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NC Budget and Tax Center

Each year public schools across the state experience changes in their student enrollment levels – some see an increase, others a decline, while enrollment in some schools remain steady. A policy change included in the budget approved by state lawmakers for the current fiscal year 2015 means schools experiencing growth in student enrollment are no longer guaranteed to receive full state funding for the additional students when state lawmakers create a budget for the next school year.

The new provision in the budget no longer includes enrollment adjustments for public schools as part of the baseline budget, also referred to as the continuation budget. Prior to this policy change the state’s budgeting process took enrollment adjustments into account when determining how much state funding is required to maintain education service levels. Doing so more accurately reflect the actual level of state funding that should be invested in K-12 education.

Public schools that experience an increase in student enrollment from one year to the next must now wait until state lawmakers finalize a budget for the next fiscal year to know if enrollment growth is fully funded. Many public schools across the state could potentially feel the impact of this deceptively subtle policy change. Read More

NC Budget and Tax Center

It hasn’t taken long for the costly tax plan passed last year to replace grandiose promises with an unfortunate reality. State officials recently confirmed that the 2013 tax plan passed by state policymakers will cost at least $200 million more each year than initially projected, with a price tag of at least $5.3 billion over the next five years. Our own estimates point to the potential for the total revenue loss to reach $1.1 billion by 2016.

As the prolonged negotiated budget for fiscal year 2015 highlights, North Carolina’s revenue challenge hampers our ability to invest in public education, healthcare services, and other public investments that serve as the foundation of economic growth.

The General Assembly’s Fiscal Research Division (FRD) was charged with assessing the fiscal impact of the tax plan and confirms that the personal income tax rate reduction is having a greater immediate impact on revenue collections. FRD attributes the larger-than-expected eventual revenue shortfall to slower wage growth. But it’s difficult to imagine that the income tax cuts are not driving the greater revenue losses given what we know about who benefits from the tax changes and slower wage growth suggests that the tax changes should cost less, not more. Moreover, slow wage growth raises additional concerns about the reality of a Carolina Comeback. Read More

Falling Behind in NC, NC Budget and Tax Center

Governor McCrory signed a final budget into law for the current 2015 fiscal year, which runs from July 2014 through June 2015, this morning. The $21.1 billion budget includes new spending initiatives – largely pay raises for teachers and state employees – but fails to include additional revenue to sustain this spending in the long-term. Contrary to fueling North Carolina’s economic comeback, as Governor McCrory claims, the final budget continues to fund core public services at diminished levels, well below pre-recession levels, and compromises the ability of the state to get ahead and prepare for the future.  Moreover, it puts North Carolina on a fiscally irresponsible path that will continue to create budget challenges in the years ahead, largely as a result of the tax plan that was little debated and discussed in the final budget.

North Carolina faces a revenue challenge, and actions taken within the final budget make this reality clear. The final budget signed by the Governor spends every available dollar and uses dollars from last year’s budget as a result of the Governor requiring agencies to cut their respective budgets. No funding is available to build up the state’s Savings Reserve fund, which is meant to position the state to weather a future economic downturn. Furthermore, the budget relies on one-time funding sources that, once depleted, cannot be replenished with such low revenue and shifts funding for core public investments such as K-12 education to lottery receipts and early childhood programming to federal block grants.

Such budget decisions are driven largely by the tax plan the governor signed into law last year, which significantly reduces revenue available for public investments. Revised analysis by the General Assembly’s Fiscal Research Division estimates that the income tax rate cuts in the plan will cost at least $200 million more annually than initially expected – more than $1 billion less in annual revenue once the plan is fully implemented. The Governor and state policymakers failed to account for this reality in the final budget, which means that, absent new revenue, more budget cuts to core public services are likely to occur in future years as the tax plan continues to be implemented. Another round of tax cuts is set to occur in January 2015.

Under the final budget signed by the Governor, state spending remains 6.6 percent below pre-recession levels (see chart below). Read More

NC Budget and Tax Center

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

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.