NC Senate Finance Committee Starts Work on Tax Reform

This Wednesday, the Senate Finance Committee began deliberations on S394, a comprehensive tax reform bill that could dramatically impact revenues local governments share with the State.

The session featured further analysis on the proposed legislation, which streamlines state personal and corporate income tax rates, eliminates state and local privilege license fees and utility franchise taxes, reduces the local sales tax on food from 2% to 1%, and broadens the overall sales tax to include most services.

NC League of Municipalities Director for Government Affairs, Paul Meyer, sent out an email late Wednesday indicating that the Committee is working to address as they balance tax reform with maintaining shared revenue levels for local governments:

The original version of SB 394 proposed the elimination of several state-collected local revenues and changes to the local tax structure, with that revenue being replaced with an expanded sales tax base, including the application of the sales tax to electricity. A new version of the bill proposed in committee on Wednesday added additional revenue sources for municipalities. Under this version of the bill, cities would receive a distribution of a portion of the State business privilege license tax, and a different distribution formula would be used for the revenue from the local sales tax on electricity and piped natural gas. Sales tax revenue from electricity and natural gas would be returned to the county of collection, with 80 percent going to the cities in those counties to be distributed on an ad valorem basis.

Reductions in municipal revenues that were in the original version of the bill remain. Of most interest to cities are the elimination of the city distribution of the electric franchise and beer and wine taxes, the elimination of the local privilege license tax, and the reduction in the local sales tax on food from 2 percent to 1 percent. All told this amounts to an annual loss of at least $320 million for cities and towns.

Bill sponsors indicated in the Committee meeting that the intent of the legislation is to be revenue-neutral at the local level, but they said that ensuring that no municipalities face a serious revenue loss as a result of the bill has been a challenge. Fiscal analysis of the current version of the bill indicates that at full implementation it will be revenue-neutral for cities and counties in the aggregate, but no city-by-city estimates have yet been made public. Bill sponsors did indicate that if the changes to the tax code generate additional revenue for the State in the first year of implementation, the excess revenue could be used to help fill in gaps at the local level.

Several items presented and discussed during the Senate Finance Committee on this important issue and piece of legislation are available for viewing and download below, including an overview of S394.


Other Documents:

S394 Overview

S394 Fiscal Chart

Income Tax Proposal Analysis

S394 Committee Substitute Legislation

More information on S394 can be found at the NCLM website, as well as the bill’s page at the website for the NC General Assembly.



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