Why Politicians Learned to Love the Sales Tax

By fall 2020, the Charlotte Moves task force was well on its way to putting together a nearly $20 billion plan to meet the city’s transportation needs for the next 30 years.  

There would be rail extensions—including a long-awaited line to north Mecklenburg—as well as road improvements, better bus service, and even an ambitious “micro transit” system that uses on-demand vans to fill gaps. Pieces were falling into place.

Except for one—a way to pay for it.

That September, the city’s chief financial officer presented the group with a long menu of financing choices that included property and sales taxes, revenue bonds, motor vehicle fees, development fees, federal loans, special tax districts, and private money.

“[It’s] almost like I’m drinking from a fire hose right now,” task force chair Harvey Gantt told the committee. “Lots of options out there.”

At least in theory.

“We really didn’t consider them; I’ll be honest with you,” Gantt, a Democrat and former mayor, told The Assembly recently. “The most equitable tax is the sales tax.”

So in November, Mecklenburg County voters will be asked to approve a penny sales tax increase projected to raise $19.4 billion over 30 years for transportation improvements. A “yes” vote would put Mecklenburg County’s sales tax at 8.25 percent, the highest in the state. Other municipalities will be watching to see whether a sales tax boost could help with their own transportation challenges.

Critics call the sales tax regressive because poor people pay a larger share of their income on it than wealthier people.

“My concern is the timing of a regressive tax,” said former Mayor Jennifer Roberts, a Democrat. “The economy is very uncertain. … It’s a tough time to be asking people to pay more, and especially those we know are low-income.”

Advocates like Gantt say the trade-off would be more reliable transportation options for people of all income levels. People from outside Mecklenburg would subsidize the investment by contributing a third of the tax revenue, according to the city. Food, medicine, housing, and utilities would be exempt.   

The referendum faces potential hurdles.

The killing of 23-year-old Iryna Zarutska on the light rail in August has drawn national attention, including from the White House. It has raised questions of safety and prompted investigations by the state and by the Federal Transit Administration. It triggered a congressional hearing and a special legislative session. The national scrutiny could make some Charlotte residents wary of funding a big expansion of light rail.

In a city grappling with gentrification, some voters also are concerned that residents would be displaced by wider roads and development along new rail lines. Others worry about getting a fair share of expected economic opportunities that would come with billions in spending. But according to Gantt, few are concerned about the tax itself.

“Nobody—nobody—gets in my face about the sales tax,” he said. 

A ‘Tax on Poverty’

North Carolina’s state sales tax began in 1933 as a temporary revenue source during the Great Depression. “It should be levied with the distinct understanding that it is an emergency measure … to save the state’s credit and keep going its essential activities,” then-Gov. John Ehringhaus, a Democrat, said.

Critics denounced it at the time. The state’s revenue commissioner in 1933 said the tax amounted to a “tax on poverty.” But lawmakers made it permanent in 1939.

To raise money for public schools, Gov. Terry Sanford extended the sales tax to food in 1961. (A quarter-century later, GOP Sen. Jim Broyhill ran a TV campaign ad criticizing “Food Tax Terry.” Sanford won the Senate seat.) The General Assembly repealed the food tax in the mid-1990s.

In 1971, the General Assembly gave counties authority to levy their own 1-cent sales tax in addition to the 3 percent state sales tax. Lawmakers allowed that local sales tax to double in the 1980s and then permitted some counties to levy an even higher one. 

Now, with the state sales tax at 4.75 percent, the combined state and local sales tax in N.C. counties ranges from 6.75 to 7.5 percent. 

In recent years, North Carolina has cut corporate and personal income taxes, and as a result, the state has become more reliant on the sales tax. In 2000, the state generated 25 percent of General Fund revenue from it; by 2024, that share rose to 34 percent, which is about the national average.

Earlier efforts to raise the sales tax in Mecklenburg have met with mixed success.

