NC Budget and Tax Center

Follow the money: House budget proposal includes major tax changes that reduce ability to rebuild broadly shared opportunity

Another round of tax cuts for corporations, extended tax breaks for selected industries, and considerable fee hikes for families and businesses are included in the tax and budget package that the House leadership unveiled yesterday afternoon. Because tax changes affect the level of state resources that are available for investment, lawmakers must decide on its tax priorities ahead of approving their budget bill for the upcoming 2015-17 biennium. The House Finance committee tweaked the tax changes last night and now the budget bill is moving through the committee process with the expectation of a final vote on the House floor by Friday.

How the state raises the money that supports public schools, health care, courts and other core supports to the economy and communities should get just as much scrutiny as the spending side of the budget debate—but this is rarely the case. Examining how lawmakers pay for the budget is important in light of the 2013 tax plan that continues to drain resources, which otherwise could have been used to build opportunity and replace the worst cuts enacted since the economic downturn.

The House leadership pays for its FY2016 budget proposal in the following way:

The House relies on a surplus over anticipated revenue collections, 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 projections by $400 million for the current fiscal year that ends in June. And, the House has access to $230 million in unspent money that is expected to be left “on the table” at the end of the current fiscal year. This includes agency
  • The House also has an additional $20.4 million due to the Dorothy Dix property sale, the Standard and Poor’s Settlement, and an already-approved tax change.
  • Lawmakers put the entire surplus into the state’s main savings account and the savings account dedicated to repairs and renovations of state properties. This is a good decision because it is increasingly clear that the surplus this year is one-time in nature. They also earmark $20 million for the State Emergency Response Account and $60 million for the Film and Entertainment Grant fund (which replaced the Film Tax Credit that lawmakers allowed expire last session).
  • The House carries over nearly $171.2 million into the upcoming budget cycle and should only be used for one-time expenses because it is one-time money.

On top of the money that the House carries over at the end of this fiscal year, they expect to receive $21.97 billion in base revenues.

  • Most of the revenues will come from taxes, primarily from the state income tax, sales tax, and corporate income tax. The remaining revenue comes from the Highway Fund and other non-tax sources.
  • The revenue total is diminished, accounting for the revenue reduction resulting from the tax plan that lawmakers enacted in 2013—the benefits of which primarily flow to the wealthy and profitable corporations.
  • The total also includes the further rate reduction to the corporate income tax that will be lowered from 5 to 3 percent by 2017, costing $109.1 million in FY16 and $349.1 million in FY17. Lawmakers should eliminate—or at least delay—this tax break until revenues recover to the level that’s needed to adequately fund education, public health, and other economy-boosting public goods.

House leadership includes major tax changes that reduce revenue and also diverts money that is available or leftover from special funds to enhance General Fund availability.

  • The House reduces revenue availability by $68.2 million in FY16 by including special tax breaks for datacenters, historic preservation activities and mill machinery as well as restoring and extending the tax deduction for medical expenses. None of these provisions were offset by closing other loopholes and as a result reduce revenue that could be used to boost needed funding in core areas of the budget. (In FY17, additional tax breaks kick in for the motorsports and solar industries).
  • The House expects to have $186.3 million from the current year Medicaid Contingency Reserve Fund, setting aside $50 million to remain in the fund with the remainder to revert to the General Fund. They also boost General Fund availability by diverting an additional $3.7 million from the Highway Fund (which is on top of the usual $215.9 million transfer), $25 million in Judicial Fees and $2.9 million from the Statewide Misdemeanant Confinement Fund (no further information is available that explains these last two transfers).
  • Among other changes, the House also anticipates an additional $50 million from the Sale of the Dorothea Dix Property as well as funds transferred from the Treasurer’s Office and funds forfeited from flexible spending accounts.
  • On net, the House boosts General Fund availability by $157 million in FY16. In the second year, the net impact is in the red—the state would reduce General Fund availability by $264.6 million.

To be clear, the House substantially hikes fees to the tune of hundreds of millions of dollars that aren’t sent back to the General Fund and thus do not show up in the summary chart below. In transportation fees alone, the House raises $139 million in FY16 and $329.6 million in FY17—this is partially offset by a drop in the gas tax by $30.5 million in FY16 and $28.7 million in FY17. The complete lists of new fees are here.

In the end after accounting for appropriations, the House leaves $138 million on the table in FY16 that can be carried over into the FY17 budget cycle. See the chart below for a summary.

Revenue Chart, House


One Comment

  1. LayintheSmakDown

    May 20, 2015 at 9:33 am

    The NCGA is doing fine with sharing opportunity in a reasonable way. Tax cuts for all in NC including businesses, was a start. Noting all that is requested on this blog and doing the opposite is also a HUGE step in the right direction. Things will be fine, rational spending and reasonable tax cuts are where the future takes us.

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