Connect NC Bond Act out of step with cutting taxes


By Patrick McHugh - N.C. Justice Center



State policymakers seem to think we can spare the money for another $1 billion tax cut, but also need to run up $2 billion* in new debt for core investments. The NC Senate this week takes up the Connect NC Bond Act of 2015 (HB 943), which would use debt instead of regular appropriations to pay for a range of repair and renovation projects. While now is a great time to borrow for major new investments, cutting taxes at the same time is bad news for North Carolina’s long-term fiscal house.

There are good reasons to issue debt right now. Interest rates are still pegged to the floor and low oil prices make it cheaper to complete construction projects. After seven years of below average appropriations, especially during the recovery, the list of overdue repair and upgrade projects is as long as your arm (assuming you’re on the tall side).

Simultaneously running up debt and cutting taxes is risky business. Together, the cost of tax cuts passed last week and repaying new debt will set North Carolina up for future cuts to core government functions that are already stretched beyond the breaking point. More tax cuts may also topple North Carolina’s credit rating, which already happened to states like Kansas when they cut taxes. If lenders get even more edgy about North Carolina’s shaky fiscal house, they may demand higher interest rates in a few years’ time when the last of the bonds authorized by HB 943 would go to the credit market.

Bonds are also a sub-optimal way to make up catch up on repairs. Like most states, North Carolina put off a lot of repair projects during the worst of the Great Recession. However, instead of filling the hole when the economy got moving again, the legislature chose to cut taxes in 2013, leaving many repairs undone. As a consequence, HB 943 would use up a huge share of the funds on repairs that should already be completed, eating away at our ability to invest in new assets that move North Carolina forward.

Finally, there has been very little public discussion about which projects to fund with bond proceeds. The version of HB 943 that was posted yesterday reduces the total debt package from $2.85 billion to $2 billion and significantly alters how those funds will be assigned to different types of projects. The earlier House version, for example, would have devoted $500 million in funding for local school construction and renovation, but K-12 receives nothing in the version published yesterday. Another $400 million for transportation funding also disappeared in the most recent draft. Going in the other direction, water and sewer funds for local governments increased by nearly $375 million compared to last month’s bill. At the time of this post, it appears that HB 943 is undergoing another round of edits, so the details may change again within the next day. Given the magnitude of the funds to be spent if HB 943 passes and voters approve the debt, a more thorough and public discussion is warranted.

Now should be a great time to use debt to invest in North Carolina’s future, but with recent tax cuts threatening our ability to repay and little public debate about how best to invest the funds, the Connect NC Bond raises some questions.

Patrick McHugh is the economic analyst for the N.C. Budget & Tax Center.

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By Patrick McHugh

N.C. Justice Center

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