After lengthy negotiations, North Carolina House and Senate leaders have reached a final budget agreement in recent days that they intend to pass into law before week’s end. As has been the case for the last several years, it is a disappointing document.
The final budget holds to the rigid formula of population plus inflation, spending only $22.3 billion to operate core public services, as well as meet the needs of a growing state population undergoing significant demographic shifts and the persistent challenges in ensuring that every community has access to opportunity. This spending level is a mere 2.8 percent above spending for the current fiscal years and does not reflect the actual needs of North Carolina. Opportunity exists to invest in North Carolina to meet those challenges and pursue every opportunity for greater success and well-being; however, policymakers have instead chosen to reduce the state’s collective commitment bringing state spending to 4.14 percent relative to the size of the economy, well below the historic average of 6 percent.
Lawmakers are relying on a largely disproven theory that cutting public spending and reducing taxes for the wealthy and profitable corporations will deliver improved economic outcomes for all North Carolinians. Some point to the state’s apparent recovery, which mimics the overall national recovery, but lawmakers have failed to address the fact that wages aren’t recovering for everyday North Carolinians, there aren’t jobs for everyone who wants to work in the majority of North Carolina counties, and there is persistently high poverty in urban and rural communities alike.
Our leaders’ loyalty to severe budget constraint and lopsided tax cuts, which primarily benefit profitable corporations and the wealthy, are making it impossible for them to meet the needs of communities and families across the state. And as research and prior experience shows, this tax-cut, disinvestment approach will not deliver the economic gains they promise. It diminishes the ability of the state to pursue the investments that do deliver returns to the broader economy: preparing every child for kindergarten, increasing post-secondary attainment of the workforce, and targeting investments in main streets and small business development in struggling areas, for example.
While most of the public budget debate this week will be on the spending side (see our initial take here), examining how the North Carolina General Assembly plans to pay for their proposal is just as important. Lawmakers pay for their 2017 budget proposal in the following ways:
• They rely on revenue collections coming in above what officials anticipated, money they anticipate agencies will return to the state (known as reversions), and other one-time dollars to help finance the budget. Revenues are expected to come in above conservative projections by $330.2 million for the 2016 fiscal year. In addition, they rely on $420 million in agency reversions or money that the agencies return through the course of the year through reductions in services or because of changes in costs to delivering services. Finally, because they left money unappropriated for the current year, this $175 million is one-time money that is rolled forward and used in their budget for the upcoming fiscal year.
• The final budget contributes $473 million to the Rainy Day Fund. Such an aggressive effort to contribute to the Rainy Day Fund is ill-timed given the unmet needs in communities. If other proposals to restrict access to these savings move forward, the purpose and effectiveness of the savings is called into question.
• In an interesting development, the joint budget contemplates base revenue from the existing tax structure to come in below prior projections made in this budget cycle, an amount is severely constrained by previously-approved tax cuts. The $21.4 billion in revenue projected to come in is slightly below the $22.2 billion projection used in the House budget, which was already a historically low 1-percent growth rate over the current fiscal year. This modest growth is “below long-term average growth and typical growth during economic expansions,” as state budget officials pointed out.
• The revenue total is diminished by the sizeable cuts to the personal and corporate income taxes that lawmakers approved over the last few years. On net, the already-approved tax changes (that also include sales tax expansions) are expected to result in a $1.3 billion loss in the upcoming fiscal year.
The joint budget availability statement shows clearly the decision to double down on tax cuts and the preferences given to certain groups.
• First, the final budget raises the standard deduction at a cost of $145 million. This approach is more costly and less effective than restoring the state EITC, which does a better job of helping working families and addressing inequities in our tax code. This is especially important as legislators pursue their goal of eliminating the income tax and expanding the sales tax to make up for the massive revenue loss that will result.
• They offset this revenue loss in part by phasing in more services to be subject to the sales tax. The anticipated increase in sales tax collections fully realized under that proposal would be $22.4 million.
• The other source of additional revenue for their budget is to eliminate the state contribution to local sales tax distribution by $17.6 million, another blow to local governments across the state.
• They reduce General Fund availability by providing preferential tax treatment to certain groups: $2 million to further reduce the tax on airplanes and boats and repeal certain service contracts; $6 million to expand the Mill Machinery Tax to metal recyclers, metal fabricators and ports; $1 million to exempt Styrofoam purchases for alternative wastewater systems.
• They boost General Fund availability through transfers from the Insurance Regulatory Fund ($2.5 million), the Treasurer’s Office ($517,872) and the NCGA Special Fund ($3 million) which was intended for use to pay legal fees associated with seeking private counsel.
• The joint budget spends every available revenue dollar, leaving no money on the table for any unanticipated needs or changes in estimates of costs and revenue.
The bottom line: This year’s budget deal represents another missed opportunity to reverse the destructive path lawmakers have been pursuing for several years now. The damage to essential public structures and services and the economy as a whole will, unfortunately, continue in fiscal year 2017.
Alexander Forter Sirota is the Director of the N.C. Budget & Tax Center.