2017 Fiscal Year State Budget, Back to School Series, NC Budget and Tax Center

Back to school – Ensuring a high quality education for all students

This is the first of a Back to School blog series that highlight various issues to be aware of as the 2016-17 school year kicks off.

It’s back to school time, and more than 1.5 million students are preparing to embark upon a new school year. Currently the 10th largest public school system in the nation, North Carolina has experienced steady growth in the number of students entering school doors in local communities across the state – enrolling more than 100,000 additional students over the past decade. This makes it more important than ever to increase investment in schools to ensure the growing number of students in North Carolina receive a high quality education.

The makeup of students in public schools has changed over time. Last school year, no single race or ethnic group represented a majority of North Carolina’s student enrollment—a reflection of the changing demographic trend in the state’s broader population. Furthermore, one of every two students in public schools qualified for free or reduced school meals, which indicates that a significant number of students reside in low- and moderate-income households and face persistent economic challenges.

One way to ensure that our schools have the resources to provide a quality education to all students, regardless of their socio-economic background, is through the state budget, which serves as an important source of education funding for our schools. For the upcoming school year, the state budget under which schools will operate is a mixed bag of incremental progress in some areas and persistent lagging support in other areas. For the 2016-17 school year, state funding per student remains 8.1 percent below 2008 pre-recession level, with more than 81,000 additional students enrolling in public schools during this time. Consequently, our schools are challenged with educating more and more students with fewer resources.

Back to School - State Budget

 

Lawmakers limited their ability to boost investment in public schools by passing costly tax cuts in recent years that largely benefit the wealthy and profitable corporations. The state’s ability to invest in public education will continue to be limited in the years ahead as the cost of the tax cuts grow larger. For the current fiscal year, these tax breaks reduce available revenue by $1.4 billion, dollars that otherwise would have been available to lawmakers to boost investments that promote student achievement. Once all tax changes are fully in place, this annual cost grows to more than $2 billion. Read more

2017 Fiscal Year State Budget, NC Budget and Tax Center

Highlights of Justice and Public Safety Budget in joint budget agreement

The joint budget for Justice and Public Safety for the upcoming fiscal year entails a 3.5 percent increase to the original JPS budget passed by state lawmakers last year. Despite unmet needs in North Carolina such as re-entry services for ex-offenders returning into local communities, little progress is made beyond funding for pay raises and one-time bonuses.

Highlights from the joint budget for Justice and Public Safety:

Public Safety Read more

2017 Fiscal Year State Budget, NC Budget and Tax Center

Highlights of Higher Education budgets in the joint budget agreement

Under the joint budget, state support for higher education – the UNC System and Community College System – fails to ensure that adequate resources are available to provide quality education services to the more than 400,000 students enrolled in public colleges and universities across the state.

The joint budget includes a new fixed-tuition payment option that would guarantee that tuition does not increase during a specified time period for future students attending public four-year universities within the UNC System. The joint budget also limits the amount of revenue raised through student fees at public four-year universities each year. While these actions aim to address the cost of college, they fail to ensure that North Carolina’s four-year public universities have the resources required to ensure quality education services.

Steady erosion of state support for higher education in recent years has played a direct role in the increasing cost of college in North Carolina. Tuition at community colleges has increased by 81 percent since 2009. At public four-year universities, state funding per student remains more than 15 percent below its 2008 pre-recession level when adjusted for inflation – equating to hundreds of millions of dollars in funding cuts. This pressing reality is unaddressed in the joint budget negotiated by lawmakers.

Highlights from the joint budget for higher education: Read more

2017 Fiscal Year State Budget, NC Budget and Tax Center

North Carolina does not have a $1.2 billion revenue surplus

North Carolina continues to struggle with too few dollars coming in to serve a growing state that needs good, quality schools, healthy environments, safe neighborhoods and supports for workforce training and economic development. In the final days as policymakers negotiate the differences in their original proposals to arrive at a final budget, relying on bad numbers to try and meet these real needs in an unsustainable manner would be a mistake.

One number that talking heads and others have suggested shows the strength of our current tax code (and to some could be used to meet unmet needs) is the $1.2 billion in excess dollars over appropriated expenditures noted in the May 2016 current monthly financial report from the state Controller. This number does not mean that revenue collections for the current fiscal year came in $1.2 billion over state officials’ initial projections. The consensus revenue estimates have that figure at about $330 million.