In 1998, voters approved a half-cent increase for transit. That has paid for the Blue Line light rail, which runs from south Charlotte to the University of North Carolina at Charlotte. In 2007, voters defeated a measure to repeal that tax. Seventy percent of voters voted against repeal, a higher percentage than those who voted for the original tax.

But in 2014, voters strongly rejected an effort to raise the tax a quarter-cent to fund teacher salaries and support Central Piedmont Community College, as well as the arts. Five years later, they rejected another proposal to raise the tax a quarter-cent for the arts, parks, and education.

The General Assembly this summer overwhelmingly passed a bill allowing Mecklenburg County to try again to raise the sales tax, this time for the transportation package. 

If November’s referendum passes, the city says a Mecklenburg household with the median annual income of $84,000 would pay an additional $240 a year in taxes, while the average low-income household would pay $132. (That’s based on calculations that poorer households spend 59 percent less than the median household on taxable goods.)

Another way to look at it, according to the progressive N.C. Budget & Tax Center, is that households with “poverty-level income” now spend 6.6 percent of their earnings on sales and excise taxes (such as levies on tobacco and alcohol). The top 1 percent of earners pay just over 1 percent of their income on those taxes.

“We know that a sales tax is going to be borne by those who have a fixed income because they spend more of what they have on goods and services,” said Alexandra Sirota, executive director of the nonprofit.

Like any tax, the sales tax has pros and cons. 

The benefits are that the sales tax is less of a drag on economic growth than corporate and personal income taxes, said Brian Balfour, senior vice president for policy at the conservative John Locke Foundation. From a revenue perspective, it also has a broad base, unlike the personal income tax, which has a large deduction that excludes many people from paying.  

The downsides of the sales tax, he said, are that it hits low-income households harder and can give incentives to shoppers to cross into another county for major purchases, which would harm local businesses. 

“The regressive nature of the tax needs to be balanced with the better economic and job growth that results from a tax structure more reliant on sales taxes instead of corporate or personal income taxes,” Balfour wrote in an email. 

State Sen. Graig Meyer, an Orange County Democrat, doesn’t like sales taxes because of their impact on low-income people. But he said most people view the sales tax as fair because everyone pays it. It’s a transparent tax–you see it on every receipt–and unlike income taxes, sales taxes can’t be dodged by people who can afford to hire a savvy accountant.

“They just want to know that everyone is paying their fair share, and I’m not getting screwed,” Meyer said. 

Counting Pennies

On a clear Sunday morning in August, Rev. William Barber took to the pulpit at Charlotte’s First Baptist Church West. Barber, a former Goldsboro pastor who led the state’s Moral Monday protests against the Republican-led legislature, cited other recent tax hikes in criticizing the referendum.

“We’re not necessarily against [a] tax,” he told congregants. “We’re against constantly being taxed in ways that hurt the poor.”

The campaign to pass the referendum is led by the Charlotte Regional Business Alliance, which is spending $3 million and has hired prominent consultants from both parties. So far, there’s been no organized opposition, though individual voices have made themselves heard.

Speaking to county commissioners in August, former City Council member Braxton Winston, a Democrat, called the proposal “a maximal tax that promises minimal returns.”

Roberts, the former mayor, told commissioners the tax would come as people “are losing health care … losing food benefits … losing their jobs.” The estimated $132 annual cost “may seem like a rounding error if you’ve got a white-collar job. But if you’re a struggling family, that’s a huge increase,” she said.

Community activist Robert Dawkins described supporters as an “unholy coalition.”

“Democrats and Republicans have turned into a corporatist on this,” he told The Assembly. “The fix is in.”

But Gantt said the benefits for low-income people, as for everybody else, outweigh the costs. He said a better transit system would give them improved service and access to more jobs across the county.

“Many of them said to me, ‘You know, we don’t mind paying the penny. If I can’t get to work on time, I lose my job.’”

The influential Black Political Caucus of Charlotte-Mecklenburg has endorsed the plan.

For County Commissioner George Dunlap, a Democrat, it’s “real simple.”

