NC Budget and Tax Center

We use tools to fix things. Just like you’d use literal tools to improve your house, we all use metaphorical tools to improve our lives.

Money is a tool. You would expect a fabulously wealthy technology executive turned venture capitalist to understand this. You might not expect said one-percenter to shout it from a media platform. That’s just what Chamath Palihapitiya has done, though, in this fascinating story about his journey from welfare to wealth.

Two pieces of this story fascinate me. First, Palihapitiya is explicit about the role that affordable health care and subsidized university tuition played in his ability to succeed. Without these tools, his family would have been worried about basic survival, not figuring out how to contribute to the technologies of the future.

The second piece is related: without these vital public investments, how would brilliant but disadvantaged individuals like Palihapitiya find their way to success? With the odds already stacked against them, how would today’s poor but bright future entrepreneurs make it happen?

“I’m acutely aware that there are many other people who grew up like me who are frankly, 1,000 times more talented then I am,” he said. “We should ask ourselves, ‘Can somebody like me grow up with the exact same problems and disadvantages and yet get to the equivalent place as me 20 years from now?’”

It’s in everyone’s best interests to get kids growing up today — many of whom with the same potential — access to economic security and a high quality education. Personally, I think that’s a human rights issue.

If you don’t, perhaps you will consider the issue of human capital: to have brilliant children with unlimited potential struggling even to survive, with limited access to any upward mobility, is a tragic waste of human capital.

As Steven Jay Gould once put it: “I am, somehow, less interested in the weight and convolutions of Einstein’s brain than in the near certainty that people of equal talent have lived and died in cotton fields and sweatshops.”

Right now the next Einstein or the next Chamath Palihapitiya may be working in, to name one example, North Carolina’s tobacco fields. I would like to believe that we, as a community, will find a way to give that person some tools and a chance.

Because, really, that’s all that person would need.

It is normal in the budget process for the Governor, state Senate, and state House to each put forward budget proposals that lay out different visions for how best to educate our children, care for vulnerable populations, boost prosperity, and put North Carolina on more solid footing. The public expects those differences to be ironed out during what’s known as the “conference” process. What the public doesn’t expect is for the three budgets to use wildly different estimates on items that should be fairly consistent across budget proposals. But, that’s exactly what is going on in North Carolina.

Among the three budget proposals, there is no consensus on four key items in the budget that significantly impact the availability of dollars for other public investments, as illustrated in the table below. The budgets don’t agree on the revenue shortfall that the state is facing now in the current fiscal year. Curiously, the House anticipates a current year revenue shortfall of $429.4 million—this is $16 million lower than the Governor’s and Senate’s estimate of $445.4 million. Lawmakers must address the current revenue shortfall before putting together a budget proposal for the upcoming fiscal year. This is because the shortfall hampers how much money can be carried over next year and used to pay for one-time expenses in their proposals.

Blog post, no consesus

Also, the three budgets use wide-ranging estimates for the amount of money agencies are expected to return back to the state. The House anticipates a far larger amount of money will be returned than what the Governor and Senate do. The House anticipates $407.2 million—which is higher than the Senate’s anticipated amount of $371.6 million and the Governor’s amount of $290 million. These agency reversions are made possible due to the Governor’s directive in March that ordered state agencies to curb spending as well as the second directive issued in May. The directive was issued to address the current year revenue shortfall. But, if the House’s estimates are correct, the directive is bringing in more than what is actually needed to address the revenue shortfall—effectively, making deeper cuts to programs this year to pay for one-time spending for the upcoming fiscal year.

Next, on the spending side, the budget proposals are all over the map when it comes to estimating the cost of the current year Medicaid shortfall and next fiscal year’s Medicaid rebase—which is the latest calculation of what it takes to run the Medicaid program due to enrollment growth, changes in service consumption, drug price increases, and other factors. Back in April, state officials estimated the Medicaid shortfall to be between $120 million and $140 million. Breaking from the norm, budget writers use different assumptions—on the backlog claims, for example—that determine the estimate for the shortfall. As a backup measure, two of the three budgets put money into savings account in case their estimate ends up being above projections.

Of all three budgets, the House budget puts aside $100 million to $156.7 million less than what the Governor and Senate do, respectively, for the shortfall, rebase, and reserve combined. It’s clear that the House lowballs the Medicaid Shortfall, putting aside only $25.4 million. The House also puts aside nearly $118 million in a reserve but it fails provide money for the rebase like the other budgets do so it’s essentially money that will pay for the rebase—not something that will account for underestimating the shortfall. On the other end of the stick, the Senate puts the most money aside for these items combined.