What that $1.2 billion figure reflects is revenue over-collections plus unspent revenue from the prior fiscal year in the current year budget and reverting state funds that were appropriated to state agencies back to the General Fund – all of which has resulted in not spending available revenue for the current fiscal year despite ongoing needs in many areas of the budget and communities across the state.

Not only are the majority of these dollars not sustainable sources to meet unmet and important recurring needs, they aren’t all that different from figures we’ve experienced in the past following a downturn. Before the Great Recession, when North Carolina was still in fiscal recovery from the 2001 recession, such excess revenue over appropriations was over $900 million when adjusted for inflation (see chart).

 

NC does not have a $1.2 billion revenue surplus (updated)

The reality is that these dollars fall far short of what is needed to ensure that all North Carolina communities can thrive. Given the potential one-time nature of these dollars, they shouldn’t be used to provide all teachers and state employees a raise, provide retirees with cost of living adjustments and ensure healthcare services for the elderly and poor.

Instead, North Carolina needs to re-examine the income tax cuts that lawmakers have already passed and make sure that further flexibility is available to make sure communities can thrive and aren’t hampered by unnecessary and arbitrarily low tax caps in the state Constitution. The $1.5 billion that already has been foregone with the low income tax rates could have been used to get teacher pay to the national average, reduce waitlists for early childhood programs, make a college education more affordable and help ensure safe and healthy communities.

No, North Carolina does not have a $1.2 billion revenue surplus. And no, this excess revenue does not mean we have enough resources to ensure that all communities can thrive. It is time to realize that the math won’t work under a tax-cutting regime when we aspire to grow and thrive.

NC Budget and Tax Center

Tax swap likely to create more problems than solutions

State leaders are on a relentless pursuit to radically change the state’s tax system to rely more and more on the sales tax, while working to eliminate the income tax. This tax swap is necessary, they say, to address the volatile nature of the income tax. What it means is that there will be a heavier tax load for middle and low income North Carolinians.

This is an approach to taxation that will likely create more problems than solutions.

Volatility refers to how the level of revenue collections is affected by what’s going on in the economy. Good economic times mean higher levels of overall tax revenue, while economic downturns typically result in state revenues plummeting. The strength of revenue collections, however, can be a product of both the business cycle and the design of the tax system. North Carolina’s current tax code is underperforming historic growth rates (see Gov.’s FY17 budget, Page 33), which could be a result of tax changes passed in recent years that have resulted in a flat income tax, for example.

A report by the Center on Budget & Policy Priorities highlights reasons that a tax swap—greater reliance on sales tax and less on income tax—will not only fail to address volatility concerns but also can generate additional problems.

  • Virtually all state taxes are volatile, albeit to varying degrees. Most major state taxes, including the sales tax, are subject to ups and downs with the economy. Indeed, under some circumstances, sales taxes can decline faster in recessions than income taxes.
  • While income taxes typically fall more steeply than sales taxes when the economy enters a recession, the reverse is also true:  income taxes rise more rapidly than sales taxes during periods of economic growth. Taking both periods of growth and decline together, only income taxes increase enough to fund normal expenditure growth and meet the evolving needs of residents and businesses. Sales taxes do not.
  • Eliminating the income tax won’t protect North Carolina from revenue losses in downturns. States without income taxes—Florida and Nevada for example—were among the hardest hit in the Great Recession. Most experts recommend a balance across various sources of revenue to offset the competing sensitivities and contributions that each can make to a revenue system seeking to achieve stability, equity and long-term adequacy.

Most fundamentally, North Carolina Senators proposal to eliminate the income tax would require policymakers to find other sources for more than half of the revenue that the state currently collects. A proposal that will likely lead to further erosion in the state’s commitment to public investments that help families, seniors and communities thrive.

Moreover, it is a solution that is unnecessary given the better tool of a Rainy Day Fund to address volatility—one that state leaders have committed to aggressively.  And while the timing and pace of state leaders’ contribution to the Rainy Day Fund now raises concern, it is clear that a responsible Rainy Day Fund policy, relying on a mix of state taxes that include an income tax and not restricting tools to generate revenue at the local level, are ways that can help address and manage volatility.

Shifting to greater reliance on the sales tax and eliminating the income tax will not give North Carolina the flexibility it needs to change with the ebb and flow of the economy. It will only shift the tax load and undercut the state’s tax code’s ability to achieve a core responsibility of funding the services that support thriving communities.