NC Budget and Tax Center

Latest proposal in budget debate would lock in harmful policy choices

The Senate Finance Committee this morning voted to approve SB 607 which included a number of proposals that would make the state’s current economic challenges worse and undermine the foundations of a strong economy. This included an amendment to the constitution to cap the income tax at 5% and another undemocratic amendment creating a flawed formula-based limit on state investments that would force permanent cuts to education, roads and highways, health care and other key services that support our economy and quality of life. This amendment would also require a 2/3rd majority vote to increase spending beyond the formula. There is also a third amendment to the constitution included in the bill which would limit access to Emergency Savings Reserves by requiring a 2/3rd majority of legislators to access it.

The flurry of activity on tax and budget matters comes on the heels of the Senate announcement yesterday that they are willing to address certain policy matters outside of the budget, clearing the way for a final budget deal before the August 14th deadline.

A rigid, arbitrary, and fundamentally flawed formula for budgeting

The second proposed amendment which would remove authority from state lawmakers by setting an arbitrary formula for government spending has been tried in only one other state, Colorado, and has been widely acknowledged as a failure. In fact, it did so much damage in Colorado that voters chose to suspend it. Before they suspended it, this rigid formula forced drastic cuts to Colorado’s K-12 and higher education, and it became impossible for the state to keep pace with the rising cost of health care, forcing cuts to child immunization programs and prenatal health care. At the same time, it was clear that it was doing nothing to improve Colorado’s business climate, economy, or quality of life. As a result, business leaders in Colorado were major proponents of suspending the law.

The harm to Colorado was significant, but the use of such a rigid and fundamentally flawed formula would be particularly damaging in North Carolina where recent harmful budget cuts to our schools and other services average people depend on everyday would be locked in permanently and new emerging needs could not be met by future policymakers because their hands would be tied by this constitutional provision.  The capping of state spending to population plus inflation growth would lead to large, annual cuts that over time make it impossible to ensure a quality education for our children, maintain vibrant main streets in communities, and invest in the health and safety of families.

In North Carolina, such a rigid formula would mean forgoing an estimated $500 million in investments next year alone. This $500 million would provide for critical classroom funding for our kids, could allow the state to support rural economic development and support the research and development at public universities that drives innovation.

Additionally, it’s critical to understand that this type of law is a gimmick and does nothing to make government run more efficiently or ensure that tax dollars are well spent. Instead of making meaningful reforms, the proposal passed by the Senate Finance Committee simply turns lawmakers’ decision-making responsibilities over to a flawed formula. Meanwhile, it won’t do anything to make sure the state’s spending priorities are in line with the needs of North Carolinians or make the tax system fairer.

An undemocratic hurdle for our tax system

The other proposal passed today by the committee – a hard limit to the income tax rate of 5% would severely limit the state’s ability to ensure the tax code is adequate and fair over time. Such a proposal could cost taxpayers money by raising the cost of borrowing. It also would likely shift the financing of public investments to fees and other taxes that taxpayers will have to pay, including higher local property taxes, sales tax, vehicle fees, and college tuition.

These proposed constitutional amendments make it harder – not easier – for lawmakers to budget responsibly and they will weaken the foundation of our economy by ensuring the state cannot invest in its people and places. A budget that includes these flawed policy ideas will not help North Carolina move forward.


The erosion of the minimum wage hurts us all, #wageweek calls for a raise to the minimum wage

This week will be commemorated as #wageweek by advocates, workers, and business leaders across the country. It was this week in 2009 that the federal minimum wage was last raised to $7.25 where it remains today.

The failure of the federal minimum wage to be raised in the past six years is just the recent failure in a long line of inaction that has allowed this wage floor to erode and with it an important check on rising inequality, economic hardship and inefficient economic performance.  The minimum wage is now far below what it actually takes to make ends meet for a worker and a labor standard that fails to reflect the modern economy.

Here are four facts about the minimum wage in North Carolina: Read more

NC Budget and Tax Center

Education Reform Funding In Massachusetts: Recognizing the Connection between Education and Economic Development

This is a guest blog post from Luc Schuster, Deputy Director with the Massachusetts Budget and Policy Center. This blog post synthesizes and updates information in a longer MassBudget’s factsheet on Education Reform in Massachusetts, available online HERE.

Motivated by growing concerns that our schools were not serving all students well, especially those in high-poverty districts, Massachusetts passed the landmark Education Reform Act of 1993 (or Ed Reform), which included a bunch of changes to the way schools are financed. While pressing challenges remain, these changes helped position a much greater share of all Massachusetts children to learn and to thrive over the past couple of decades.

