Commentary, COVID-19, NC Budget and Tax Center

Big falloff in revenues dictates an obvious course for state leaders

As economic projections worsen across the country, the outlook on state budget shortfalls is equally bleak. While there is still much we don’t know, North Carolina’s fiscal picture is now a little clearer with the release of the state’s first revenue forecast since the start of the COVID-19 pandemic.

Last week’s consensus revenue forecast expects revenue collections to be down $4.2 billion –  $1.6 billion (6.6%) this fiscal year and $2.6 billion (9.9%) next year. That means fewer public resources at a time of growing demand for services and supports. Without additional revenue, $1.6 billion less in North Carolina’s General Fund is equivalent to the total state funding currently allotted to the Community College System plus NC State University, combined. Next year, a $2.6 billion hit would be equivalent to the entire state allocation for Justice and Public Safety.

State economists have repeatedly emphasized the unprecedented and uncertain nature of the current crisis. There will not be a final account of state revenue until after the new tax filing deadline, which was pushed back from April 15 to July 15. But economic indicators, such as skyrocketing unemployment and plummeting GDP, suggest that this recession could be deeper and longer than any in modern history.

Unfortunately, as the chart indicates, North Carolina’s current fiscal position has been hampered by past policy choices that provided tax breaks for the wealthy at the expense of everyone else.

The state is estimated to currently collect $3.6 billion less per year than it would had lawmakers not enacted the tax cuts that commenced in 2013. Starting this downturn from a diminished level of revenue collection means our public institutions were already under-resourced and unable to fully meet people’s basic needs, long before our current public health and economic crisis began.

The latest revenue forecast paints a troubling picture of state finances and points to the urgent need for additional and flexible federal aid to state and local governments. According to U.S. Treasury guidance, federal funding cannot be used to cover revenue shortfalls, and it must be received by recipients by the end of 2020 and spent on COVID-related expenses incurred before the new year.

A recent proposal passed by the U.S. House would provide critical aid to state and local governments, with estimates suggesting it would deliver about $6.8 billion in state aid to North Carolina and more than $11 billion to the state’s local governments.

Without additional federal funds or state revenue, budget cuts could cause thousands of people to lose access to public resources and services at a time during which they need them most. North Carolina’s leaders should act quickly by asking the federal government for more flexible state aid and requiring companies that have profited from the pandemic – like big banks and online retail giants – to pay their fair share in state taxes.

Building a more vibrant and inclusive economy will depend on thoughtful fiscal policies that put people before profits.

Leila Pedersen is a policy analyst at the N.C. Budget & Tax Center.

COVID-19, NC Budget and Tax Center

COVID-19: Three policy principles to advance equity

The COVID-19 pandemic and ensuing economic crisis have disproportionately harmed communities of color and exacerbated existing inequities.

In North Carolina, the life expectancy for Black newborns is three years less than it is for white newborns, and the poverty rate for African Americans is twice what it is for white people. These troubling inequities underscore the ways in which the United States’ history of racism, bias, and discrimination have remained embedded in its health, social, and economic systems.

While more federal aid to states could help ease state budget shortfalls, North Carolina’s lawmakers can help reverse current trends and create a broader economic recovery by enacting policies that adhere to the three principles set out in a new report from the Center on Budget and Policy Priorities:

1. Target North Carolinians with the greatest health and economic needs

  • Support people experiencing and at risk of homelessness. Before the pandemic, rent was unaffordable for half of North Carolina renters. In the wake of massive job and income loss, more and more people are at risk of getting pushed out onto the streets.
  • Expand Medicaid. Without Medicaid expansion, fewer people will have access to the life-saving treatment they need now more than ever. Medicaid expansion would not only save lives, it would also save the state money.
  • Ensure every student receives a “sound basic education.” The state’s education shortcomings, outlined in the Leandro case and WestEd report, have been exacerbated by necessary school closures and unequal access to the resources students need to succeed. North Carolina should address students’ immediate needs while setting them up for long-term success by distributing funding in accordance with student need.
  • Track data and make it transparent. State and local agencies need the mandate and funding to track data in ways that follow best practices. Understanding disparate impacts across demographics and jurisdictions is the first step to ensuring that policy responses effectively address root causes.

2. Dismantle North Carolina’s longstanding racial, gender and economic inequities

  • Establish permanent paid leave policies. North Carolina’s lack of paid sick day protections force workers to choose between earning a paycheck and staying healthy. COVID-19 has increased the need for workers to be able to take time away from work without losing wages.
  • Improve Unemployment Insurance system. North Carolina has one of the worst Unemployment Insurance systems in the country. Significant changes are needed to ensure that workers get the benefits they need to meet their basic needs and continue contributing to the economy.
  • Boost incomes and alleviate poverty through a state earned income tax credit (EITC). One of the most effective ways to improve health outcomes for people in poverty is to reinstate North Carolina’s EITC.

3. Prepare North Carolina for long-term economic growth and opportunity Read more

Commentary, COVID-19, NC Budget and Tax Center

North Carolina’s first legislative response will fall short of meeting even immediate needs

The North Carolina General Assembly is scheduled to reconvene for the short session tomorrow.  All indications from legislative leadership suggest that this session will only last a few days and be limited to those items that have bipartisan support and require immediate action to move resources.

The General Assembly will likely reconvene in July or August to consider a fuller scope of proposals to address outstanding needs. That means there will be no full and transparent accounting through a revised budget document for a second year in a row. State agencies will have continued uncertainty at a time when they need to rapidly build infrastructure and adapt to address the surge in demand for public services.

It appears as if the state will not deploy the full complement of federal and state funds in a timely manner — namely the unappropriated balance from last year’s underinvest in public infrastructure, which is available now and needed to protect people from the worst public health threats and long-term economic harms.

