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This afternoon, Governor McCrory released his $20.99 billion 2015 fiscal year budget for the period that runs from July 2014 to June 2015. His proposal creates more problems than it solves, failing to take prudent steps that would put North Carolina’s budget on a more sustainable path. Similar to his budget proposal last year, his new spending proposal follows suit and fails to catch up—let alone keep up—with the needs of kids, working families and communities in many areas of the budget.

The Governor’s budget was constrained in major ways—which were self-imposed by state lawmakers last year when they decided to cut taxes. The state is facing a revenue shortfall of $191 million in the 2015 fiscal year (not to be confused with the nearly half-a-billion shortfall for the current 2014 fiscal year that ends in June). The driver of these revenue shortfalls—despite an economic recovery—is the series of tax cuts that Governor McCrory signed into law last year that was already estimated to drain available revenues to the tune of $437.8 million in the 2015 fiscal year.

As we reported last week, estimates suggest that the revenue losses from the tax plan, particularly stemming from the personal income tax changes, could reach $600 million next fiscal year.

Yet, rather than prudently recommending the halting of future tax cuts that are scheduled to go into effect in January 2015, the Governor chose to keep this next round of tax cuts in place despite the diminished revenue picture. As we warned last year, North Carolina cannot afford to pay for tax cuts that primarily benefit the wealthy and profitable corporations at the expense of teacher layoffs, growing waiting lists for critical public services, and higher tuition rates.

State spending under the Governor’s proposal would continue to remain well below pre-recession levels, as illustrated in the chart below, even though spending over the base budget would slightly increase. All areas of education funding fall short of what was called for in the continuation budget. Tax cuts are making it harder to regain lost ground. Read More

The Governor’s budget irresponsibly jeopardizes North Carolina’s future economic prospects.

There are two main reasons: it uses one-time money that won’t be there in years to come, and it makes cuts in key areas that are the building blocks of a strong economy.

Self-inflicted revenue shortfalls resulting from the tax plan enacted last year mean fewer dollars to build a strong foundation for the state’s economy and improve the lives of all North Carolinians. The Governor’s use of one-time money and cuts to key areas, like higher education and health, are shortsighted and harmful to the state’s long-term stability and growth.

The Governor should put forward a responsible plan to pay for his priorities by stopping any further tax cuts from going into effect and urging legislators to re-examine the tax decisions made last year.  Next year’s financial gap has the potential to grow even larger as the costs of personal income tax changes are felt. State policymakers would do well to plan for that impact and its potential devastating effect on families and the state’s economy.

Thom TillisNorth Carolina House Speaker Thom Tillis headlined a press event at the General Assembly this morning that was supposed to be about kicking off the 2014 legislative session but that, at times, felt a lot like a part of Tillis’ U.S. Senate campaign.

There will plenty of time for dissecting the details of what was said at the event, but there was at least one familiar conservative talking point repeated by Tillis that deserves to be debunked immediately and often.

Namely, it is utterly absurd for legislative conservatives (or anyone else for that matter) to argue — as the Speaker did at at least one point — that Democrats imposed more significant cuts on state services (like public education) back in 2009 and 2010 than have been imposed since the GOP assumed control of the General Assembly  in 2011 and the Governor’s mansion in 2013. This is like blaming FDR for the plunge in federal spending during the Great Depression.

Earth to Speaker Tillis: Yes there were large and problematic state budget cuts in 2009 and 2010, but that’s mostly because state revenues had literally dropped like an anvil as a result of the global Great Recession. Read More

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.

State policymakers return to Raleigh tomorrow challenged with addressing a budget gap of $335 million for the current fiscal year as a result of a huge forecasted revenue shortfall for the current fiscal year and a Medicaid shortfall. Next year, state policymakers face a budget gap of around $228 million, which could reach as high as $637 million based on higher costs estimated from the personal income tax changes.

In the face of underperforming revenue, today the General Assembly’s Revenue Laws Committee voted favorably to pursue changing an arcane tax policy that would FURTHER reduce annual revenue by $10 million next year, FY 2015, and by more than $23 million for FY 2016.

In pursuit of ultimately shifting to a single sales factor apportionment formula, today the Revenue Laws Committee voted to give greater weight to the sales component in determining 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. The tax change would give two-thirds weight to the sales component.

This tax change would create winners and losers. Around 3,000 corporations would see their taxes decrease under the tax change while around 6,000 corporations would see their taxes increase, according to analysis by the General Assembly’s Fiscal Research Division.

Proponents of this tax change claim that doing so will improve the state’s business climate by making expansion of property and payroll in the state more attractive to businesses. Other states that have adopted an SSF formula based on this premise have not seen this happen, however, and there is no reason to believe that North Carolina will experience a different outcome.

Furthermore, reducing the amount of revenue available for public investment will make the self-imposed budget challenge resulting from the tax plan passed last year worse. And everyone will pay the price because this will require further reductions to investments in educating our children, maintaining our infrastructure and protecting the safety and well-being of North Carolina families—investments that are needed to support a strong economy.