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Senate Bill 369 – A summary and analysis of the bill’s components
S369, Sales Tax Fairness Act, would fundamentally restructure the county-levied sales tax
system by converting the first 2 cent levies authorized (Art. 39 1% point of delivery, Art. 40 ½%
per capita, and Art. 42 ½% point of delivery) into a state sales tax for distribution to counties and
cities based on population. While the bill’s language clearly states that these funds would be
local revenue and not a state expenditure, the state-levied allocations would flow though the
state’s annual appropriations process. We are awaiting clarification as to how these funds would
be portrayed within the state’s budget.
Local Sales Taxes to Be Repealed & Converted into State Sales Tax Allocated Per Capita
The reallocations would be phased in over several years. As currently drafted, S369 would
repeal Arts. 40 and 42 Jan. 1, 2016, and convert those ½ cent levies to the state sales tax, raising
the state rate from 4.75 to 5.75%. This higher state rate would be applied to sales on or after
that date. A portion of the rate (1/5.75 = 17.39%) would then be distributed monthly to counties
and cities on a per capita basis.
Article 39 would be phased out over two years, beginning with a county levy decrease to .50%
Jan. 1, 2017 with a like increase in the state sales tax rate—the local government distribution
percentage would increase to 24% to reflect this change. On Jan. 1, 2018, Art. 39 would be
eliminated and the remaining .50% would be converted into the state sales tax, increasing the
state rate to 6.75% and resetting the state proceeds distributed to counties and cities to 29.63%
(2/6.75%). Similar changes would be made to the current food portion of the county-levied sales
tax base throughout the transition.
Per Capita Formula Defined & Only Method Allowed for City Allocation
The inter-county allocation would be based on the county population to the state total. The
intra-county allocation would follow the current per capita allocation method counties may now
consider to share sales tax proceeds with their cities—total county population plus total city
populations as the denominator. The ad valorem distribution option currently used by 47
counties would be eliminated by the transition’s end.
School Capital Set Aside Requirements Remain & Increase
The proposal would also reset the county requirement for public school capital set asides from
roughly 45% of 1 penny to 22.5% for the 2 cent equivalent allocation. County set aside
requirements would effectively increase as the new percentage would also include food sales
receipts in the base.
Current Per Capita Sales Tax Adjustment Factor Phased Out
The proposed legislation would also phase out over three years the sales tax adjustment
factor—a statutory adjustment which has been traditionally applied to the per capita sales tax
levies (now only applying to Art. 40 and the 1% per capita food portion). It appears that the
declining adjustment factor would apply to the entirety of the new allocation, excluding food,
until the adjustment factor is phased out. We understand a technical amendment will be offered
to remedy this application.
Art. 46 ¼ Cent Tax May Be Enacted via Time-Limited Resolution
Changes would also be made to the county-only Art. 46 ¼ cent sales tax. Under S369, counties
could enact the ¼ cent sales tax by referendum or resolution—the resolution option can only be
initiated if a referendum on Art. 46 was not defeated within 5 years of action (similar
restrictions are found in the existing local tax levies). The resolution option would only be valid
for roughly 4 years—it would revert to a referendum only process Jan 1, 2020.
S369 also inserts language now found in Art. 39 into Art. 46 in order for it to become the
administrative local sales tax article. Only conforming changes are made to Art. 43, the ½ or ¼
cent public transportation tax.
Impact on Medicaid Relief Swap Unknown
We are still trying to determine the impacts of these changes on the 2007 Medicaid Relief Swap
and its annual hold harmless calculation. As our readers may recall, the swap effectively
converted Art. 42 from a per capita distribution to a point of delivery distribution, in order to
minimize the state’s financial exposure from sizeable Medicaid hold harmless costs. We
understand that the county allocation to hold the cities harmless would go away.
Click here to access the NCACC’s Legislative Alert on S369 sent to county commissioners,
managers, assistant managers and clerks.
Contact
If you have questions about this analysis of S369, please contact Rebecca Troutman, NCACC
Intergovernmental Relations Director, at (919) 715-4360 or [email protected].