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County, towns brace for sales tax blood bath

Although local government budget-writers have no solid figures yet on sales tax revenue since the coronavirus shutdown, they know the drop will be steep.

 “Right now the estimate for April, May, June is down from 10 to 50 percent, we don’t know,” County Manager Steve Wyatt said in a County Commission meeting last week when Commissioner Bill Lapsley brought up the subject. “That’s a big range but we know it will not be what we thought it was and unfortunately the numbers come to us a couple of months late.”
“We’re talking about millions of dollars” in lost sales tax revenue, Lapsley said. “It’s a big deal.”
That “big deal” is one reason that managers and their financial forecasters will likely be dramatically scaling back new projects and expensive items that have been in the works but may no longer be affordable.
“I spent three hours looking at that this morning,” Wyatt said Friday, two days after the commissioners met, when asked about the county’s revenue forecast. “You’re looking at millions. I’m looking at percentages between 20 and 50 percent.”
The effect will be felt in the Legislature in Raleigh and in every county and town in the state. April is the month budget drafters begin the first steps in finalizing a budget. Staffers forecast the fiscal year’s take from property tax, sales tax, utility tax, ABC tax and other taxes and fees to come up with an overall revenue projection. Elected officials know they’re looking at an entirely new landscape but they’re not sure how bad it will be.
At the end of a work session on Thursday, Laurel Park Town Council member Paul Hansen brought up “the elephant in the room — budget.”
Town Manager Christopher Todd, like Wyatt said, forecasts range so widely now they’re useless in terms of budgeting.
“I am working every day to see what we can do,” Todd said. “The best numbers are guesses.” He mentioned the same 10-50 percent drop in sales tax revenue that Wyatt had heard. “That’s a huge range and frankly it’s an uninformed range,” Todd said.
He’s already decided to recommend a dip in the property tax collection forecast of at least 1 percent. Another wild card is whether Congress might enact a long-range mortgage holiday. Local governments usually get a big percentage of property tax revenue when mortgage holders release taxes from escrow accounts in the fall.
“My fear is if we get a 6-month deferment, we may not get a huge chunk of our property tax revenue until the end of our fiscal year,” he said.
Less driving means less gas tax revenue, which means less money from the state for city streets through the Powell Bill. Todd thinks that will decline, too.
“My recommendation is going to be try to limit some of these large projects” in street and storm drain repair, Todd said. “To tell you we’re going to get what we’ve been getting last few years or close to it is another shot in the dark.”

Budget deadline extension?

In a weekly Covid-19 update last week organized by the Land of Sky regional council, executives with associations representing North Carolina cities and counties all urged local officials to plan for a plunge in tax revenue.
“We’re very concerned about sales tax, everybody is,” Kevin Leonard, executive director of the N.C. Association of County Commissioners, said. The state association is also talking about:
• Extending the deadline for adoption of 2020-21 budgets or permitting some kind of interim budgets that can be amended when revenue projections become more clear.
• How counties can help small businesses.
• School construction as an economic development package through a bond or some other financing.
• “The need for virtual connectivity and broadband connecting kids to the internet so they can learn from home.

Although the CARES Act allocated $4 billion for North Carolina for Covid-related expenses, “it has to be tracked and reimbursed,” Leonard said. “None of that money is for the replacement of lost revenue.” The association wants Congress to amend the rules and to appropriate more money to replace lost revenue.
Paige Worsham, associate general counsel for the county association, said sales tax and hotel taxes will be most impacted.
“You may have a lot of hospitality industry,” she said. “Your occupancy taxes and your sales taxes are going to take a very significant impact.”
Tourism-rich Henderson County will almost certainly see a sharp drop in the hotel tax, which funds the Tourism Development Authority.
“TDA money is going to get hammered,” he said.

Rainy day fund is 'out the door'

Worsham recommends counties budget conservatively, expect steep declines in sales tax and more modest declines in property tax revenue through the last quarter of their budget year and into the first part of the fiscal year that starts July 1.
“In past years you saw sales tax go up several percentage points each year,” she said. The picture for 2020-21 “is going to be much different.” She suggested county budget-makers draft a quarter by quarter or even monthly projection reflecting a significant drop at the end of 2020. “It slowly starts to rebound so the decline in the budget (revenue) would be less and less every month.” Property tax is likely to be less impacted, she said, depending on homeowners’ and business owners’ ability to pay and whether they appeal the values.
She said it’s possible the deadline under state law to adopt budgets by July 1 could be amended or pushed back.
“I think that is often brought up because there is uncertainty,” she said. “The guidance that I have been seeing from the School of Government and LGC (Local Government Commission) has local government looking at interim budget authority” and the ability to amend budgets after July 1.
Addison McDowell, a lobbyist for the League of Municipalities, said the league projects a decline of $250 million in sales tax revenue March through June and a decline in occupancy taxes paid by hotel of at least 50 percent, representing a $25 million drop.
“An emerging concern” is that fewer people will renew tags, meaning they won’t pay for a new registration and motor vehicle property taxes, hurting both state and county revenue collections. Even the utility tax, which generates $3 billion a year, could suffer. People may be unable to pay their light bill and, under the governor’s order, power companies have lost the threat of a cutoff to force payment.
“The CARES Act seem to allocate a lot of money to local government but it’s to cover Covid related expense and not to replace lost revenue,” McDowell said. “We need future legislation to actually replace lost revenue for cities and towns.”
Legislators said the state is forecasting a steep drop in revenue.
“We were in a really good position to deal with a crisis because of the surplus we had on hand,” state Rep. Jake Johnson said. The state’s general fund had a surplus of $1.1 billion, the unemployment insurance fund had $3.5 billion in reserves and a Medicaid contingency fund stood at $186 million. But with demands for relief “those will be depleted relatively quickly,” he said.
State Rep. Chuck McGrady, a lead budget writer in the House, was more blunt.
The rainy day fund “is out the door,” he said, “and at this point the expectation is we’re looking at upwards of a $2 billion shortfall.”