NC Budget and Tax Center

Tax cuts have pitted capital needs against education, health, other vital services

North Carolina’s budgeting mechanism for servicing debt, paying to repair state property, and investing in new capital projects will change on July 1 with the implementation of the State Capital and Investment Fund (SCIF). Given that North Carolina has been underfunding repairs, renovations, and new capital projects for years, creating a pot of funds to address these needs that is separated from the rest of the General Fund does make a certain amount of sense.

The challenge, however, is that years of tax cuts have squeezed our ability to fund the needs of a growing state, so setting funds aside for capital projects at the outset of the budgeting process will create even fewer resources in other areas of the budget. The result is that our state is facing a growing gap between the revenue we need to keep up with providing basic services and with maintaining and building infrastructure to serve North Carolinians and the revenue that we collect.  This will only get worse in future years as the tax cuts continue to reduce revenue annually by at least $3.6 billion from what would have been collected under the tax code before the tax cuts began in 2013.

The SCIF creates a new dedicated pot of funds for these capital needs that is taken out of the General Fund before other appropriation decisions are made. The SCIF is funded statutorily with 4 percent of general fund revenues (projected to exceed $950 million for 2019-20 fiscal year), and 25 percent of the unreserved fund balance ($237.5 million in the upcoming fiscal year). Those funds will first be used to make $721 million in debt payments, with another $250 million devoted to repairing existing state facilities, and just north of $200 million for new capital projects.

Creating the SCIF has some merit as capital improvements and repairs are often the first things to get cut when budget writers don’t have enough revenue to go around, but a few bits of context are still important.

First, the scope of North Carolina’s capital needs far exceeds what the SCIF can meet in its current arrangement. North Carolina’s schools alone have over $8 billion in facility improvement needs, and that is only one area of capital needs that have been underfunded for years. Building and maintaining quality public facilities doesn’t come cheap, and the SCIF simply won’t generate enough funding to deliver what North Carolinians deserve.

Second, by setting aside debt and capital funds before the rest of the budgeting process takes place will make it even harder to meet all of the other needs of a growing state. While budget writers were in committee discussing the House’s proposal, thousands of educators were just outside demanding more funding for supplies, school nurses, teaching assistants, and a range of other vital educational needs that have gone wanting in recent years. And across areas of health, housing, and environment, documented needs for investments that would protect the public good have gone unfunded.

All of these challenges are rooted in years of decisions to give wealthy individuals and big corporations billions a year in tax cuts. Just this year alone, a scheduled reduction in the Corporate and Personal Income Tax rates drained another $900 million from the state’s coffers, funds that would have more than covered our existing debt payments without diverting support for everything else.

A final important note: At a time when revenue is already reduced, the move to solely propose funding capital projects through available revenue rather than looking to the potential for a state bond to take advantage of low interest rates is concerning.

As noted by some legislative leaders, this appears rooted more in fears of debt than in a practical consideration of what financing mechanisms would best allow the state to achieve its full set of priorities for our families and communities.

In the end, the SCIF is a cautionary tale. After years of lavishing tax cuts on the most prosperous North Carolinians, the legislature has backed itself into a corner where the only way to start addressing the need to repair existing facilities and build new ones is to take even more funding away from other services that are needed today.

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