NC Budget and Tax Center

“Tweaking” North Carolina’s state budget fails to address the underlying issue of failure to invest

Legislators are planning to release and vote on a state budget for 2019 by June 1. The budget this year will be released as a conference report which according to House Speaker Moore will only deal with minor changes to the second year of a two-year budget, which was debated and approved last year.

While the final details are yet to be seen, based on recent budget proposals it is clear that ”tweaks” to the budget will not address its shortcomings and the under-investment that is occurring because of tax cuts.

Analysis of both the final $23.6 billion budget passed by the legislature last year and the Governor’s recent $24.5 billion budget proposal shows that while they contain different priorities for 2019 they share one thing in common: they are missing investments because of the tax changes that have primarily benefited the wealthy and profitable corporations since 2013.

Reconsideration and debate of the tax changes since 2013 and how they continue to hamper our commitments to community and family well-being is fundamental to creating a budget that reflects our values as a state.

More than tweaking here are also some key areas of investment that are critical and will require a tax code that aligns with the needs of our state:

  1. The aging of North Carolina’s population

The final budget last year put $1 million less in the Division of Aging and Adult Services than was invested in 2017. Preparing for the aging of our state is critical as analysis within the budget shows that North Carolina’s population age 65 and over is already growing faster than other age groups. According to the state’s budget office, “between 2017 and 2037, the older adult population will increase by just over 1 million people (63.3%) to 2.6 million in 2037, and the oldest adults (ages 85+) will more than double from 181,000 in 2017 to 381,000 by 2037.”

  1. The infrastructure for the 21st Century

North Carolina’s infrastructure ranks as the 11th worst in the country yet the final budget did not address in a strategic and comprehensive manner the state’s need to rebuild our infrastructure and create jobs for the 21st Century. A comprehensive approach would target investments towards decaying water systems, mass transportation projects, a clean-energy future, and resilient infrastructure in natural disaster prone areas. It would also advance a more robust investment in broadband access so more people, particularly in rural areas, could access high speed internet.

  1. The preparation of our future leaders and workforce

The final budget fell short of investing in each child’s education because it prioritized another round of tax cuts. Those dollars could have allowed North Carolina to get back to pre-Recession per-pupil spending levels. They could also ensure that children have the textbooks, technology and instructional materials they need to get ahead. Not only in the K-12 classroom but in early childhood, North Carolina continues to miss an opportunity to follow the evidence and commit state resources to expanding pre-k access and supporting access to quality early childhood programs for children in low-income families. At the other end of the education pipeline, North Carolina has not kept post-secondary education affordable or adequately supported a workforce development system that can reach those looking for work and careers that will pay a living wage.

Tweaks won’t make the fundamental fiscal challenge we face go away. It is only likely to make it worse. North Carolinians need leaders to reconsider their prioritization of tax cuts over communities and families.

Luis A. Toledo is a Public Policy Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

Governor Cooper’s budget points state in the right direction

The Governor’s proposed budget changes directions for North Carolina after years of tax cuts by focusing on urgent and smart public investments that communities have identified as critical to boosting our state’s economy today and in the future. By stopping the scheduled tax cuts in 2019 for the richest taxpayers and profitable corporations, the Governor is able to make some progress in meeting needs that have gone unmet under the budgets that have prioritized tax cuts.

Indeed, the Governor’s $24.5 billion budget stands in contrast to the proposed spending target of members of the General Assembly. The Senate and House have agreed to a $23.9 billion budget that keeps the tax cuts for wealthy taxpayers and corporations.

What do these numbers mean?

North Carolina has historically appropriated at the state level each year an amount that is 6 percent of the size of the economy as measured by state personal income. Governor Cooper would spend 5.1 percent in 2018-19, bringing us back to the level the state was investing at in 2017. The General Assembly leadership would spend 5 percent, or basically hold the line on the state’s diminished investments since the recovery began in 2009.

Here’s a baker’s dozen of investments in Governor Cooper’s budget that will position the state for long-term economic success:

  • Directs $110 million in revenue into teacher and principal pay with a stated goal of reaching the national average for teacher pay in four years.
  • Adds $55 million for mental health personnel and training, including $40 million for local school districts to hire more nurses, counselors, psychologists, and social workers who directly support student mental health
  • Provides an additional $25 million for textbooks and digital resources for all students.
  • Invests $366 million for state employee compensation and benefits package that among other things provides a recurring cost of living adjustment that is the greater of $1,250 or 2 percent. This is the largest increase in over a decade.
  • Adds 79 positions to the Judicial branch to effectively meet workload needs and new ‘Raise the Age’ legislation
  • Adds $9 million in community mental health funding to expand treatment and recovery services to help combat the opioid crisis
  • Invests $14.5 million in the clean-up and ongoing monitoring of air and water quality from Gen-X
  • Invests $28 million to improve the safety and security of prison facilities
  • Provides $3 million for state matching funds that will be used to leverage an additional $14 million in federal funds for drinking water infrastructure projects
  • Provides $30 million to create the NC GROW (Getting Ready for Opportunities in the Workforce) Scholarship, for students enrolled in curriculum programs or non-credit short-term workforce training programs leading to industry credentials in high-demand fields
  • Provides $17.5 million to increase Broadband Connectivity access and improve service to under-served households, businesses, and community anchor institutions
  • Prioritizes low-income housing by including $7 million to assist in developing more safe and affordable housing units in the state
  • Directs $175 million to begin necessary digital and physical upgrades, such as replacing the state’s 25-year old accounting system and repairing university and state buildings

As legislators prepare to release their budget for 2019, they should consider the Governor’s budget and stop the scheduled tax cuts in 2019 in order to make investments that help all North Carolinians and help our state be competitive in the future.

