Public investment falls, tax responsibility shifts

By Alexandra Forter Sirota - N.C. Justice Center

Public investments are essential building blocks of long-term economic growth and shared prosperity. Decades ago, North Carolina diverged from its Southern neighbors by investing in good roads, quality public schools and universities and early childhood programs.

Since the official recovery began in 2009 — when rebuilding from the Great Recession would have been possible — state lawmakers have turned away from that tradition, choosing to sharply limit public spending in favor of tax cuts. Overall, state support for services in the 2016 fiscal year will be nearly a full percentage point below historic investment levels as a share of the economy.

In fact, state spending as a share of the economy — measured by state personal income — has fallen every year since 2009. The new budget continues this trend, and caps off the only period in more than four decades in which state spending declined as a part of the economy for more than five straight years.

The tax code has been radically transformed since 2010 in a way that makes adequate funding 0f core public services more difficult.

The most recent chapter in state fiscal history began in 2009 with the worst revenue shortfalls since the Great Depression. State policymakers responded with targeted spending cuts, deferred capital projects and measures to bolster state revenues. A temporary tax package passed in 2009 combined a sales tax increase with a surcharge on high-income taxpayers and profitable corporations to raise $1.3 billion. It expired in 2011.

The official recovery began in July 2009, but job losses in the state continued for 14 more months. Despite still-sluggish job creation and revenue projections, policymakers, having allowed the temporary tax package to expire, made $1.7 billion in additional budget cuts in 2011. At the same time, the legislature passed a tax exemption for business “pass-through” income at a cost of more than $300 million per year.

In 2012, the legislature increased taxes on many working families by reducing the value of the state Earned Income Tax Credit (EITC). At the same time, lawmakers constrained the ability of the Department of Revenue to prevent multi-state corporations from shifting profits to other states to avoid paying taxes on profits earned in North Carolina.

In 2013, as the state’s economic recovery was finally taking hold, lawmakers enacted a major overhaul of the tax code that further reduced revenues. They scrapped North Carolina’s progressive income tax and replaced it with a flat rate, phased in tax cuts for profitable corporations, extended the sales tax to several services and eliminated many credits and deductions — including the state EITC — reducing available revenue by roughly $1 billion per year. In a separate bill they also eliminated the estate tax that would have been levied on the value of estates worth more than $5 million. The combined effect was to shift the tax load further onto working- and middle-class taxpayers while giving millionaires a significant tax cut. Reductions on the public investments side included: fewer slots in pre-K programs; elimination of funding for small business lending in underserved communities; decreases in Medicaid provider rates; and reduced staffing for monitoring and testing the state’s environmental quality.

Policymakers made fewer changes to state-level taxes in the 2014 legislative session, but they enacted restrictions on the ability of local governments to compensate for the loss of state funding support caused by previous tax cuts. Most significant was a new law barring local governments from collecting privilege license taxes from businesses.

In 2015, policymakers once again cut taxes on profitable multistate corporations, reduced the personal income tax rate and expanded the sales tax to more services. On top of increasing the share of total state taxes paid by low- and middle-income families, this package of changes will reduce available revenue by more than $1 billion annually within four years.

Alexandra Forter Sirota is the Director of the N.C. Budget & Tax Center

By Alexandra Forter Sirota

N.C. Justice Center

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