Adjusting the Sales Tax

There is a peculiar and rarely mentioned anomaly in how North Carolina has, for years, allocated sales taxes to different counties.

We have heard a lot (actually more than a lot) recently about the State Senate’s plan to change how the state allocates sales taxed between counties. In a nutshell, the Senate shifts sales tax revenue from twenty urban counties to rural counties. And we’ve had a long, acrimonious debate with almost everyone pounding the table demanding more money. But we’ve had almost no debate about the most fundamental question of all: What is fair?

Additionally, in the 16 pages of the Senate version of House Bill 117, there’s one change that hardly a soul has mentioned: The elimination of what’s called the “adjustment factor” – a key but little known part of the previous plan.

The adjustment factor worked like this: Let’s say that Alexander County sent $100 in sales tax collections to the state. The state then applied a 100% adjustment factor and returned $100 to Alexander County.

But with Catawba County, the state applied a different adjustment factor – 99%. So when Catawba sent $100 to the state it only received back $99. Less than it sent.

Applying the adjustment factor meant counties like Mecklenburg took a big hit – every time Mecklenburg sent $100 to the state it only got back $89. But other counties, like Dare, were well rewarded. Every time Dare County sent in $100 to the state it got back $149.

One would hope that, years ago, there was some rational theory at work when the state set those adjustment factors – but it may also be what was at work was politics. After all, the leader of the State Senate for years was Marc Basnight from Dare County.

Reforming an unfair tax system is inevitably a painful process. Every county, naturally, wants more money. And there are always winners and losers. But still, when you cut through the politics, the fundamental question is still: What’s fair? After that it’s simply a matter of legislators having the courage to follow an old adage: Doing the right thing is the right thing to do.

The Education Sales Tax

It’s a curious turn of events: The State Senate just got whacked for spending more money on education.

For years, the state has returned 25% of the sales tax revenues to counties based on their population. The state also instructed the counties to spend part of that money to build schools.

In its new plan, the Senate doubled the amount of money (to 50%) sent to counties based on population and says all the money must all be spent on education – and allows local officials to spend the money however they want: To hire more teachers, pay teachers more, hire teacher assistants, add technology or build schools.

That sounds pretty straightforward. But there’s a hitch – any way you cut it, under the Senate’s new plan, 80 rural counties get more money and 20 urban counties get less. And the urban counties don’t like that.

It’s easy to see why a Chamber of Commerce in, say, Charlotte would feel that way.

But that ignores a second reality. There is no urban center in the state that can survive without well educated workers driving in each day from rural counties to fill jobs.

The bottom line is simple: We’re all in this together. Charlotte isn’t surrounded by a moat and a drawbridge. When a rural county nearby doesn’t have the money to pay for schools and community colleges that’s not just its problem – it’s a problem for Charlotte too. Everyone gains from better rural schools. Including urban centers like Charlotte.

Fairness and the Sales Tax

Back in the 1970’s, the legislature passed a local sales tax. The total sales tax – of one penny – was collected by Raleigh then distributed to the 100 counties based on where the goods were purchased.

Later, in 1983 and 1985, the legislature passed two one-half cent sales taxes. But, this time, the tax revenue was allocated based upon the population of each county, not by where the goods were purchased.

And for over 20 years that was our model. 50% of the sales taxes were returned to counties based on their population and 50% based on where goods were purchased.

Then, in 2007, the legislature changed the model. And local sales taxes were distributed 25% based on population and 75% based on point of sale. Obviously, that change favored commercial centers like Charlotte and Raleigh and left rural counties with less money to pay for schools, roads, and other needs.

Today, there is a debate underway to change the formula again.

Rural counties argue they do not have enough money to pay for schools and other essentials.

Urban areas argue they have to spend more to provide roads and infrastructure and police to support commercial centers – like shopping malls – that both urban and rural citizens use.

One earlier bill proposed to distribute 80% of the sales taxes based on population and 20% based on point of sale. Obviously, that reverses the current formula. And is a big change in favor of rural counties and a big drop in revenue for urban counties.

So, was it fair?

Would 20% (instead of 75%) cover urban counties unique infrastructure costs – which serve both urban and rural citizens?

As far as I can tell no one on either side has even attempted to answer that question. So no one knows what is fair.

That said, it’s hard to argue with returning to the 50-50 allocation we used for years. That will provide rural counties more money for their schools. And urban counties will still get a relative boost to help meet their unique infrastructure needs.

It’s not a perfect solution but, for now, it may be as close to fair as we can come.

Enigma

Now and then, I happen across a program in state government that makes me wonder, what on earth were they thinking?

And, usually, the answer is: They were thinking about politics.

And that’s probably the best explanation of why politicians in Raleigh have made such lavish promises to provide health insurance benefits to state employees after they ‘retire’ – without setting aside a penny to pay for those promises.

Now, when I say retire most people will think of someone who retires at 65 and signs up for Medicare.

But that’s not the case here.

A state employee can work 20 years and retire and the state will go right on paying for their health insurance. For years.

The state will even continue to pay for their health insurance if they take a job with another employer.

