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NC Budget and Tax Center

Yesterday evening, members of the Senate Finance Committee gathered to consider a modified version of House Bill 1050 (HB 1050) which includes repealing the local privilege tax. A repeated claim by proponents of the tax repeal is that additional revenue from the local sales tax – resulting from the tax plan passed last year – will make up for the revenue lost from repealing the local privilege tax.

A closer look at a fiscal note provided by the General Assembly’s Fiscal Research Division, however, highlights that the math simply doesn’t add up to support this claim.

Fiscal Research estimates that a full repeal of the local privilege would result in nearly $63 million in less revenue for cities and counties across the state. Revenue from an expanded local sales tax is projected to bring in an about $10.9 million in additional annual local revenue and sales taxes from online sales via Amazon is expected to bring in around $2.9 million – for a total of $13.8 million in local revenue from an expanded sales tax.

Local Privilege Tax Repeal

It is clear that $13.8 million in additional local sales tax revenue is not sufficient to replace $63 million in lost revenue from the repeal of the local privilege tax. Less revenue means local governments will likely be further challenged with providing its residents with core public services and an attractive quality of life.

NC Budget and Tax Center

The Senate Finance Committee is scheduled to convene at 7 PM tonight to consider a modified version of House Bill 1050 (HB 1050), which includes a provision that would restrict the ability of local governments to manage their budgets and public investments in their respective communities.

One provision, among many, within HB 1050 would repeal the local privilege tax beginning next year. State law currently permits local governing authorities to levy a local privilege tax on various businesses that engage in significant economic activities in their respective locales. Repeal of the local privilege tax would result in nearly $63 million in less revenue for public investments in cities and counties across the state.

State policymakers point to the tax plan passed last year as a way to offset the lost local revenue from repealing the local privilege tax. Particularly, proponents expect the expansion of the sales tax base to some services to generate additional revenue.

The proposed repeal of the local privilege tax means businesses would get a tax cut that will be paid for largely by middle- and low-income North Carolinians who pay more of their income in sales tax than higher income taxpayers. And if the local sales tax fails to generate sufficient revenue to make up for lost revenue from repealing the local privilege tax, local governments will either have to find revenue in other places (e.g. increase local property tax rate), reduce the level of services provided to residents, or a combination of both.

Cities and counties, like the state, faced tough budget decisions during the economic downturn and recovery. They are relying on revenues to catch up and keep up with the needs of their residents. This bill puts that progress at risk.

Changes to the local privilege tax could have been made in a way that held local governments harmless, as was done in tax modernization proposals back in 2009 and earlier; however, policymakers chose this path. Under this tax change, local governments could become further challenged with providing its residents with core public services and an attractive quality of life.

NC Budget and Tax Center

From poverty to job creation, North Carolina has been slow to bounce back from the Great Recession on the economic front. The storyline is much the same when it comes to tax collections. North Carolina’s tax revenues at the end of 2013 were lower than its previous peak that occured just prior to the economic downturn, according to new data released by the Pew Center on the States.

These findings fail to signal an economic comeback. In fact, they illustrate that there is a considerable amount of lost ground to regain even as state revenues are projected to slowly pick up as the economy grows stronger. Catching up will be all that much more difficult due to lawmakers’ decision to pass a costly and lopsided tax plan last year that primarily benefits the wealthy and profitable corporations.

State revenues were down 4.5 percent, or $287.4 million, in the last quarter of 2013 compared to the state’s previous peak quarter that occurred in the third quarter of 2007—just before the onset of the Great Recession. Note, this was under the old tax code. See the figure below. North Carolina fared better on this measure compared to all of its southern neighbors except for Tennessee and only 19 states in total. For the states that experienced a recovery to peak revenue levels by the end of 2013, more than half of them raised taxes to keep up with the growing demands of a growing population.   Read More

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McC709The General Assembly kicks off the summer session at noon but the big story of the day comes an hour later when Governor Pat McCrory unveils his budget recommendations for next year.

