Durham city government may see surplus from Senate tax plan

Jun. 13, 2013 @ 07:04 PM

An N.C. Senate tax bill that appears likely to hurt most of the state’s cities and towns financially could, in some scenarios, generate a financial windfall for Durham’s city government.

The measure, a compromise Senate President Pro Tem Phil Berger, R-Rockingham, announced earlier this week, would reduce or eliminate some of the taxes that local governments rely on, including a sales tax on food.

But it would also phase out the sales-tax exemption that state law now allows nonprofit groups and corporations to claim after they buy many kinds of goods.

General Assembly budget analysts estimate the measure would cost local governments across the state a combined $887 million in revenue as it takes effect over the next five fiscal years.

N.C. League of Municipalities advocates said Wednesday that nearly every city and town government in the state would take a hit that would force them to cut spending or raise property taxes. Durham is the major exception to that.

An initial analysis from the League suggested that the city could bank an additional $27.4 million in revenue over the coming five fiscal years if the Senate plan becomes law.

Changes made to the bill in committee likely will cut into that, turning the measure into a roughly $2.5 million money loser for the city the first couple of years before it starts generating surpluses, Finance Director David Boyd said.

The quirk comes thanks to the proposed phase-out of the sales-tax exemption for nonprofits – an idea that would benefit the city government thanks in no small part to the presence here of Duke University, a nonprofit that also happens to be one of North Carolina’s largest private-sector employers.

Duke is but the largest nonprofit in a city that’s full of them, City Manager Tom Bonfield said.

“For sure there’s a uniqueness in Durham which we’ve known for a long time” because the existing refund system has made the flow of sales-tax revenue to the city difficult to predict, he said.

The phase-out of the sales tax exemption by the League’s reckoning could be worth $17 million a year to the city of Durham by fiscal 2018-19.

That would more than offset losses from proposed repeals of the food tax and the privilege license fee that businesses pay to operate within a city or town. The city would also lose money because the Senate plan takes away its ability to claim a sales-tax exemption for its own purchasing.

Estimates at Duke are that the loss of the nonprofit sales tax exemption would cost the university and its hospital up to $30 million a year. The state collects sales taxes on the purchases of goods and shares part of the money with cities and counties.

Bonfield said Duke Vice President Michael Schoenfeld, the university’s point man in dealing with local and state government, “has been out and about communicating Duke’s position” on the exemption, presumably relaying opposition to the change.

Schoenfeld, however, declined comment on Wednesday.

The city manager said he’s approaching the numbers skeptically because the legislation is subject to change, and because it’s possible that estimates from the League and other sources have been skewed by Duke’s recent construction program.

The university built, among other things, a new cancer-treatment center that opened in February of 2012. The original budget for it was $235 million, according to a Duke University Health System website.

There’s “no guarantee [construction at Duke is] is going to continue at that pace,” Bonfield said, adding that his sense is that the surplus estimates “are heavy or optimistic.”

Bonfield more generally has told the City Council that it’s not particularly useful to reckon with the effects of potential tax changes by the state until the General Assembly finishes its work.

The Senate plan is the second to emerge from that chamber, and is quite different from the first. What’s on the table now is closer to but still different from a competing proposal from the N.C. House.

“Tom’s right, it’s still a very fluid situation,” Boyd said. “Whether or not this is the ultimate plan they pass, who knows? We were quite surprised to see the effect relative to other cities. It speaks to how economic circumstances in the city of Durham may be quite different from other cities.”