My friends in the private sector, who have reached 65, tell me hitting the age of Medicare is like walking into the Promised Land. Not only are basic Medicare benefits well beyond what they had been paying for with their own insurance – they’re free. And, if they want, they can buy additional benefits (say, to pay for all their prescription drugs) for a fraction of the cost.

A state employee who goes on Medicare at 65 gets an even better deal: The state will provide whatever supplements or additional coverages they want and it doesn’t cost them a penny. They get Medicare free. And additional coverages free too.

Which leads to an inevitable question: How much are all these promises going to cost taxpayers? The answer: $26 billion. Which is what state budget writers are euphemistically calling an ‘unfunded liability.’ And what the rest of us simply call a debt.

Let’s put that $26 billion in perspective: I remember the debate, two years ago, when we found ourselves facing an inherited $2.5 billion debt to the federal government for unemployment insurance.

Now we face another debt that is ten times as big.

No one questions taxpayers providing health insurance to people who work for the state – but spending $26 billion to provide health insurance to people who don’t work for the state? It’s time for a serious talk.

More Debt and Market Timing

I’ll admit if I was a genius at stock market timing, I might not be serving in the NC Senate. I also suspect the same holds true of most folks serving in state government. So it’s interesting to watch the ongoing debate in Raleigh over how to fund NC’s long-ignored infrastructure needs.

One side says now is the time to borrow a couple of billion dollars – because interest rates are low and cannot go lower.

That may be so. But, then again, it may not.

While market timing is tempting, as a lot of folks have learned the hard way, it’s also risky. And when it comes to borrowing a couple of billion dollars it’s hard to ignore gathering clouds on the economic horizon.

While Greece gets most of the recent headlines, it’s also a fact that the stock market in China has lost about a third of its value since mid-June. And the drop in industrial commodity prices, like oil and copper, suggest the world economy may be slowing.

At the same time, both the wizards of Wall Street and the typical American family are reducing debt . In fact, the only sector actively adding to its debt burden is government.

I don’t pretend to know if this is the right time to borrow billions – and I’m not sure anyone else does either.

Another option is to redirect roughly $900 million currently held by the Golden Leaf Foundation and use that money to pay for the same infrastructure projects. That sounds a lot safer than borrowing.

In other words, NC taxpayers have close to $1 billion in cash on hand – so why take on the risk of borrowing?

I realize some will protest (loudly) that Golden Leaf was supposed to help rural areas that were dependent on tobacco, but a review of their grant allocations by county show some pretty prosperous counties – like Wake and Durham – at the top of the list.

And there’s another consideration. Several state leaders are actively promoting a new tax structure because they want to shift sales tax dollars from urban to rural counties. But, if we are going down that road, we can surely eliminate the special programs buried in the labyrinthine state bureaucracy – like Golden Leaf – that were set up to accomplish the same goal.

Let’s make those infrastructure improvements. But let’s do it with available cash, not by increasing a debt burden that will quickly weigh on current taxpayers as well as future taxpayers.

A $26 Billion Hole

One item – that comes with a $26 billion price tag – in the Senate budget is getting plenty of attention. In fact, the rhetoric – from the State Employees Association and the Teachers Union and liberal groups – has gotten so heated one spokesman went so far as to suggest that, if this reform stays in the budget, we may never be able to hire another state employee.

Here’s what the ruckus is all about: Currently, state employees receive first class health insurance. And they receive two additional health insurance benefits: First, after working 20 years, and after reaching age 50, a state employee may retire and the state will continue to pay for their health insurance.

Second, if the same employee decides to go to a new job, the state will still continue to pay for his or her health insurance – instead of their new employer.

Those are the provisions the Senate proposes to change – for people who will be hired to work for the state after Jan 1, 2016.

What this means is straightforward: As long as a new employee works for the state he or she will receive the same first class health care benefits as every other state employee. However, if he or she changes jobs (after working 20 years and after reaching age 50) the state will no longer pay for their health insurance. Their new employer will have to do that. Or, if they decide to retire early, they will have to pay for their health insurance themselves.

There’s one other argument in favor of this change.

For years, the state has made commitments to pay employees and teachers pensions. And each year, the state has set aside funds to pay those pensions. As a result, the state’s pension plan is well funded and rests on a solid financial foundation.

However, state health insurance benefits are different. The state has never set aside a penny to pay for these benefits and, as a result, the state now has an unfunded liability of $26 billion.

We’ve dug ourselves a financial hole. Should we keep on digging or start climbing out?

The Senate’s proposal is fair to both employees and taxpayers. And – with a $26 billion unfunded liability – it’s the right thing to do.

The Road to Charlotte

Mooresville is thirty minutes north of Charlotte, and Rock Hill (South Carolina) is thirty minutes south of Charlotte – thirty minutes that is, as Google Maps puts it, “without traffic.” And there’s the rub.

When you leave Rock Hill heading for the big city, Interstate-77 is an 8-lane boulevard. When you leave Mooresville, it’s a 4-lane bumper to bumper parking lot.

