NC Budget and Tax Center

NC Budget and Tax Center

The radical changes to the state Constitution passed out of the Senate today puts policymakers’ primary responsibility of creating a budget each year on auto-pilot.

These arbitrary and flawed formulas for spending growth and income tax collections will reduce revenue by nearly $2 billion annually and restrict access to the state’s rainy day fund in times of crisis. It’s clear these proposals are a fiscally irresponsible path that will harm our state’s families and future.

NC Budget and Tax Center

Last night on the Senate floor, the initial debate about a suite of constitutional changes that would undercut our state’s economy focused on having North Carolina voters weigh in on all three changes in one vote in March 2016.

These changes would:

  1. Limit investments in education, health, and other services through a rigid, arbitrary, and fundamentally flawed spending formula. A 2/3rd majority vote of legislators would be needed to override that formula.
  2. Cap the income tax at 5 percent, which significantly reduces the resources available to run our schools and maintain investments in other critical priorities.
  3. Limit access to the state’s rainy day fund – the Emergency Savings Reserve Fund – by requiring a 2/3rd majority vote of legislators.

The result of these changes to the constitution would be an ongoing and annual budget crisis in which revenues are dramatically limited—while taxes are likely increased for middle-class consumers and property owners—and a flawed formula determines spending each year, reducing the ability of policymakers to meet the needs of a growing economy.

As the debate continues on the Senate floor, it’s particularly important that lawmakers remember a two key things so they don’t fall for some of the most common myths about these proposals: First, there is no use having a rainy day fund for emergencies if you restrict access to those funds.  Second, tax and spending limits and formulas built into the constitution are anti-democratic because they limit the ability of lawmakers to craft budgets that reflect the will of the people. Read More

NC Budget and Tax Center

The North Carolina House just passed HB 943, which would put a $2.86 billion bond referendum before the voters this fall. This move is based on a growing consensus that investing in our schools, roads, state facilities, parks, and local infrastructure is an economic must.

Issuing new debt should be pared with a few pragmatic fiscal steps. First, we should not cut taxes again, which would undermine the flexibility we will need to repay the debt. Second, we should use regular appropriations to pay for most repairs, and keep the bond finances for transformative projects that move North Carolina’s economy forward.

If we are going to issue more debt, we cannot afford another round of tax cuts. If we borrow to improve the state’s infrastructure, the state will need strong future revenue growth to repay borrowers; more tax cuts or limits on revenue growth are bad fiscal policy. Moreover, reducing taxes even further could jeopardize North Carolina’s AAA rating, and force us to pay higher interest rates. The bond rating agencies are very sensitive to states’ long-term fiscal stability and states with lower credit scores have to pay higher interest rates. Other states that have cut taxes even more dramatically than North Carolina (e.g. Kansas) have been downgraded by the credit rating agencies, not an example that we should follow if we are about to purchase new debt.

Read More

NC Budget and Tax Center

The Senate Finance Committee this morning voted to approve SB 607 which included a number of proposals that would make the state’s current economic challenges worse and undermine the foundations of a strong economy. This included an amendment to the constitution to cap the income tax at 5% and another undemocratic amendment creating a flawed formula-based limit on state investments that would force permanent cuts to education, roads and highways, health care and other key services that support our economy and quality of life. This amendment would also require a 2/3rd majority vote to increase spending beyond the formula. There is also a third amendment to the constitution included in the bill which would limit access to Emergency Savings Reserves by requiring a 2/3rd majority of legislators to access it.

The flurry of activity on tax and budget matters comes on the heels of the Senate announcement yesterday that they are willing to address certain policy matters outside of the budget, clearing the way for a final budget deal before the August 14th deadline.

A rigid, arbitrary, and fundamentally flawed formula for budgeting

The second proposed amendment which would remove authority from state lawmakers by setting an arbitrary formula for government spending has been tried in only one other state, Colorado, and has been widely acknowledged as a failure. In fact, it did so much damage in Colorado that voters chose to suspend it. Before they suspended it, this rigid formula forced drastic cuts to Colorado’s K-12 and higher education, and it became impossible for the state to keep pace with the rising cost of health care, forcing cuts to child immunization programs and prenatal health care. At the same time, it was clear that it was doing nothing to improve Colorado’s business climate, economy, or quality of life. As a result, business leaders in Colorado were major proponents of suspending the law.

