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Aug 04

Sales Tax Distribution Report & Advice

Posted on August 4, 2016 at 2:15 PM by Paige Worsham

July  2016
                                    May 2016 Collections -- July 2016 Distributions

Once again local governments saw strong sales tax collections in May, gleaning $247.8 million. This is essentially flat compared to April collections, with an overall decline of less than $2.0 million. Year over year, that is an increase of $28.92 million. While substantial, that is less than the $44.59 million year over year increase we enjoyed in April.
 
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Looking Forward

In the short term, it appears that sales tax revenues will remain relatively strong. This strength will come from the continuing impact of the recent and ongoing base expansion and steady economic growth.

In terms of employment growth, as the chart from the Richmond Federal Reserve suggests, North Carolina has been experiencing growth similar to the nation as a whole.

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For us, the largest areas of employment growth have continued to be “business and professional services,” “trade, transportation and utilities,” and “construction” (although we are below the national growth rate in construction employment). Most of these industry sectors tend to be strongest in our more urban areas. With the decline in oil prices, domestic production has slumped more than 16.1% since the beginning of 2015.  While North Carolina is still experiencing some growth in this industry, it is depressed compared to expectations.

This slow but steady growth is also reflected in the rolling national Gross Domestic Product or GDP. Each week the Richmond Federal Reserve prepares a rolling national Gross Domestic Product (GDP) growth estimate. Throughout the month of June, that estimate hovered at 2.7% for the quarter. Even after the Brexit vote on June 24th, that number only dropped to 2.6%. Suggesting, at least at this point, that the vote is not expected to make a tremendous change in the value of our nation’s goods and services.

All of these factors contribute to slow but steady economic growth, which will support sales taxes statewide. Although the greatest increase will continue to be in more urban communities.

Beyond the immediate and near term, however, the future becomes less clear.

In previous writings we have mentioned the uncertainty surrounding the US election, which has caused some overall softening in the economy. This is normal and not unexpected in open, Presidential election years. However, Britain’s vote on June 24 to exit the European Union will have long lasting and unknown impacts on the global and national economies.

Most commentators agree that the financial sector is the most likely to see the greatest impact, at least for some time. Current stock market activity for two of the state’s top five employers, Wells Fargo and Bank of America, suggest this is true.

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The change could also impact North Carolina in terms of exports. According to the US Census Bureau, the United Kingdom is our state’s 7th largest trade partner for North Carolina exports. In 2015 the United Kingdom received more than $1.0 billion in North Carolina goods.

Other Sales Tax Changes

The budget passed by the General Assembly this week makes a number of changes to the sales tax statutes that will impact county revenues. Most of the changes are expected to increase sales tax revenues, although areas with particular industries may see less of an expansion than other counties on their point-of-sale revenues.

The bill expands the types of retailers that must levy the recently enacted sales tax on repair, maintenance and installation services. Previously some retailers who provided those services were excluded in a legislative attempt to limit a substantial expansion of the number of business that would have to register for a sales tax number. However, during the interim, the Revenue Laws Study Committee heard from several businesses who felt this was unfair, as businesses providing similar services were not being taxed similarly. The Fiscal Research Division estimates this change will net $22.4 million for the state, and a proportionate amount for local governments. This portion of the legislation has a January 2017 effective date.

The legislation also repeals the sales tax on automotive service contracts and limits the tax on the repair and maintenance of airplanes and boats.

Finally, legislators eliminated the $17.6 million State contribution to the local sales tax distribution. The commitment to provide this funding was included as a part of last year’s sales tax redistribution agreement, and was designed to hold all counties harmless for the first year of the new plan.


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