The NC Department of Transportation needed – and came up – with a solution: To get a private business to build two additional lanes and, in return, let them collect tolls on the new lanes. The idea received, at best, mixed reviews from NC commuters who would be paying the tolls.

And, then, the process took a decided turn for the worse.

At the last minute, after the contract was signed, legislators learned there was a big surprise buried in the fine print – a non-compete clause. A clause that said NCDOT cannot, for 50 years, add additional lanes to I-77 where the toll lanes run. And if they do, NC taxpayers will have to pay damages to the toll-collecting corporation.

So if we decide our side of I-77 should be as wide as SC’s side, NC taxpayers will not only pay for the road construction, there will be an additional ransom for adding those lanes.

In the meantime, nothing stops SC from adding more lanes on their side whenever they want.

There are two lessons to be learned from this: First, maybe something other than incentives is luring companies from NC to SC. And, second, when state bureaucrats sit down at the table to negotiate a contract with eagle-eyed MBAs, the taxpayers will likely be the dinner.

Discouraging Jobs and Investment

Last week we saw how a manufacturer – in this case Volvo – announcing it’s going to build its new plant in SC instead of NC ignites editorial writers and creates a firestorm of finger-pointing.

But amid the bloggers’ cries of “why not us” two facts have been ignored.

First, giving Volvo (or any new industry) $200 million in tax breaks means that someone else has to pay for the cost of streets and sewer lines and infrastructure to support their new business.

New development, especially huge new developments like this one, increase what government spends on roads, schools and other public facilities. Politicians who favor incentives will argue that, in the long run, those costs will be offset by future taxes the business pays. But it’s also a fact there will be a short-term deficit that has to be funded by taxpayers.

The second issue is more subtle. And has to do with fairness.

In 2013, so NC could better compete with our neighboring states, the General Assembly reduced personal and corporate income tax rates. But later, after the dust settled, we learned an odd fact: A little known glitch in the state tax code is actually increasing taxes manufacturers pay on job creation and investment in our state.

The glitch is the way we allocate the state taxes for big corporations. And the fix is straightforward: convert our tax system to the ‘single sales factor.’

Right now, NC doesn’t just tax our manufacturers on the products they sell in NC – we also tax them based on the number of workers they employ and how much they invest in plants and equipment. Other states – like SC – don’t have those additional taxes. And if we eliminate them here, we will also eliminate a big reason the state has to hand out cash to get a manufacturer – like Volvo – to build a plant in NC.

Consider this hypothetical example: A manufacturer who has a plant in NC sells its products all over the world.  Under the current law, let’s say the additional taxes it pays – for creating jobs and investments here – are $10 million a year. Going to the single sales factor (and just taxing manufacturers on NC product sales) will give that company 10 million reasons to create jobs in NC.

It’s not a new idea. For years we have allowed banks and utilities to use single sales. Why not allow it for the businesses offering the fastest route for working families to move from poor to middle class?

Single sales is not only smart tax reform – it’s fair. Because instead of helping a select few corporations with special tax breaks or cash incentives, we help every manufacturer, whether they are new to our state or have been here 100 years, do the very thing we need: Hire and invest in NC.

Broken Politics – On The Right

Here’s another way facts get twisted and political debate goes downhill.

A politician, making a speech, says, ‘Solar energy gets a special tax break – an 80% exemption from property tax.’ It sounded innocent enough. It was, technically, correct. But the politician left out part of the story.

Next a blogger, bent on lambasting solar energy companies, took the politician’s half-truth and twisted it again and wrote it was an outrage solar companies only pay property taxes on 20% of the land they use.

And that’s how political debates go downhill: From half-truth. To twisted half-truth. To outright fiction.

Here’re the facts: Solar energy businesses do receive an 80% property tax exemption on the power generation equipment they own. But they receive no exemption at all on land. They pay those property taxes just like everyone else.

But that’s not all of the story.

Here in Catawba County, 35 acre solar facilities have been built on agricultural land. Prior to their being built that land was taxed at a special rate for ‘farmland’ – a special rate that set the value of the land (which determines how much tax is paid) at $300/acre.

Installing a solar facility did two things: It took the land out of the special farmland category, thereby raising the land value for tax purposes back to current land values of approximately $3000/acre.

And it changed the land use to an industrial use which pushed the land’s tax value up even more – to $10,000/acre.

In other words, the county’s tax base increased from $300 to $10,000 per acre. On 35 acres that’s an increase from $10,500 to $350,000.

Next the Solar Center adds $20 million in equipment and, after it claims the 80% exemption, ends up paying taxes on $4 million in equipment.

Which means that tax value of the 35 acre site increases again – going from $10,500 to $350,000 to $4,350,000. A 400 fold increase. Which means the property taxes the county collects on the site go up 400 fold as well.

When all is said and done the solar company has converted a 35 acre vacant field with no water and sewer service into a business that adds $4.35 million to the Catawba County tax base. And without having to build schools and police domestic disputes.

But, then, a blogger writes it’s an outrage solar companies don’t pay property taxes on land.

That’s an example of how politics becomes broken.