Capping privilege tax worries city

Apr. 21, 2014 @ 08:00 AM

State legislators are working on a tax-cut proposal for business that could wind up costing Durham’s city government up to $2.3 million a year in local revenue.

The measure seeks to place a $100 cap on the levy cities and towns can charge a business in return for a “privilege license.” It would replace existing law that allows them considerable discretion in what they can charge some types of businesses, and none at all in what they charge others.

Members of the N.C. General Assembly’s Revenue Laws Study Committee endorsed the cap in a preliminary vote this month and are scheduled to confirm their support for it again next month. That would clear the way for the state House and Senate to act later this summer.

Supporters of the cap – Republicans, generally – say it would curb abuses by local government that have harmed business.

“Whose ‘privilege’ is it?” state Rep. Tim Moffitt, R-Buncombe, said during one of the panel’s discussions of the cap. “Is it the privilege of the business owner to operate in a municipality? Or is it the municipality’s privilege to have that business operate within their community, employ their citizens [and] contribute to the overall economic well-being of that community?”

Moffitt favors the outright repeal of the privilege license.

Locally, the privilege license now nets Durham’s city government about $3 million a year.

That’s a relatively small piece of the city’s general fund, which all told took in $178.5 million in fiscal 2013-13, according to the city’s most recent annual finance report.

By comparison, property taxes accounted for $96.8 million in revenue.

“It’s real money and supports the general fund, of which about half [pays for] public safety” operations, City Manager Tom Bonfield said of the license revenue. “Obviously it’s a concern.”

And eventually, it’ll have “to be made up with another revenue source or more cuts in budgets,” Bonfield said. “It’s a zero-sum game.”

Durham has an assortment of flat-rate license fees. But using the discretion the state now allows them, it also taxes five different types of businesses varying amounts based on the “gross receipts” of the enterprise.

The most important and only open-ended of those levies targets retail merchants, who pay $50 tax on the first $15,000 of sales and then 50 cents for each $1,000 in sales beyond that.

During a briefing for legislators, UNC School of Government professor Chris McLaughlin used Durham’s retailers levy as an example of how much the taxation practices of different communities can vary under the present law.

He noted that a Target store that does $50 million in trade each year would pay Durham about $25,000 in privilege-license taxes.

But comparably popular Target stores in Charlotte and Dunn would pay their host communities about $10,000 and $400, respectively.

The $50-million-in-trade benchmark lines up with the amount of business some south Durham merchants believe the Target on Renaissance Parkway does each year.

The Target Corp. booked a $2 billion profit in its most recent fiscal year, returning about 2.7 percent on $72.6 billion in sales in the U.S. and Canada.

Supporters of the cap favor a one-size-fits-all approach to tax laws across the state.

In addition to limiting cities’ control over the privilege-license tax rate, the measure would do away with state-mandated exemptions that for now insulate enterprises like medical practices and law firms from having to pay. Furthermore, it would allow cities to tax only those businesses that actually have an office or store in their community.

Legislative analysts estimate the proposal would cost city and town governments across North Carolina between $11.4 million and $24.6 million a year, depending on how they collectively respond to it.

The lower-end estimate assumes cities and towns will find, charge and collect from every eligible business the maximum $100 annual levy the proposal would allow.

Working on that assumption, state analysts figure Durham’s government would lose $294,263 a year.

But Durham officials think the state estimate is “unrealistic,” Bonfield said.

They don’t consider it a given, for example, that the City Council would opt to raise to $100 the annual levy for many existing business that pay less under current law.

And they aren’t ready to assume it’s possible to find and charge every business the state’s proposal would make newly eligible for taxation.

 “Identifying the additional businesses and getting them to pay the tax could present a significant administrative burden,” Budget and Management Services Director Bertha Johnson said.

“Some pieces there don’t add up to significant amounts of money,” Bonfield added.

On that count, the potential dilemma for city leaders is similar to one that last year prompted Durham County officials to eliminate a tax for owning a cat or dog. The so-called “cat tax” was costing the county more money to administer than it was yielding in revenue, so officials actually saved money via the repeal.

The cap on privilege-license levies wouldn’t go into effect until the summer of 2015, so it’s not a factor in the city’s fiscal 2014-15 budget debate. But administrators already have “looked at some of the issues” they’ll have to address next spring, Bonfield said.

A $2.3 million loss -- about the same amount of money a penny on the city’s property tax rate generates – would enter the picture if the council doesn’t at least raise rates for businesses that now pay for a license but pay less than $100, Johnson said.