The Herald will address the issue in an editorial in Sunday’s edition, but in the meantime, here’s the latest salvo in the City of Sanford’s Business Privilege Tax issue…a press release from the Civitas Institute…
City of Sanford ’s Privilege License Tax Bad for Business, Denies Public Opinion
The City of Sanford ’s FY 2007-08 Budget implemented one of the most unfair and destructive taxes a government can impose: a business privilege license tax. In short, this tax forces businesses to pay taxes to local government even if they lose money.
Such a tax not only defies the principles of sound taxation, it represents an especially poor policy when applied to Sanford ’s specific situation.
A business privilege license tax is levied on businesses, in effect, for the ‘privilege’ of operating in a specific municipality. In the case of Sanford , the schedule of taxation includes a flat fee for all businesses with annual sales under $500,000, with every dollar of revenue above that amount being taxed at a fixed percentage.
These rates, however, are not applied evenly across all businesses. For example, there are three separate “schedules” established, based on each business’s industry category (i.e. manufacturers pay a different rate than retail stores). Moreover, several business types are exempt from the tax, with a list of roughly 60 categories of business revenue not subject to taxation, including chiropractors, attorneys and insurance agents.
Sanford’s business privilege tax clearly violates perhaps the most basic principle of business taxation: taxes should be applied evenly across all businesses. Creating different rates of taxation for different businesses is inherently unfair because some businesses are forced to pay more than others, creating an uneven playing field.
Probably the most unfair aspect of this tax, however, is that it taxes revenue, not profits. This means that a business operating at a loss is forced to add to their losses by paying a tax to local government. Further, the extensive record-keeping required to comply with this new tax creates high compliance costs – time and effort necessary to properly disclose all revenues – especially burdensome on small businesses with limited resources. Such a policy could more adequately be described as a ‘punishment’ rather than a ‘privilege.’
Not only is the tax inherently unfair, closer scrutiny of the city of Sanford ’s financial situation reveals the business privilege license tax to be wholly unnecessary. For starters, the city currently maintains an unreserved balance for its General Fund of $9.7 million. This equates to roughly 47 percent of the city’s General Fund expenditures. Simply put, city government has nearly $10 million sitting idle in anticipation of a revenue shortfall.
While setting aside money for a “rainy day” should be commended, such a large amount goes far above and beyond sound financial planning. For instance, North Carolina ’s state treasurer recommends that local governments maintain a reserve fund equaling a minimum of 8 percent to adequately cover any short-term revenue slowdowns. If Sanford were to double that recommendation, they would still only need to set aside $3.6 million. In short, city government is keeping an excess $6.1 million of taxpayer’s dollars in their reserve account.
Compare this to the $250,000 estimated revenue the new business privilege license tax is projected to bring in this year. With such an overly-robust reserve account, city leaders should be thinking of ways to lower taxes, not raise them.
With an economic slowdown upon us, and unemployment on the rise in Lee County , now is not the time for new taxes. Punishing entrepreneurship by imposing more taxes on local businesses is the perfect recipe to destroy much-needed jobs.
Not surprisingly, Sanford ’s privilege license tax is being faced with serious community opposition. Not only has the local Chamber of Commerce come out against it, the public has made their voice heard as well. During a public hearing on the tax last May, city council members were presented with a petition opposing the tax with more than 5,000 signatures. Unfortunately, city officials were more concerned with further padding local government coffers than listening to the concerns of their citizens.
Efforts are underway, however, by city council to repeal the policy before businesses begin receiving tax bills later this month. City leaders should listen to both sound economic principles and their citizens when making their decision.
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