The harm to Colorado was significant, but the use of such a rigid and fundamentally flawed formula would be particularly damaging in North Carolina where recent harmful budget cuts to our schools and other services average people depend on everyday would be locked in permanently and new emerging needs could not be met by future policymakers because their hands would be tied by this constitutional provision.  The capping of state spending to population plus inflation growth would lead to large, annual cuts that over time make it impossible to ensure a quality education for our children, maintain vibrant main streets in communities, and invest in the health and safety of families.

In North Carolina, such a rigid formula would mean forgoing an estimated $500 million in investments next year alone. This $500 million would provide for critical classroom funding for our kids, could allow the state to support rural economic development and support the research and development at public universities that drives innovation.

Additionally, it’s critical to understand that this type of law is a gimmick and does nothing to make government run more efficiently or ensure that tax dollars are well spent. Instead of making meaningful reforms, the proposal passed by the Senate Finance Committee simply turns lawmakers’ decision-making responsibilities over to a flawed formula. Meanwhile, it won’t do anything to make sure the state’s spending priorities are in line with the needs of North Carolinians or make the tax system fairer.

An undemocratic hurdle for our tax system

The other proposal passed today by the committee – a hard limit to the income tax rate of 5% would severely limit the state’s ability to ensure the tax code is adequate and fair over time. Such a proposal could cost taxpayers money by raising the cost of borrowing. It also would likely shift the financing of public investments to fees and other taxes that taxpayers will have to pay, including higher local property taxes, sales tax, vehicle fees, and college tuition.

These proposed constitutional amendments make it harder – not easier – for lawmakers to budget responsibly and they will weaken the foundation of our economy by ensuring the state cannot invest in its people and places. A budget that includes these flawed policy ideas will not help North Carolina move forward.

NC Budget and Tax Center

For the 2015-16 school year, the NC Department of Public Instruction reports that around 1,200 public schools are eligible to participate in an initiative that aims to fight hunger in high-poverty schools. Referred to as Community Eligibility, this initiative allows eligible high-poverty schools, groups of schools, or school districts to offer breakfast and lunch to all students free of charge.

When children arrive at school hungry, it is very difficult for them to concentrate and do well in the classroom. Accordingly, community eligibility helps ensure that all children in high-poverty schools arrive to class each day fed and ready to learn. Last year, North Carolina got off to a good start with nearly 650 schools (around half of eligible schools) adopting community eligibility to feed more than 310,000 kids. Participating schools note that more NC children are eating school meals because of community eligibility, with a particular increase in the number of children eating breakfast.

The second year of this initiative provides an opportunity for additional eligible schools to join this initiative. With 1,200 public schools eligible for the upcoming school year, this means that hundreds of schools are not currently participating. Eligible schools that are not currently participating in Community Eligibility have until August 31, 2015 to confirm that they will join the initiative.

The impact of Community Eligibility extends beyond ensuring that children arrive to class fed and ready to learn. By eliminating the need to collect school meal applications, schools are able to use their staff more effectively and reduce administrative costs. These cost savings are likely welcomed by local schools amid limited financial resources and tight budgets.

This is not to say that the transition is easy. For example, a key feature of community eligibility is that schools no longer have to collect school meal applications; however, this paperwork has long been key to determining school funding mechanisms and poverty estimates, among other things. However, the USDA and US Dept. of Education have issued a variety of rules intended to address this issue and viable solutions exist for other particular challenges.

North Carolina has an opportunity to build upon its initial success with fighting child hunger through community eligibility. The overall health and prospects for the state will largely depend on the care and attention given to one of our most valuable assets – our youth. Supporting participating schools and getting more eligible schools to join community eligibility helps promote opportunity for all children.