NC Budget and Tax Center

House proposes important economic investments through bond, but cutting taxes at the same time would be a mistake

The North Carolina House just passed HB 943, which would put a $2.86 billion bond referendum before the voters this fall. This move is based on a growing consensus that investing in our schools, roads, state facilities, parks, and local infrastructure is an economic must.

Issuing new debt should be pared with a few pragmatic fiscal steps. First, we should not cut taxes again, which would undermine the flexibility we will need to repay the debt. Second, we should use regular appropriations to pay for most repairs, and keep the bond finances for transformative projects that move North Carolina’s economy forward.

If we are going to issue more debt, we cannot afford another round of tax cuts. If we borrow to improve the state’s infrastructure, the state will need strong future revenue growth to repay borrowers; more tax cuts or limits on revenue growth are bad fiscal policy. Moreover, reducing taxes even further could jeopardize North Carolina’s AAA rating, and force us to pay higher interest rates. The bond rating agencies are very sensitive to states’ long-term fiscal stability and states with lower credit scores have to pay higher interest rates. Other states that have cut taxes even more dramatically than North Carolina (e.g. Kansas) have been downgraded by the credit rating agencies, not an example that we should follow if we are about to purchase new debt.

Recent tax cuts are part of why the House proposal would use some bond proceeds to pay for repairs. A good chunk of the revenue that would be raised by this bond would likely go to repair projects that have been put off in recent years. Like many states, North Carolina put off repairs and deferred renovation projects when the Great Recession drastically reduced revenues. But after the economy recovered and revenues growth returned, a portion of these funds could have been used to catch up. Instead, the North Carolina General Assembly cut taxes rather than dealing with the backlog of repairs. While there’s not much North Carolina could have done to escape the budget impact of the Great Recession, the choice to cut is a big part of why there are hundreds of millions of dollars in repair and renovation projects included in the House proposal.

Using bonds to pay for repairs also reduces our ability to make transformative new investments. As a general principle, bonds are best used for new investments, things like new schools, roads, and infrastructure. When you spend bonds on things that make the state more competitive, new economic activity is part of what helps to pay for the debt. For example, if we did not need to pay for the backlog of repairs out of the bond proceeds, those funds could be used to substantially extend high-speed internet across more of rural North Carolina, which would help many of the most economically challenged parts of the state connect to the global market.

Moreover, if the state had not cut taxes so significantly, funds would already be available for some of the new investments that are included in the House proposal. For example, a portion of the corporate income tax was set aside for new school construction , but that allocation was removed in Fiscal Years 2011-12 and 2012-13 when the corporate income tax was cut. Some or all of the $400 million in the House proposal for transportation infrastructure would have already been appropriated if the legislature had not capped the gas tax in recent years, or if we had built a more sustainable long-term foundation for the Highway Fund. The Clean Water Management Trust Fund was cut by $100 million in Fiscal Year 2008-09, some of which could have paid for local sewer and water projects that will instead be supported by the House proposal.

To sum up, it is good to see a consensus emerging that building a competitive economy in North Carolina will require some serious investment. Given the low cost of debt right now, and the long list of critical economic needs across North Carolina, there is a good case that issuing a bond right now makes sense. On the other hand, recent tax and spending cuts mean that the House is now planning to use some of the funds on projects that could already have been covered in the budget. Finally, if we do borrow for these projects, it would be fiscally irresponsible to further reduce taxes and limit our options for how to pay back what we would owe.

More Information

Click the link at the top of this post for the text of HB 943, including a list of the projects that would be funded. At the time of this writing, here is a very high level breakdown of how most of the funds would be allocated:

  • UNC System: $890 million
  • Public Instruction: $500 million
  • Transportation: $400 million
  • Community Colleges: $300 million
  • General Capital Projects: $200 million
  • Agriculture: $195 million
  • State Parks and cultural attractions: $135 million
  • National Guard and military: $93 million
  • Water and Sewer Loans: $75 million
  • Public Safety: $47 million
  • Courthouses: $15 million

2 Comments


  1. Pertains!

    August 9, 2015 at 7:51 am

    This smart and much needed bond will play catch up on maintenance long over due and upgrades in technology. Hopefully they will let us vote on this.

    Any more tax cuts will once again only benefit the upper income residents of NC.
    It appears for the most part the tax cuts have been unsuccessful in bringing new business to our state. Giving tax cuts to successful established businesses when most middle and lower income level residents have ended up paying more in taxes is just another way of increasing the wealth at the top.

  2. LayintheSmakDown

    August 10, 2015 at 8:11 pm

    This is true, we need to go out and vote against these bonds. They are needless in almost every case and will raise taxes at both the state and local levels. You know localities will be on the hook for as much as $1 for $1 matching funds in a lot of cases. I will be doing all I can to work for defeat of the bonds…assuming the Senate is stupid enough to put them on the ballot.

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