Luis A. Toledo is a Public Policy Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

The possibility of a government shutdown was avoidable

For those of us digging out of the snow still, it may be surprising to learn that our country is facing a federal shutdown that could begin tomorrow based on the lack of progress on a long-term deal to fund programs and services, to ensure children have health care, and to make sure young adults have pathways to education and jobs no matter where they come from.

To avoid a shutdown, the House in Congress voted yesterday to approve legislation that would keep agency doors open and hundreds of thousands of federal employees at work through Feb. 16. It is now up to the Senate to decide today whether it will take the House bill and approve another short-term continuing resolution (CR) to avoid a federal shutdown.

Where we are now is not inevitable. It is the result of a failure to put together long-term plans for funding government and the preference for tax cuts that have grown the deficit.  Despite broad public support and bipartisan agreement that we should fund children’s health insurance and fix the temporary protections for immigrants who arrived in this country as children, these two issues are now caught up in this short-sighted deal-making. Read more

NC Budget and Tax Center

Thousands of North Carolinians stand to lose from Step #2 of the GOP tax plan

The Senate and the House in Congress have reached a deal for a tax plan that would give unnecessary tax cuts to the richest top 5 percent of Americans and most profitable corporations. This deal now clears the way for final votes next week. That this tax bill is full of tax games, roadblocks, and glitches that will drive up the federal deficit by over $1.5 trillion has been widely reported. What is not widely covered is that passing the tax plan and increasing the deficit is only the first of two steps planned by Congress.

The second step involves lawmakers using the deficit they created to justify major budget cuts to federal investments that help millions of North Carolinians.

Below is a brief list that provides the total number of North Carolinians that currently receive assistance from a major federal program that could be affected from the second step of the tax plan. Included in the total numbers are children, students, the elderly, and people with disabilities.

  • Medicaid: 2,024,342
  • Medicare: 1,883,428
  • SNAP (food assistance): 972,535
  • Housing Assistance: 256,545
  • Supplemental Security Income: 233,432
  • Health Marketplace Enrollees: 549,155
  • Pell Grants: 223,633

Some Congressional leaders have already stated publicly their intent to cut programs and services starting next year. In many cases some federal programs could be cut to nothing automatically as a result of a 2010 law that Congress passed to keep itself from increasing the deficit too much.

Luis A. Toledo is a Public Policy Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

Experts conclude: New tax legislation is full of tax games, roadblocks, and glitches

As Congress continues to go against the will of the people by pushing a tax framework that most Americans are not in favor of, it is worth noting that a number of leading tax academics, practitioners, and analysts have issued a 35-page report describing various tax games, roadblocks and glitches in the tax legislation.

According to the report:

“The complex rules proposed in the House and Senate bills will allow new tax games and planning opportunities for well-advised taxpayers, which will result in unanticipated consequences and costs. These costs may not currently be fully reflected in official estimates already showing the bills adding over $1 trillion to the deficit in the coming decade. Other proposed changes will encounter legal roadblocks that will jeopardize critical elements of the legislation. Finally, in other cases, technical glitches in the legislation may improperly and haphazardly penalize or benefit individual and corporate taxpayers.”

The report highlights various problems with the bill in the following areas:

  • Using Corporations as Tax Shelters: If the corporate tax rate is reduced in the absence of effective anti-abuse measures, taxpayers may be able to transform corporations into tax-sheltered savings vehicles through a variety of strategies.
  • Pass-Through Eligibility Games: Taxpayers may be able to circumvent the limitations on eligibility for the special tax treatment of pass-through businesses.
  • Restructuring State and Local Taxes to Maintain Deductibility: The denial of the deduction for state and local taxes will incentivize these jurisdictions to restructure their forms of revenue collection to avoid this change. This could undercut one of the largest revenue raisers in the entire bill.
  • International Games, Roadblocks, and Glitches: The complex rules intended to exempt foreign income of domestic corporations from U.S. taxation present a variety of tax planning and avoidance opportunities.
  • Money Loophole Machines: The variety of tax rates imposed on different forms of business income in different years invite arbitrage strategies, whereby taxpayers can achieve an economic benefit solely based on the timing and assignment of their income and deductions.

The report concludes with a serious warning:

“Further problems with the bills are likely to emerge. These tax games will reduce tax revenues and thereby increase the true cost of the legislation and make the legislation more regressive than it now appears. Furthermore, additional tax complexity will be necessary in order to police the new rules and to prevent these abuses, ensuring that this legislation will move us further away from the goals a simpler, more equitable, and more efficient tax system. Finally, the IRS and Treasury may be overwhelmed in their efforts to police the new and manipulable rules during a period of reduced funding and budgetary constraints.

“We urge the members of the Senate and House to reassess the tax reform process and the resulting legislative proposals, and to undertake a more deliberative approach to far-reaching legislation that will significantly affect our economy and taxpayer behavior.”

Luis A. Toledo is a Public Policy Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.