Yesterday, the North Carolina Senate released its proposed biennial budget for the next two years. The budget falls in line with the spending target that leaders in both chambers agreed to earlier this session, but includes tax law changes that the House proposal did not.
Together with funds statutorily committed to the State Capital and Infrastructure Fund, which are not reflected in the total budget amount, the $24.6 billion budget is nearly three percent higher than the FY 2019 budget that runs out this July. By at least three key measurements, however, the proposal comes up woefully short in meeting basic state needs.
- Senate budget proposal shows a decrease in spending from pre-recession levels.
Despite North Carolina’s rapidly growing population — one of the fastest in the nation — the current proposal is 5.5 percent less than the pre-recession budget. This is reflected in our abysmally low rankings for per pupil spending, among other areas, despite the small year-over-year increases that legislative leaders tout.
- Spending as a share of the state’s economy continues to decrease.
With an expanding economy (frequently and mistakenly cited by legislators as a tax cut success), we would expect spending to increase to keep up with the growing population in our state and to help fuel growth as our state continues its slow recovery from the recession. But with fewer dollars as a result of the General Assembly’s commitment to tax cuts since 2013, insufficient dollars are available for areas like early childhood education, protecting natural resources like water, and ensuring that our most vulnerable have access to even the most basic resources.
- The Senate budget proposal shows increasing reliance on over-collection of revenues and agency reversions.
Tax provisions included in the budget, while resulting in slightly more revenue on net each year, would continue to cut taxes for most businesses and individuals while expanding the sales tax and raising a gross premium tax on Prepaid Health Plans. The result is that the budget relies less on General Fund revenue for expansion and instead on revenues coming in ahead of projection and agencies not expending all funds allocated to them.
This reliance on unsustainable, one-time funds raises concerns for North Carolina’s future, particularly as the state takes on the significant transition of major public systems like the transition to Medicaid managed care. It is even more concerning given the growing need to plan for climate change-related disasters and the potential of an upcoming recession.
- The Senate budget worsens the already upside-down tax code, placing a greater burden on those with low incomes.
The tax changes included in the Senate budget will not fix the upside-down tax code. The changes raise the standard deduction for taxable personal income subject to the income tax (a benefit to all who don’t itemize) and provide windfall to corporations through franchise tax cuts. In so doing, the budget proposal misses the opportunity to deliver a more targeted bottom-up tax cut to working families and stop cutting taxes that flow primarily to (mostly out-of-state) corporate shareholders.
North Carolina could better meet the needs of a fast-growing state and render its tax structure less regressive by re-introducing a graduated personal income tax rate that features marginal tax rates which increase based on increased ability to pay and lifting corporate tax rates back up to better match rates in neighboring states.
Suzy Khachaturyan is a Policy Analyst at the Budget and Tax Center, a project of the North Carolina Justice Center.