Prosperity Watch Issue 53, No. 4: New Sales Tax Distribution Won’t Fix What Ails Rural North Carolina

Amidst a growing recognition that many local governments can’t invest sufficiently in their educational and economic systems, a much ballyhooed provision was included in the budget which changes sales tax distribution.

Unfortunately, this move will not cure what ails rural North Carolina. Most of the revenue won’t go to the most economically distressed communities and there just aren’t enough dollars in the new fund to make up for years of underinvestment in rural communities.

The new allocation system does not target the states’ areas of most dire economic need. North Carolina divides counties up into three economic tiers, with Tier 1 being the most distressed and Tier 3 the most economically robust. As shown above, the forty Tier 1 counties receive roughly 1/3rd of the new allocation, while the majority goes to Tier 2 and 3 counties that are comparably better off. In fact, the average allotment received by Tier 2 counties is almost twice as large as what the average Tier 1 county will receive. While some struggling rural communities will get a bump in revenue, a more targeted mechanism or a direct appropriation made possible by an adequate state tax code could have sent even more to where it is needed the most.

There’s also concern about whether this new fund will come from new revenue, or will cannibalize existing sales tax collections. The bulk of the funds to be distributed according to this new system are projected to come from expanding the sales tax to a variety of repair and maintenance services, but it is next to impossible to accurately predict how much revenue will come from expanding the sales tax base in this way. If expanding the sales tax does not raised the projected revenue, this new fund could eat into the dollars distributed according to the existing formula or require greater appropriation of state dollars, resulting in a smaller net gain for counties that receive a part of this new fund.

The sales tax provision is also part of a larger budget that will ultimately undermine state and local governments’ ability to build good schools and vibrant economies. Personal and corporate income taxes are slashed again in the budget, which will force the state to cut education and economic development assistance for local governments down the road. The broader tax cuts in the budget dwarf the amount of sales tax revenues that will be reallocated, so it's likely that some local governments which will get a bit more sales tax revenue next year will ultimately see lower overall state support once the most recent round of income tax cuts are phased in.
Reallocating some sales tax revenue may ultimately prove a hollow victory for rural North Carolina. The most economically distressed communities won’t see most of the dollars and the provision is part of a larger budget that will continue to undercut our ability to invest in rural communities. At least this debate elevated the economic needs of rural North Carolina, but that’s a conversation that is far from over.

Research & Publications: