2017 Fiscal Year State Budget, NC Budget and Tax Center

Follow the money: The Governor’s budget keeps phased-in income tax cuts on the books, proposes no further rate changes, and leaves nearly $5 million on the table

Today, Governor Pat McCrory unveiled a budget proposal for the 2017 fiscal year that provides modest funding increases to support early learning, education, mental health, and inconsistent pay bumps for teachers and state employees. His $22.3 billion budget proposal represents a 2.8 percent—or $600 million—increase over the current 2016 fiscal year budget.

The Governor’s budget proposal, in large part, is one that stays the course. That’s because his ability to replace the worst cuts from the economic downturn and address pressing needs is severely constrained by the recent tax cuts that he signed into law. His proposal allows these tax cuts—which primarily benefit profitable corporations and the wealthy—to continue to phase in as scheduled. All told, recent tax cuts are expected to cost more than $2 billion annually once all tax cuts go into effect.

That price tag is coming at the expense of providing pay raises and cost of living adjustments for all workers as well as strengthening education, public health and safety, and the other building blocks of a strong economy. His proposed modest levels of reinvestment are a small fraction of what is needed to realize his own stated principles of preparing for future growth and helping those who are struggling in today’s economy, as noted in the NC Budget & Tax Center’s public statement.

In fact, his budget would keep state support for services below pre-recession levels, when adjusted for inflation. That would be fine if public needs had shrunk. But they have grown. His budget also caps off the only period as far back as 1971 in which state spending would decline as a share of the economy for eight years in a row, while the economy itself grows. As such, many unmet needs will persist in programs that support vulnerable communities, including working parents who earn low-incomes and need affordable child care options as well as older adults in need of in-home and community care supports.

While most of the public budget debate this week will be on the spending side, examining how he pays for the budget deal is just as important. The Governor pays for his 2017 budget proposal in the following way:

 To start out, he relies on unanticipated revenue collections, money he anticipates agencies will return to the state (known as reversions), and money left on the table last year.

  • Revenues are expected to come in above conservative projections by $237.1 million for the 2016 fiscal year. Also, the Governor has access to nearly $533.9 million in unspent money that is expected to be left “on the table” at the end of the current fiscal year. This includes agency reversions.
  • He uses about 60 percent of the over-collections and unspent money to boost the state’s main savings account (“Rainy Day Fund”) and the savings account dedicated to repairs and renovations of state properties. He also uses part of the remaining money to pay for the $250 deduction that teachers can claim for classroom expenses in the 2016 tax year and also to transfer $150 million into the Medicaid reserve fund.
  • He carries over the remaining $164.6 million into the upcoming budget cycle.

On top of the money that the Governor expects to carry over at the end of this fiscal year, he expects to receive $22.2 billion in base revenue—an amount that is severely constrained by previously-approved tax cuts.

  • 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 $22.2 billion projection is a modest 1-percent growth rate over the current fiscal year. The Governor’s budget points out that this modest growth is “below long-term average growth and typical growth during economic expansions.”
  • That’s mostly due to tax cuts. The revenue total is diminished by the sizeable cuts to the personal and corporate income taxes that lawmakers, including the Governor, have approved over the last few years. On net, the tax changes (that also include sales tax expansions) are expected to result in a $1.3 billion loss in the upcoming fiscal year.

The Governor does not include any major new tax changes in his budget proposal.

  • His proposal reduces General Fund availability by $1.5 million due to conforming to federal tax policy that allows teachers to deduct up to $250 on their tax returns for expenses used to pay for classroom materials (an area of the state budget that is woefully inadequate).
  • He boosts General Fund availability by nearly $150,000 due to a transfer from the Insurance Regulatory Fund.

In the end, the Governor leaves nearly $5 million on the table in the 2017 fiscal year that can be carried over into the next budget cycle. See the chart below for a summary.


Governor Budget Graphics

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