Senate Unveils Economic Development & Tax Reform Bill that Could Cost Mecklenburg County Millions

Senate leaders this week unveiled a much-awaited proposal to improve North Carolina’s economy, through a combination of corporate incentives, tax reform, and redistribution of locally collected sales taxes to rural areas. But for Mecklenburg and other fast-growing urban counties, the legislation would likely result in reduced tax revenue and greater hurdles to attract new employers through the use of state incentives.

The Senate substitute to HB 117, ‘The NC Competes Act’, expands the original 7-page House proposal to 46 pages, and would make dramatic changes to the state’s Job Development Investment Grant (JDIG) incentives program, prioritizing investments in rural (Tier I) counties and allocating additional grant funding only for ‘high-yield projects’ (such as an auto plant). Urban counties like Mecklenburg would have to pony up substantial local funding to be eligible for state grants. Specifically, the bill would:

  • Create a new set of JDIG grant criteria for ‘Major Market Communities,’ the top three counties in terms of average weekly wage (including Mecklenburg). JDIG prospects in one of those counties would have to create at least 250 jobs (compared to 20 now), which pay an average salary of at least 120 percent of the county’s existing average wage.
  • Expand the existing $15 million annual JDIG grant pool to $30 million for a year in which a ‘High-Yield Project’ receives incentives from the state. To qualify as a ‘High-Yield Project,’ a business must invest at least $750 million and create a minimum of 2,000 new jobs.
  • Limit the amount of the state grant in Major Markets like Mecklenburg to 50% of the incentive dollars provided by the local government.

The bill would also lower the state corporate income tax rate from the current 5% to 4% in 2016 and 3% in 2017, while eliminating certain ‘antiquated’ deductions and the tax liability cap for bank holding companies. It would also phase in a ‘Single-Sales Factor’ apportionment formula over the next three years, benefiting North Carolina-based companies that sell their products in other states

The state’s personal income tax rate would also fall under the bill, from the current 5.75% to 5.5% in 2016, and the Standard Deduction would rise incrementally from a maximum of $15,000 (married, filing jointly) today to $18,500 in 2020. And the bill would reinstate deductions for medical & dental expenses, investment income and casualty losses, which are currently not allowed today. The trade-off? All itemized deductions, including charitable contributions, would be capped at $20,000.

Other tax provisions in the plan include:

  • Expanding the sales tax base to include repair and maintenance services (cars, appliances, etc.), pet care, boarding, and veterinary services, and advertising services.
  • Phasing down the sales tax refund for nonprofits from a current state & local cap of $45 million per year, to $15 million per year by 2020. Hospitals would be most greatly impacted under this provision.
  • Increasing the sales tax on boats and aircraft from 3% to 4.75%, and increasing the tax cap on aircraft from $1,500 to $5,000 per plane.

But it’s the proposal for redistribution of locally collected sales tax dollars that’s causing the most heartburn for Mecklenburg and other urban counties. The current formula sends 75% of sales taxes back to the county where they were collected, and redistributes the remaining 25% statewide on a per-capita basis. Under the Senate’s proposal, that formula would gradually shift over the next four years to one that redistributes a whopping 80% of locally collected sales taxes statewide, on a per-capita basis.

That would mean Mecklenburg County stands to eventually lose as much as $12 million a year under the plan, or $62 million over the next five years. The City of Charlotte could lose as much as $5 million annually. The county’s delegation to the General Assembly is almost unanimously opposed to the the plan, as is Governor Pat McCrory, who likens the proposal to “class warfare.” At a County Commission budget workshop on Thursday, County Manager Dena Diorio told board members the revenue hit could necessitate a property tax hike of as much as 5 1/2 cents to recover.

The bill was introduced Wednesday in the Senate Commerce Committee, but no vote was taken on the measure. Assuming the full Senate adopts the measure in its present form, the House is sure to reject it, setting the stage for a conference committee to negotiate the two bills.

Hold on to your hats. It’s shaping up to be a LONG summer in Raleigh …

For the full details of the proposal, including summaries and fiscal impact tables, CLICK HERE.

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