It is worth remembering that McCrory only proposes the budget, the House and Senate actually approve it. And if last year is any indication, the final budget may not look much like the one released today.

Last March, McCrory sent lawmakers a spending plan that called for a one-percent across the board raise for teachers and state employees.  The final budget that lawmakers passed and that McCrory signed contained no raise for teachers or state workers.

McCrory’s budget called for $58 million in new funding for textbooks in schools to restore some of the cuts in textbook funding in the last two years. The final budget included no new funding for textbooks.

McCrory’s budget called for $9 million more for instructional supplies for schools. The final budget that passed the House and Senate instead cut another $6 million for classroom supplies.

And McCrory’s budget called for $3.3 million in funding for the highly successful drug treatment courts that the Republican General Assembly had defunded in the last two years. McCrory even singled out the drug courts in his State of the State speech. But the final budget passed by the General Assembly included no funding for the drug courts.

There are plenty more examples and then there is tax reform. McCrory also said in his State of the State speech that any tax reform must be revenue neutral, but the final tax plan approved last summer will cost $600 million a year when fully implemented and is a major reason why there is a budget hole this year and a shortfall projected for next year.

So take whatever you hear today and read in the headlines tomorrow about McCrory’s budget with a grain of salt. The leaders of the House and the Senate will make the major budget decisions again this year, not the Governor, no matter how assertive he promises to be.

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State Rep. Nelson Dollar said he anticipates the state will be able to patch the $445 million shortfall for next year and use money from budget cuts for modest teacher and state employee salary raises.

State Rep. Nelson Dollar

State Rep. Nelson Dollar

“The question is will we be able to pay teachers and state employees or have increase, modest though they might be, and… keep on track with raising beginning teacher pay,” Dollar said. “The answer is yes.”

Dollar, a Wake County Republican and chief House budget writer, made his comments Monday at a reporters’ roundtable held in downtown Raleigh.

The N.C. General Assembly short session begins on Wednesday, when lawmakers arrive to begin making revisions to the upcoming budget year and deal with proposals for coal-ash cleanup, teacher and state employee raises and more.

Dollar, who said there will be cuts, or “budget reductions,”  coming, but didn’t say from where with lawmakers still waiting to see a proposed budget from Gov. Pat McCrory’s administration.

‘There will be budget reductions, yes. There will be budget reductions in the various agencies,” Dollar said. “That will flow right back into raises.”

He said he did not anticipate an across-the-board percentage cut, but expected cuts to be “much more thoughtful than that.”

Dollar also said:

  • The Medicaid shortfall may be lower than the estimated $130 million shortfall currently projected, though Dollar did say that the continuing problems with the NC TRACKS Medicaid billing system makes it difficult to project accurately.
  • No major changes to Medicaid system this year. Any reforms to the $13 billion system will come with significant legislative input, Dollar said. “We need to keep momentum moving forward on Medicaid reform,” Dollar said. “It’s going to take a while to get the system that we want.”
  • Less babysitting of the UNC system? Dollar, in mentioning that the UNC Board of Governors now consists completely of appointments by Republican legislative leaders, said he expects the General Assembly will dictate less about how the UNC should make cuts. “There’s a lot of interest in letting them do their work,” he said. He added, “A lot of what they’re doing is evaluating the whole system.”
  • No independent redistricting process  any time soon. Dollar said he doesn’t see much desire at all in the Republican-led legislature to hand over redistricting responsibilities to a non-partisan group. “I get asked that sometimes by my colleagues in the other party and I always remind them that we introduced bills and they refused to take them up or consider them,” he said. “So, it’s sort of, it is what it is. I don’t see that moving anywhere anytime soon.”
  • Interested in the Speaker job? “I would certainly be willing to serve in any capacity that the caucus would choose,” Dollar said. “But my focus right now is solely on the budget.”