NC Budget and Tax Center

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

Yesterday, legislative leadership unveiled a joint budget deal that puts the train on the wrong tracks by pursuing deeper tax cuts at the expense of strengthening public education, public health and safety, and the other building blocks of a strong economy. The deal includes another costly round of income tax cuts, additional tax breaks for selected industries, and an expansion in the sales tax base to include installation, repair, and maintenance services. The tax plan will lose $383.6 million over a two-year period, with the annual loss ballooning to $692.9 million in by the fifth year.

The state Senate is scheduled to give preliminary approval of the 500-plus page deal at 2pm today and final approval tomorrow, despite its 11:30pm release last evening. The House is expected to vote on the deal as early as Thursday, with it headed to the Governor’s desk after a final vote. The stop-gap spending measure that is currently in place expires Friday at midnight and would need to be extended for a fourth time if a final budget deal is not in place by then.

While most of the public budget debate this week will be on the spending side, examining how lawmakers pay for the budget deal is just as important. This is especially true due to this new round of costly tax cuts that come on top of the $1 billion annual tax cuts approved two years ago. Both tax plans drain resources that otherwise could have been used to build opportunity and replace the worst cuts enacted since the economic downturn.

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

 To start out, the leadership 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 came in above projections by $445.8 million for the 2015 fiscal year. And, leadership has access to nearly $417.7 million in unspent money that is expected to be left “on the table” at the end of the current fiscal year.
  • They also have an additional $2 million due to the Dorothy Dix property sale but that is offset by an already-approved tax change that costs the state $1 million.
  • Lawmakers used 70 percent of the overcollections and unspent money to boost 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 FY15 surplus is one-time in nature.
  • Leadership carries over the remaining $264.5 million into the upcoming budget cycle (more than what they’ve done in the past couple of years). These dollars should only be used for one-time expenses because it is one-time money.

On top of the money that the leadership 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 Highway Fund transfer is repealed; see below).
  • The revenue total is diminished by approximately $1 billion per year, 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 have eliminated—or at least delayed—this tax break until revenues recover to the level that’s needed to adequately fund education, public health, and other vital public services.

The 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 final budget reduces revenue availability by $587.6 million over the biennium by including another costly round of income tax cuts, tax changes for corporations, and renewing the Historic Preservation Tax Credit that was scheduled to expire.
  • The cost of these tax cuts is offset by expanding the sales tax base to include installation, repair and maintenance services—this move raises $204 million over the biennium. Any shift in the sales tax base should be paired with a state Earned Income Tax Credit to provide targeted and efficient relief to low- and moderate-income families but the budget fails to include this credit.
  • They also force local governments to set aside $17.6 million in FY17 from local sales tax collections (that are raised from the sales tax base expansion) and target those dollars to public schools, community colleges, and economic development. There is a related special provision that would change the sales tax allocation among the state’s 100 counties for new tax collections collected under the expanded sales tax base.
  • They also reduce General Fund availability by ending the $215.9 million transfer from the Highway Fund that supported the State Highway Patrol, by transferring $10 million each year to Golden Leaf from the Master Settlement Agreement, and setting aside $75 million in FY16 and $150 million in FY17 for Medicaid reform.
  • They boost General Fund availability by $18.9 million from transfers—for example, from the Treasurer’s Office and funds forfeited from flexible spending accounts—and anticipate another $44.4 million by transferring judicial fees and accepting the Standard and Poor Settlement funds.
  • On net, the leadership reduces General Fund availability by $312.3 million in FY16—they more than double the losses at $713.4 million in FY17. This price will further balloon with each year as the income taxes phase in, limiting future budget writers’ ability to pass an adequate budget.

To be clear, the budget also substantially hikes DMV and other transportation fees and taxes by $292.7 million that aren’t sent back to the General Fund and thus do not show up in the summary chart below.

In the end, the leadership leaves nearly $182.6 million on the table in FY16 and $125.8 million on the table in FY17 that can be carried over into the next budget cycle. See the chart below for a summary.

Follow the Money, final budget

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