Ed Reform overhauled the state’s Chapter 70 education funding formula, making the distribution of state aid more adequate and more equitable by:

  • Creating a minimum required funding level for all districts. A district’s minimum requirement is driven by its “foundation budget,” calculated by considering the characteristics of its student population (e.g. the total number of kids in each grade and the number of low-income students).
  • Requiring communities to contribute revenue based on a uniform calculation of their local tax-raising capacity.
  • Providing state aid to fill the gap between a district’s foundation budget and its required local contribution.

As part of a grand bargain to couple new policy reforms with greater state investment, Ed Reform included an ambitious commitment to increase education aid to local districts. The timing of this commitment coincided nicely with strong state economic growth, and education aid roughly doubled over the 1990’s. But the state’s fiscal situation deteriorated by the early 2000’s, due in large part to the annual loss of about $3 billion in revenue resulting from state-level income tax cuts phased-in between 1998 and 2002. With less revenue to support state programs, funding progress of the 1990’s has been partially reversed since 2002.

Part of the original motivation behind Ed Reform was a sense that the nation was rapidly moving towards a knowledge-based economy with a growing premium placed on the skills of a state’s workforce. This movement has continued over the past twenty years, underscoring the importance of investing in the education over the long term (see A Well-Educated Workforce is Key to State Prosperity).

Back in the late 1970’s states with more highly-educated workforces tended to have somewhat higher wages, but the relationship was pretty weak, with many outliers. States like Michigan and Ohio, for instance, were among the highest-wage states, even though they had lower levels of education, largely because these states had healthy manufacturing sectors with jobs that paid relatively well for people with only a high school degree.

Largely by 1993, and even more so today, there was a much stronger relationship between median wages and the education of a state’s workforce, with many fewer outliers. State leaders were right to identify the changing dynamic of education as the pathway to greater economic well-being back in the early 1990’s, and it appears that education will continue to play a central role in our state’s ability to build a strong, high wage, economy.

MA Scatterplot

NC Budget and Tax Center

National Economy, Stock Market Drive Better than Expected Income Tax Collections Not Tax Cuts

Both House and Senate budget writers did the right thing by putting the $400 million projected surplus this year towards reserves.  This is important because North Carolina’s revenue collection surprise in April was largely the result of national trends that saw strong performance in capital gains income, a likely one time event.

The challenge, of course, is that budget writers do reduce the corporate income tax rates in the context of this one-time event.  The House allows the automatic trigger to go into effect reducing the rate profitable corporations pay down to 4 percent because the one-time collection above expectations meets the revenue threshold established in statute.  The Senate makes permanent the tax cuts for corporations regardless of current or future revenue collections but does so, in part, using the latest revenue news as justification.  Importantly, while collections are above expectations, as my colleague identified in a previous post, they are not above pre-recession levels or stronger than historic performance. Thus the decision to further reduce the state’s revenue sources based on a one-time event is not fiscally prudent.

In this week’s Prosperity Watch we wrote about more of the research into the national trend that drove an increase in personal income tax collections at tax time.

38 of the 41 states that have a broad-based personal income tax saw an average year over year growth in personal income tax collections of 11.5 percent according to a new report by the Rockefeller Institute of Government. Overall, 36 of the 38 states saw growth in personal income tax collections, with only Kansas and Illinois seeing a decline. North Carolina joined 25 other states in reporting double-digit growth in year over year personal income tax collections. Notably, other states that experienced similarly strong growth in their personal income tax collections did not pursue tax cuts and some states, California and Connecticut for example, raised taxes.

Read more here.


NC Budget and Tax Center

Statement on Senate Budget

When the Senate leadership provided an overview of their budget proposal, what you didn’t hear were all of the investments that are missing from their proposal due to the huge price tag of their tax plan – a tax plan that will do nothing to strengthen our economy. If it weren’t for this tax plan, North Carolina would have more to invest in our public schools, in the health of families, the efficient delivery of justice and in communities across the state. We wouldn’t see Teacher Assistants sacrificed for smaller class sizes or higher tuition rates at community colleges to finance pay raises for professors.

But even more troubling is the speed with which policymakers hope to move forward on a proposal that was not released in full until midnight and for which amendments to the tax plan were not allowed in committee.. A more transparent and inclusive process for developing this important document that sets the state’s priorities is needed to ensure that the choices are clear and considered.