The latest issue of the Justice Center’s Prosperity Watch is out and it explains some big practical problems that have become apparent in the new sales tax distribution changes that became law with the FY2016-17 state budget. As economist Patrick McHugh explains:

“The new allocation system does not target the states’ areas of most dire economic need. North Carolina divides counties up into three economic tiers, with Tier 1 being the most distressed and Tier 3 the most economically robust. As shown above, the forty Tier 1 counties receive roughly 1/3rd of the new allocation, while the majority goes to Tier 2 and 3 counties that are comparably better off. In fact, the average allotment received by Tier 2 counties is almost twice as large as what the average Tier 1 county will receive. While some struggling rural communities will get a bump in revenue, a more targeted mechanism or a direct appropriation made possible by an adequate state tax code could have sent even more to where it is needed the most.

There’s also concern about whether this new fund will come from new revenue, or will cannibalize existing sales tax collections. The bulk of the funds to be distributed according to this new system are projected to come from expanding the sales tax to a variety of repair and maintenance services, but it is next to impossible to accurately predict how much revenue will come from expanding the sales tax base in this way. If expanding the sales tax does not raised the projected revenue, this new fund could eat into the dollars distributed according to the existing formula or require greater appropriation of state dollars, resulting in a smaller net gain for counties that receive a part of this new fund.”

Add to this the fact that the changes were included in a budget that, as McHugh puts it, “will undermine state and local governments’ ability to build good schools and vibrant economies,” and you’ve got even more reason to be very worried about what lawmakers and Gov. McCrory have wrought with their duct-tape-and-baling-wire budget and tax package. The graph below illustrates the disconnect in the new law:

NC Budget and Tax Center

The budget passed by state lawmakers last week expanded the sales tax base to include additional services that are not currently taxed. Accordingly, the repair or upkeep of a vehicle, the repair of a broken washer or dryer, or the maintenance of an air conditioning unit will now be subject to the sales tax.

It appears that the weekend gave policymakers time for some second thoughts about their plan, however. This week, state lawmakers are now aiming to pass a bill that will roll back one particular aspect of the sales tax base expansion included in the budget.

House Bill 117 (HB 117) includes a provision that would exempt repair, maintenance, and installation services on tangible property and motor vehicles covered under manufacturer or dealer warranties from the sales tax. Accordingly, under HB 117, if your vehicle or tangible property is covered under a warranty then you don’t pay a sales tax on repair and upkeep services. To the contrary, if your vehicle or other tangible property is not covered under a manufacturer or dealer warranty then you will pay more in sales taxes.

This tax change means that two people can own similar tangible property, but one could potentially end up paying more in sales taxes simply because they don’t have a manufacturer or dealer warranty. This is troubling because it is likely to particularly harm low-income taxpayers who already pay a larger share of their income in taxes compared to the well-off. Low-income taxpayers who have to take their non-warranted vehicle to an auto shop for an unexpected repair will pay more in sales taxes, for example. Meanwhile, those who are able to afford costly warranties will escape having to pay more in sales taxes.

The backtracking on services included in the sales tax base expansion contradicts state lawmakers’ supposed commitment to base broadening on principle. Broadening the sales tax base has been sold as a way to make the state’s tax code more effective and ensure that it reflects a more service-oriented economy. That appears to be the case only if powerful lobbyists don’t object. Read More


University system leaders are happy with how they emerged in the state budget, saying they were grateful lawmakers opted to fund enrollment growth and other asks they had.

UNC system president Tom Ross (left) and John Fennebresque, UNC Board of Governor, in file photo.

UNC system president Tom Ross (left) and John Fennebresque, UNC Board of Governor, in file photo.

John Fennebresque, a Charlotte attorney who serves as the chair of University of North Carolina’s Board of Governors, called the $100 million overall increase for the university system “the best budget” since the Recession began in 2008.

Among the things lawmakers opted to fund in the two-year budget signed into law this afternoon by Gov. Pat McCrory were annual enrollment growth costs of $49 million, and earmarked dollars to vshore up East Carolina University’s medical school and Elizabeth City State University.

Chancellors will also be able to carry over financial savings they might find on their campuses to future years, in order to fund other priorities.

Those words of praise about the budget came despite the UNC system being handed $64.4 million in discretionary cuts over the next two years, and following nearly $500 million in cuts the system has weathered since 2010.

UNC system staff and faculty, like all state employees, also received a $750 bonus in the budget instead of any type of permanent salary adjustment.

Tom Ross, the president of the UNC system, said that he viewed the budget overall as a positive for the UNC system in comments he made during Friday’s meeting.

“Our enrollment was fully funded for both years,” Ross said, referring to the additional $49 million each year allotted to cover increasing numbers of students. “We’ve got to have the resources to educate the students when they come.”

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You’d think Gov. Pat McCrory would be embarrassed to release a video recognizing state employees (see below) on the same day that the ink is drying on a new state budget that once more leaves them mostly out in the cold, but, alas, a capacity for being embarrassed does not appear to be a part of the Guv’s makeup. Here’s Chris Fitzsimon explaining the details in today’s Fitzsimon File:

“In a case of perfect timing, Governor Pat McCrory released a video Friday morning thanking state employees for their service to North Carolina and declaring next week State Employee Recognition Week.

Later in the morning McCrory signed a state budget that denies most state employees a raise, instead giving them a one-time $750 bonus that will not count toward their retirement.

The lack of a raise comes despite a state revenue surplus. Legislative leaders and McCrory decided to cut taxes again, primarily on corporations and the wealthy, instead of giving state workers even the modest two percent across the board pay increase the House budget originally proposed.

McCrory wants to recognize state employees—but not pay them very much.”

Back in May, McCrory said he wanted the state’s budget surplus to be used to give state employees a raise. Today, he signed a budget that does no such thing and dispensed the following virtual pat on the back in its place:

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Here’s the deal on the subject of expanding the sales tax base to include services as Gov. McCrory and the General Assembly have decided to do: It actually can be a good idea, but only if it’s paired with a plan to lower the overall sales tax rate and provide targeted tax cuts (like the Earned Income Tax Credit) to lower income people.

Unfortunately and remarkably, however, McCrory and state lawmakers are simply ignoring this simple truth and instead pairing the sales tax expansion with personal and corporate income tax cuts that overwhelmingly favor the wealthy. As Chris Fitzsimon pointed out this afternoon:

“Supporters of the new sales tax plan claim that it is not a tax increase, that it will be offset by a reduction in the personal income tax rate. But that’s not true for the folks at the bottom of the economic ladder who will receive very little, if anything, from the income tax cut.

Millionaires by the way will receive a $2,000 break and that’s on top of the windfall they received in the 2013 tax cut package.

Low income folks won’t be so lucky.

You might be wondering how this regressive tax scheme passed the General Assembly and what people said it about it as it made its way through the legislative process.

It never went through any committee. It appeared out of nowhere in the final budget agreement and questions about the formula and how to distribute the money in future years were not answered

Proposals to restore the state Earned Income Tax Credit to help low wage workers and their families that could offset a sales tax hike have also been repeatedly ignored.

There are plenty of reasons why the budget unveiled by House and Senate leaders this week takes North Carolina in the wrong direction.

One big one is that it raises taxes on people who can least afford to pay more.”

Meanwhile, that sound of crickets chirping? That’s the response to the new plan from the far right think tanks that have lectured us for years about the supposed evil of raising taxes in North Carolina. By all indications, they go along with the Governor’s bizarre take that raising taxes on people at the bottom is okay so long as the result is to reduce state revenue overall. Talk about your worst of all worlds outcomes.