Ideally, there should be consensus on the revenue shortfall, anticipated agency reversions, and Medicaid shortfall and rebase because the professional staff for the Governor and the Legislature work together to produce these estimates. It’s unclear why legislators made the decision to use different assumptions to produce the Medicaid estimates.   When it comes to the revenue shortfall and agency reversions, it may be the case that the professional staff is using the latest revenue estimates available at the time of the release of the budget proposals—yet, there is no information online to verify this. Besides, the budgets were produced within one month of one another so the estimates should not be that far off from one another.

These differences will surely complicate the conference budget process. This is because lawmakers will not only have to work out the differences as to what they have available but they’ll also have to negotiate the rest of the differences on the spending side too.

From the way legislators have been behaving the past two years, you would think that North Carolina’s recovery from the recession has weathered the economic storm. And yet, time after time, the evidence has shown that North Carolina continues to be far from where we need to be to declare clear and sunny days.

Revenue needed to pay for basics like schools and health care is still far below pre-recession levels, there are still too few jobs for those who want to work, and the state’s poverty rate remains higher than normal. Over the past two years, lawmakers have approved budgets that failed to meet classroom needs, reduced funding for health care for those in need and allowed backlogs to grow in our courts.

So their decision to continue to set aside money in the Rainy Day Fund, a reserve they traditionally contributed to in good times to ensure that they didn’t have to make deep, damaging spending cuts during the next downturn, is, well, strange. It’s like digging a storm shelter in the middle of a tornado.

To be clear, the Budget & Tax Center has always been an advocate for a stronger Rainy Day Fund in North Carolina. And yet, boosting contributions to the fund when core public investments are being starved is just another self-imposed limitation on lawmakers’ ability to meet pressing current needs. At each turn in the budget process the Governor, the Senate and the House, have all opted to squirrel away a little more rather than meet current needs. That’s not responsible. It’s counterproductive and short-sighted, especially since North Carolina’s Rainy Day Fund balance currently is about 3 percent of overall state operations, nearly double where it was four years ago, when it was just 1.56 percent.

BTC - Rainy Day Fund ContributionsRight now, the biggest threat to the state’s future is not inadequate Rainy Day Fund contributions. It’s the tax plan lawmakers passed last year, which has drastically reduced the state’s ability to invest in priorities like education, transportation and other keys to building a strong economy that creates widespread prosperity. Indeed, the revenue shortfall that lawmakers will have to contend with in the fiscal year that begins July 1 could be as high as $600 million.

Setting aside money in the Rainy Day Fund won’t do anything to fix the gap that the tax cuts have opened between available revenue and the cost of providing for the everyday needs of North Carolina families, schoolchildren and seniors. While having a strong Rainy Day Fund is nice, having a tax system strong enough to meet our needs is even more fundamental.

The House budget shortchanges the needs of North Carolinians — the inevitable result of tax cuts for wealthy people and large, profitable corporations.

And the House worsened the state’s prospects by voting down restoration of the state Earned Income Tax Credit, a proven tool for helping low-paid, working families make ends meet.

It’s time to reverse course and get back to investing in North Carolina’s future. That means stopping the next round of tax cuts scheduled to start in January 2015 and reducing reliance on lottery proceeds – an income source that falls most heavily on lower income people.

Local communities across North Carolina are already feeling the impact of recent tax policies and budget decisions made by state policymakers. A recent news article quotes a Pitt County commissioner lamenting disapproval with the state pushing off on local governments what they should be funding. Indeed, the tax plan passed last year results in self-imposed budget challenges today that will continue for years ahead, resulting in continued state funding cuts to core public investments that serve as the foundation of economic prosperity.

We at the Budget & Tax Center have traditionally talked about the net revenue loss under the tax plan, but that masks something important that happened when policymakers overhauled the tax code. The tax plan passed last year shifts responsibility for funding core public investments to local governments, in part, by recapturing some of the shared revenue from state sources that went to local governments to meet their obligations.

One example of this shift was the decision to repeal and eliminate the allocation of a portion of corporate income tax revenue dedicated to the School Capital Building Fund (SCB Fund), created in the late 1980s to assist local governments in meeting their public school building capital and technology equipment needs. Prior to the tax change, a portion of revenue generated from the state corporate income tax went to the SCB Fund. That practice ends under the tax plan. Over the next five years, this tax change takes away $382 million from local governments who used the revenue to improve education facilities in their communities. Read More