Included in the state budget proposal being voted on this week is a provision to expand the sales tax base and alter how the local portion of the sales tax revenue is distributed among the counties. At issue, more specifically, is how to distribute the additional revenue projected to be collected by the proposed expanded sales tax base that would include services, warranties and repairs to tangible goods.
To better understand this new sales tax distribution method, we must first recall that the sales tax in NC is made up of two components: the statewide sales tax of 4.75%, and the county-level sales tax of 2% (although several counties levy a local portion of 2.25% or 2.5%).
The revenue generated by the statewide portion of the sales tax goes to the state to be used in the General Fund budget. The revenue generated by the local portion of the sales tax, however, is collected by the state and then redistributed back to the counties. The current formula for this county distribution sees 3/4 of the local sales tax revenue sent back to the county in which the tax was collected, while the other 1/4 is distributed on a per capita basis; e.g. if your county has 10% of the state’s population your county receives 10% of that portion of the revenue (with some minor adjustments).
According to the new state budget deal, the additional revenue collected by the newly-taxed services will be distributed based upon a newly-created formula, that allocates a set percentage for each county. For instance, major urban counties like Wake and Mecklenburg would receive zero percent of the additional revenue, while other counties like Harnett (5.17%) and Davidson (4.96%) would receive a more sizeable share. In the first year of this new method, there will be $84.8 million set aside to be distributed by this formula – presumably an estimate of the additional local sales tax revenue added by the newly-taxed services. This amount will then be adjusted every year according to the overall percentage increase in total sales tax revenue. The new revenue will need to be used by local governments to fund public schools, community colleges or economic development.
An additional provision not being reported upon will set aside $17.6 million annually from the statewide sales tax revenue to be distributed to counties based upon the 75/25 ratio mentioned above.