May 27 (Bloomberg) -- The North Carolina legislature is moving to require cities to follow its lead cutting taxes, as Republican lawmakers try to exert control over the state’s biggest cities, run by Democrats.
Legislation capping city business license taxes at $100 a year threatens the only levy cities control outside property taxes. The state House approved the measure on May 21 and the Senate hasn’t yet scheduled a vote.
“There are certain legislators that think the cities are too powerful, particularly the big cities,” said Durham Mayor Bill Bell, a Democrat. “It’s especially bad for a state government to micromanage us like this and to do it without asking us.”
Republican Governor Pat McCrory took office last year, giving the party control of the legislative and executive branches simultaneously for the first time since Reconstruction. Republicans have cut income, business and estate taxes, imposed new abortion regulations and relaxed gun laws, bringing North Carolina’s traditionally moderate politics closer in line with other southern states.
Legislators last year also took on cities. They passed a law transferring ownership of Charlotte’s airport from the city to a regional authority and a measure doing the same to the water utility in Asheville.
The tax, collected in more than 300 cities, towns and villages, generates about $62 million a year statewide, nearly half of it in Charlotte and Raleigh, the state capitol. The proposal would eliminate the ability of cities to charge large retailers annual license taxes of as much as $20,000.
If the measure is approved, revenue would drop by roughly half, according to the North Carolina League of Municipalities. The cap would force cities to cut services or raise property taxes, said Paul Meyer, executive director of the Raleigh-based league.
Cities apply the tax in a range of ways. Some assess a flat fee. Others, including the biggest cities, charge larger businesses more, based on gross receipts. They say the bigger tax bill reflects the higher cost of providing city services to large businesses compared with small ones.
Retailers have pushed to end the tax, calling it arbitrary and unfair. Because the state bans or caps the tax on certain businesses, including law firms and winemakers, retailers pay a disproportionate share, said Andy Ellen, president and general counsel for the Raleigh-based North Carolina Retail Merchants Association.
“We’ve been trying to reform it for 15 years,” he said.
In Greenville, with a population of 87,000, the city last month eliminated a flat fee and began charging big retailers more. The change was a response to small business complaints about paying the same as large retailers, said Steve Hawley, a city spokesman. The change will add $400,000 annually to the $650,000 the city collects, he said. The city’s budget for the coming fiscal year is $76.3 million.
Chris Fitzsimon, director of Raleigh-based NC Policy Watch, which says it works for social and economic justice, said Republican lawmakers are going after urban areas where voters disagree with their policies.
“They’re telling local government how to manage their budgets,” Fitzsimon said. “It’s a war on cities and on major urban areas in particular. That’s where voters don’t agree with them.”
House Finance Committee Chairwoman Julia Howard, a Republican, said the tax is outdated, inefficient and “places a tax burden on only a limited portion of businesses.”
“Although many cities collect it, less than a dozen receive a measurable amount of revenue from it,” Howard said May 20 on the House floor.
The debate will test McCrory, who defended the tax in his former job as Charlotte’s mayor. McCrory’s press office didn’t respond to three messages seeking comment on the tax.
McCrory, who was known as a moderate mayor, didn’t block the legislature last year as it pursued an agenda of tax and spending cuts, abortion limits and other social issues. Thousands of protesters assembled weekly to decry the legislature’s direction.
Charlotte, the state’s largest city, estimates that it will collect $18.1 million in the license tax in fiscal year 2015, or 3.1 percent of its operating budget. Raleigh, the second-largest city, collected $7.9 million from the tax last year. The city expects to lose $3.4 million to $5 million out of a $417 million budget if the tax is capped next fiscal year, said Chief Financial Officer Perry James.
Charlotte’s mayor, Democrat Dan Clodfelter, said the legislature would hurt city budgets if it repeals it without a replacement.
“The tax is archaic and difficult to administer fairly, but I’ve never supported eliminating it without providing a comparable substitute,” Clodfelter said in an e-mail.
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