NC Budget and Tax Center

HB3’s Rainy Day Fund provisions aren’t going to save NC from fiscal challenges

Among the various changes to the state Constitution proposed in House Bill 3 are a series of Rainy Day Fund provisions that reflect unnecessary and counterproductive limits to the ability of lawmakers to use these savings to protect North Carolina communities and families from the brunt of a natural disaster or an economic downturn.

The Rainy Day Fund is the state’s savings account that is built up in good times so that, in downturns or disasters, policymakers can meet unanticipated needs or smooth unanticipated drops in revenue.  Through aggressive action in the past few years, the state Rainy Day Fund has reached a balance of $1.1 billion, as lawmakers have stashed away approximately $150 million each year on average since 2011 despite persistent unmet needs across the state.

Under budget proposals for the upcoming fiscal year, the Rainy Day Fund balance would grow to at least $1.4 billion, or around 7 percent of the state’s General Fund appropriations.

The proposed changes to the management of the Rainy Day Fund represent another example of enshrining in the state Constitution something that can already happen while forcing the negative effects on North Carolina communities and future generations. Read more

NC Budget and Tax Center

Anti-immigrant bill would give Attorney General unchecked power to yank school construction, transportation funding

The Senate Appropriations committee gave its blessing to a bill that would give the Attorney General nearly unchecked power to withhold state funding for local school construction projects and road construction and repair.

If HB 100 passes as written, a single state official would have the power to cut off funding for your child’s education or to fix potholes on your street. For a body that so often waxes eloquent about government overreach and the brilliance of our constitutional system of checks and balances, this one is head-shake worthy.

Empowers every crank with a phone

HB 100 allows anyone to anonymously allege that a local government in North Carolina is not abiding by state laws on immigration enforcement. There’s no requirement that the tip come from someone who knows anything about state law or swears to the truth of what they are reporting. The tipster need not live in the locality being reported on or even be a resident of North Carolina. Even if the complaint is completely baseless, the Attorney General would still be compelled to investigate, consuming time and resources that could otherwise be used to actually protect and serve North Carolinians. Local governments would also be forced to divert resources to respond to frivolous and, potentially, malicious anonymous accusations. That’s a lot of power to give to someone with a grudge and a smartphone.

Attorney General would become the Immigration Czar and State Budget Director

The bill also lodges remarkable power in the Attorney General to personally determine whether a local government will lose its state funding. The investigation and finding of non-compliance is performed entirely by the Attorney General’s office, with no defined standards, procedures, or checks to limit his or her authority.  There is no process for a hearing, and no clear path for local authorities to present their case or arguments.  The only appeal available is where required “by the United States and North Carolina Constitutions,” which exists anyway.  No process is outlined for where such an appeal would be lodged, or what process would be followed.  Other than where constitutional issues are at stake, the Attorney General’s word would be law and nobody from the Governor to the courts could do anything about it. Read more

NC Budget and Tax Center

Changes to the state Constitution headed to the Senate floor

The Senate Rules Committee gave approval Friday to a suite of constitutional changes that would undercut our state’s economy permanently by setting a low, arbitrary income tax rate and limiting access to the state’s savings in times of emergency.

It is an entirely unnecessary move that seeks to permanently limit future budget choices to the ones that our current leaders prioritize above all else.  It is not only an insult to the wisdom of the framers of our state Constitution, but also to future North Carolinians and legislators whose priorities may differ from their own.

To recap just why such a move is completely unnecessary, let’s review how policymakers have already pursued these approaches to budgeting through public policy.

First, policymakers have already set a low, arbitrary income tax rate for individuals and profitable corporations, which will drop to 5.499 percent for individuals in January 2017 and eventually to 3 percent for businesses.  These changes began in 2013 and will continue to phase in, ultimately reducing the dollars available to invest in schools, parks and public health by at least $2.5 billion each year. More than two-thirds of the tax cut from the low individual income rate has benefited the top 20 percent of taxpayers. Policymakers continue to pursue a shift to the sales tax to make up for the revenue loss, which means the tax load has shifted to middle- and low-income taxpayers. 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

Legislation disguises tax giveaway to wealthy investors as aid for struggling communities

Money Exchange

Special interests often use the dog days of the legislative session to see if one of their old hounds can still hunt. As has become an almost yearly ritual, out of state companies appear once again to be trying to secure a huge tax give-away for their clients.

Under the guise of supposedly helping low-income communities, language inserted into HB 994 last week in the House Finance Committee would open a new tax loophole for wealthy investors and insurance companies. The provision would establish a state tax credit that would layer on top of the Federal New Markets Tax Credit. As drafted, there’s no guarantee that we would attract any projects that were not going to happen anyway while potentially costing the state millions of dollars over the next five years.

Created in 2000, the Federal New Markets Tax Credit incents investment in low-income communities by giving investors a tax discount based on how much they invest. Investment funds are channeled through banks or non-profit organizations certified as Community Development Entities (CDEs) that provide loans or equity investments in companies that operate within designated low-income communities. Tax credits generated under the federal program are then passed from CDEs to the companies or individuals who provided the investment capital.

The proposed North Carolina program would create an additional tax credit that investors can use to reduce their payment of state taxes. While the federal program has successfully spurred development in under-served communities and the goal of a state New Markets Tax Credit may be a worthy one, the current state proposal has some major flaws that make it more boondoggle than a boon.

Creates a special tax loophole for profitable insurance companies.

The current proposal creates a tax loophole that can only be used by profitable insurance companies. The bill would only allow credits to be taken against the state premium tax, a backdoor way of ensuring that most North Carolinians could not participate in the program and privileging certain business models. Only insurance companies pay the premium tax, so the bill effectively makes the provision unusable for the vast majority of potential investors in the state.

Pushed by out-of-state special interests.

There is no groundswell of support for this proposal from companies and investors that actually reside in North Carolina. Instead, the bill’s supporters are essentially out-of-state companies that specialize in NMTC investments. When the House Finance Committee discussed the proposal last week, the only company to speak in favor was Advantage Capital, a firm headquartered in St Louis which boasts of helping to distribute “$1.5 billion in state tax credits over its 20 year history.” You read that right, this proposal is avidly supported by a company whose business model relies on helping rich companies and individuals avoid paying state taxes. If this proposal was carefully designed to actually benefit struggling North Carolina communities, lots of instate companies and organizations would be lining up to support it.  But that’s not what’s happening.

Broad agreement on the dangers of this proposal.

Concern over state New Markets Tax Credit proposals knows no partisan or ideological boundary. Many of the problems identified here were also highlighted last week in a column by Becky Gray of the John Locke Foundation. Read more