Draft bills and summaries that the General Assembly will consider during the short session this week have been released by the House Select Committee on COVID-19. On Friday, the Governor put forward a budget proposal that would allocate $1.4 billion to meet needs identified in the House bills, including drawing down the Rainy Day Fund to stabilize the state’s current year budget that will be impacted by delays in revenue collections.

Given the urgent needs evidenced by the continued transmission of the coronavirus, the health risks faced by essential workers, and the historic scale of loss of work and wages, advancing community well-being in this moment requires bolder proposals.

Other states have done more to move swiftly and comprehensively make policy changes that meet the immediate health and employment issues brought on by COVID-19 and contain the ripple effects into education, environmental, consumer protections, justice, and public safety.  These states have more quickly been able to identify the gaps in federal programs and filled those gaps with policy action and state dollars.

Here are 6 urgent community needs that legislators must address now to ensure a quick recovery from the public health and economic crisis. Read more

Commentary, COVID-19, NC Budget and Tax Center

Five things the General Assembly should prioritize in responding to COVID-19

For weeks now, the House Select Committee on COVID-19 has been meeting virtually, as have committee working groups on health care, education, economic support, and the continuity of state operations.

These meetings have allowed heads of agencies to present how they are responding to the current crisis and what they need to stave off anticipated long-term impacts. The message from agencies: Act now or risk the lives and livelihoods of the vast majority of North Carolinians.

As House Speaker Tim Moore and Senate President Phil Berger work to craft North Carolina’s legislative response, the following priorities will help mitigate the public health impacts, speed up the economic recovery, and put the state on firmer footing for the future.

1. Maximize federal assistance

The best way to maximize the state’s capacity to respond in this moment is by making full use of opportunities to use federal dollars before tapping into state reserves. Congressional actions have increased the Federal Medical Assistance Percentage (FMAP) by 6.2 percent, injected over $4 billion into state and local government, and provided access to disaster relief and education stabilization funds.

2. Don’t cut taxes

Lawmakers should resist the urge to cut corporate taxes. Most businesses are experiencing dramatic declines in revenues, and therefore will have little income to tax. Small business assistance and workforce stabilization are better ways to stimulate the economy than broad tax cuts, which would only deepen the revenue hole the state will be forced to crawl out of post-pandemic. That hole has been made worse by the state’s recent tax cuts, which have dropped the corporate income tax rate from 6.9 percent in 2013 to 2.5 percent today.

3. Use state funds wisely

Once federal funds have been exhausted, North Carolina should tap into its more than $1 billion in rainy day funds and more than $2 billion in unappropriated funds. To avoid budget cuts, North Carolina should use its reserves to meet the immediate needs of our state’s most vulnerable without depleting these reserves for future natural disaster needs and while investing in long-term sustainability. Legislators should appropriate dollars toward urgent and systemic needs through a comprehensive budget that provides the public with a transparent view of their priorities.

4. Don’t cut services

Demand for public services like health care, housing, and public safety are rarely more important than they are today. In the past three weeks, nearly 500,000 people in North Carolina have filed for unemployment insurance, an average of 21,000 people per day. The growing strain on our hospitals and public institutions requires urgent attention in the form of flexibility, funding, and capacity. The public sector, which is usually taken for granted, is now the only lifeline for people facing illness and financial ruin. Now more than ever, our public institutions need the staffing, capacity, and resources to deliver statewide the quality services and programming that serve as the foundation for a sound economy that delivers well-being to all.

5. Raise revenue from those most able to pay

After the Great Recession, North Carolina cut taxes for the wealthy and big corporations at the expense of everyone else. As a result of these tax cuts, the state is currently collecting at least $3.6 billion less in revenue each year. Currently, taxpayers with the lowest income pay more of their income in taxes than millionaires pay. Restoring fairness to North Carolina’s tax code will help generate the resources that are needed to respond to the current crisis and to benefit the state long-term.

During this crisis, we must pull together across racial, economic, and ideological lines. That means prioritizing the needs of our communities most at risk to the public health and economic harms of COVID-19 in this moment and asking those most insulated from economic harm to contribute their fair share. It also requires our lawmakers to lead with sound fiscal decisions that invest in the well-being of people first and build systems that can sustain our communities through the recovery from this pandemic.

Click here to view a PDF version of this post.

Leila Pedersen is a Policy Analyst at the N. C. Budget & Tax Center.

Commentary, COVID-19, NC Budget and Tax Center

Three reasons why federal aid to state, local governments is not enough

Last week, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which was immediately signed by the President.

While the bill has many good provisions, it misses the mark in many ways, like prioritizing tax breaks for big companies over federal aid to state and local governments.

Of the approximately $4 billion North Carolina is expected to receive, the Center on Budget & Policy Priorities estimates that $3.5 billion will go to the state and only about $481 million to local governments. This is largely a result of the allocation formula, which only provides allocation to local governments if the population is above 500,000 residents.

State and local governments are on the front lines of trying to keep communities healthy and to protect people from losing income and access to basic needs. Prior to the passage of the CARES Act, the NC League of Municipalities wrote letters to state leaders calling for additional resources to make up for declining revenue and meet the growing need for public safety personnel and broadband access. In a letter to Congress, the National League of Cities outlined four recommended improvements the CARES Act: enact a stabilization fund for cities and states, make local governments eligible for tax credit to offset costs of paid leave, stabilize the municipal bond market, and repeal state and local and property tax deduction caps.

Although the state and local aid in the CARES Act is a meaningful and important first step, it is likely to be insufficient to support North Carolina’s increased expenditures from combating COVID-19, as well as the potential loss in revenue from an economic downturn. Read more