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NC Budget and Tax Center

Last week, Governor McCrory unveiled his two-year budget proposal for July 2015 through June 2017. He has since touted how his plan reinvests in the public services and programs that are essential for economic opportunity and quality of life. However, a close look at his 2016 fiscal year (FY2016) spending plan reveals that he fails to reinvest in a meaningful way in the critical public structures that benefit us all. Genuine progress will continue to be hampered until state lawmakers build a tax system that can adequately match the needs of a growing economy.

Governor McCrory’s proposed budget for FY2016 increases year-to-year spending by nearly $439.8 million, or 2 percent. This is in sharp contrast to past recoveries when state investments were far quicker to return to, and advance beyond, pre-recession levels. Enrollment growth in public schools, the UNC system, and the Medicaid/Health Choice programs is estimated to exceed the year-to-year increase in spending in the governor’s proposal, totaling nearly $442.6 million in FY2016. That means every new dollar increase, on net, is dedicated to funding enrollment growth (see chart below).

It also means that non-enrollment expansion items in the proposal are made possible by cutting or allowing spending to expire for other vital programs that are already stripped bare from previous underinvestment. That’s like rearranging the deck chairs on a sinking ship. Read More

NC Budget and Tax Center

Some legislators want to severely limit the resources the state can invest in schools and other needs and are considering arbitrary formulas to guide those decisions, even though we are already doing less with less. State investments as a share of the economy would be $3.2 billion higher if North Carolina caught up to 2008 levels. That means the Governor and legislative state budget writers have a lot of catching up to do to replace what was lost while also keeping up with the growing needs of a growing state. Tying our hands with artificial limits on how much we can invest is a road to ruin.

The goal of these arbitrary formulas is to radically restrict state spending and shrink the reach and effectiveness of critical public services, regardless of need or cost. One example is a formula that would limit year-to-year growth in total state spending to the rate of inflation plus population growth. Automatic spending limits—as well as caps on year-to-year revenue growth—are sold as common-sense measures, but in reality they are not a responsible way to measure the cost of providing basic government services. Instead, such limits merely ensure perpetually insufficient funding and never allow policymakers to replace the cuts enacted in the aftermath of downturns.

Case in point: inflation, as measured by the Consumer Price Index, doesn’t accurately reflect the cost of providing public services overtime. That’s because the CPI measures changes in the cost of goods and services that urban households purchase—not changes in the cost of public goods that benefit all of us. Read More

NC Budget and Tax Center

Senate Bill 20 passed another hurdle this morning, moving out of House Finance and to the floor for a full vote.  As I recently highlighted, state lawmakers are pursing tax changes that would further shift responsibility for paying for public investments and services to low- and middle-income taxpayers and away from the wealthy and profitable corporations.

Senate Bill 20 includes a provision that would no longer allow taxpayers to deduct expenses for tuition and related expenses such as course-related books, supplies, and equipment. The federal tax code includes this deduction, but state lawmakers are proposing that the deduction be done away with.

Eliminating this deduction would come at a time when North Carolina students and families have seen a steady increase in the cost of a college education. And this trend will likely continue, as another round of tuition increases look to be on the horizon for students attending public universities in the state. Meanwhile, state funding for need-based financial aid has not increased in recent years, meaning students likely have to incur increasing amounts of student loan debt. Read More

NC Budget and Tax Center

State lawmakers have introduced House Bill 117 (HB 117) that pushes for more tax cuts that benefit corporations, even as the state faces an ongoing revenue shortfall resulting from the tax plan passed in 2013.

State lawmakers would like to change an arcane tax provision that determines the amount of state income taxes paid by corporations. The state’s current tax system uses a formula that considers a corporation’s property, payroll, and sales in North Carolina. However, the tax change – referred to as single sales factor (SSF) apportionment formula – would only consider the sales component for certain corporations.

Proponents of this tax change claim that it will boost capital investment in the state and create more jobs. However, as BTC has highlighted before, this claim is not supported by real-world evidence. What will happen, however, is a further reduction in revenue available for public investments and services that businesses depend and rely on.

Here’s a quick recap on why North Carolina should not shift to a SSF apportionment formula: Read More

NC Budget and Tax Center

State lawmakers are targeting cash-strapped homeowners as they continue to pursue tax changes that would shift even more of the tax load to low- and middle-income taxpayers, while preserving tax benefits that have largely flowed to the wealthy and profitable corporations.

Legislation approved by the state Senate (Senate Bill 20) would require homeowners to pay state income tax on mortgage debt forgiven by lenders. Meanwhile, financial institutions that provide such consumer relief are allowed to deduct the expense as a tax write-off.

The proposal would undermine a key element of North Carolina’s recovery from the nationwide housing crisis that fueled the Great Recession. In the wake of the crisis, a number of financial institutions  agreed to  settlements that provide consumers relief for unaffordable mortgages. This often meant reducing the amount of principal debt they owed on their mortgages to make them more affordable and lessen the likelihood of foreclosure. Furthermore, the 49-state National Mortgage Settlement encourages mortgage servicers to provide such relief to distressed borrowers affected by the housing crisis.

The goal of these settlements is to ensure that homeowners who were preyed upon by unethical lenders do not fall into the financial tailspin that foreclosure often creates. The tax change proposed by the Senate would require cash-strapped homeowners who have already suffered from the disastrous housing crisis and economic downturn to report this debt forgiveness as income, even though no actual cash is provided to the homeowners.

This could deter families from accepting bank offers to modify their mortgage loans because they cannot afford to pay taxes on the amount of relief they get. Distressed homeowners seeking to stabilize their finances and rebuild in the wake of the housing crisis would face a major setback. Read More