“I travel I-77 and I-85 during certain times of day on a regular basis,” he said. “Anybody who gets on the freeway clearly understands the benefit of increasing the sales tax.”

State Rep. Julia Howard, a Davie County Republican and senior chair of the House Finance Committee, was one of the architects of policies a decade ago to cut state income taxes and expand the sales tax to cover some services and events, such as concerts, movies, and athletic contests.

Howard voted this year to let Mecklenburg put the referendum on the ballot, but she believes an 8.25 percent sales tax is too high. 

“If you’re looking at people on fixed incomes, it will hit those people hard,” she said. “They do count pennies.”

‘I Feel the Angst’

On a bright September morning, retired truck driver Daniel Huckeba was leaving a Charlotte Walmart when The Assembly asked him about the referendum.

“I’m on a limited income, but a penny, it wouldn’t bother me,” said Huckeba, 69. “I’m all for anything that can help the traffic in Charlotte right now.”

Across the parking lot, 80-year-old Effie Exarchous had a different take. “I can’t afford it,” she said. “Every time I go to the grocery store, the price is up.”

“I feel the angst,” said Mecklenburg Commissioner Arthur Griffin, a Democrat. While he voted with all but one commissioner to put the referendum on the ballot, he still has questions.

“All taxes are regressive for poor people,” he said. “What I’m looking for is a balance. What do poor people [and] rich people get for their investment?”

For example, he said, voters see all the development spurred by light rail’s Blue Line in more prosperous areas along South Boulevard. They’ve also seen the lack of development along the streetcar line, which runs from just east of Uptown up Beatties Ford Road to less wealthy areas to the west. The streetcar would be extended under the plan.

“Unless you’re Ray Charles, you can see where the Blue Line has been and is going,” he said. “When you look at the [streetcar] … you see the same Beatties Ford you’ve seen the last 20 to 30 years.”

Edwin Peacock is one of only two Republicans on the City Council. “I’m pro-Charlotte,” he said, adding that he favors “the opportunity to control our transportation choices versus the ‘hope-and-pray’ method that Raleigh will allocate enough to us.”

Limited Options

When Gantt was mayor in the mid-1980s, he frequently pushed for alternative revenues. He said levies such as a payroll or land transfer tax would take the burden off property and sales taxes. They all failed to get off the ground. He said the need hasn’t changed.

Sirota, of the Budget & Tax Center, said local governments in North Carolina are limited when it comes to raising money.

“At the local government level, there are really too few options for finding the revenue for community priorities,” she said. “They’re squeezed, and they’re squeezed in ways that are unsustainable in the long run.”

That doesn’t surprise Scott Mooneyham, a spokesman for the N.C. League of Municipalities.

“That’s something that’s always come up,” he said, “the limited ability of cities and towns to tap any broad array of revenue sources. You’ve got sales taxes and property taxes, and those are the main sources of revenue to pay the operating expenses of cities and towns.”

Whitney Afonso, who teaches public administration and government at the University of North Carolina at Chapel Hill’s School of Government, said North Carolina is like many states in the options it offers local governments.

Afonso said the proposed exemptions in Mecklenburg, including food, medicine, and housing, would make the added sales tax “less regressive than other sales taxes in the state.” And Mecklenburg’s position as a border county and tourist destination offers an advantage many counties lack.

“Charlotte and Mecklenburg benefit tremendously from those nonresidents,” she said. “That’s important to note considering who’s bearing the burden of this tax.”

Only 8 percent of Charlotte voters went to the polls during September’s primary election. But longtime Mecklenburg Elections Director Michael Dickerson expects a November turnout of 25 to 30 percent, which would be the highest local election turnout in years.

Business North Carolina reported a poll conducted by supporters of the tax in July that showed the referendum winning by slightly more than 50 percent to 40 percent, a closer margin than some expected.

Roberts, the former mayor, calls it “just the wrong plan at the wrong time.”

But, she said, “We know we’re David vs. Goliath.”

Senior editor John Drescher contributed reporting.