The first cent (Article 39) is distributed to counties by the value of sales delivered into the county with no restrictions on how the money is used. The first half-cent (Article 40) is distributed to counties by population, and 30 percent is required to go to public school capital costs. Sixty percent of the second half-cent (Article 42), distributed based on value, must also go to public school capital costs. This means 45 percent of sales tax revenue from these sources is directed to construction, repairs, and renovations of district schools.

Forty counties have sales tax rates higher than 2 percent. Thirty-eight counties, including Buncombe, received voter approval to impose a quarter-cent sales tax under Article 46, which has no restrictions on how the money can be used. Durham and Orange impose this tax and a half-cent public transportation tax under Article 43, bringing their local sales tax rates to 2.75 percent, the highest in the North Carolina. Mecklenburg and Wake have not imposed the quarter-cent tax, but levy the half-cent tax for public transportation.

The proposed public school sales tax act would allow counties to seek voter approval for a quarter-cent or half-cent sales tax specifically for public school facilities, supplemental teacher pay, or community college expenses. For most counties, the local tax rate with the new tax could not exceed 2.5 cents. For the six counties that have authority to impose a half-cent transportation tax, the rate would be capped at 2.75 cents.

Because they impose both the Article 43 public transportation tax and the Article 46 tax, Durham and Orange would have to repeal one or both to make room for the education sales tax. Wake, Mecklenburg, and 36 other counties would be able to seek a quarter-cent tax increase for schools but would first need to repeal another tax to dedicate a half-cent to education. The remaining 60 counties, which have imposed neither of the optional taxes, could each seek a half-cent tax increase.

Obviously, we see little reason to give counties additional tools to raise taxes.  Look no further than the A-B Tech fiasco to understand why.  Nevertheless, House Bill 667 may be the least objectionable way to grant counties the opportunity to ask voters for a targeted tax increase. County commissioners already sell tax increases as a way to increase education spending. It is good to think that future county governments could be held accountable for their promises. The people of Buncombe would surely have wanted something like this when they approved their quarter-cent increase in 2011.

Leaving aside the question of whether more spending on education produces better results, nobody should be under any delusion that enacting a tax increase, even one earmarked for education, would result in real increases in education spending. A new pool of money for teacher salaries, community colleges, or public school construction could allow county commissioners to divert current funds away from education, but it would make the diversion harder to hide.

Joe Coletti is Director of Oversight Staff for the NC House Majority. Joe is a former Senior Fellow at Locke. Here, he examined fiscal and tax policy. He previously headed the North Carolina Government Efficiency and Reform initiative… ...

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