Weekly Briefing

At a minimum, stop making things worse

WB-604A

 Unless lawmakers act, scheduled 2015 tax cuts will further deepen NC’s fiscal crisis

North Carolinians are coming to grips with the reality that the tax cuts enacted by lawmakers in 2013 are wreaking havoc with state government. If they had any doubts about this fact, they have certainly been dispelled by the new and disastrous litany of proposed cuts to essential structures and services that state leaders are currently proposing.

Though it’s been partially obscured so far by the fig leaf of proposed teacher pay hikes, both the Governor and the state Senate would impose all sorts of new and destructive service reductions that would, not surprisingly, disproportionately impact the state’s most vulnerable citizens. Mind you, this is during a period of an alleged “Carolina Comeback” – Governor McCrory’s label for our current period of supposed (but actually illusory) robust growth and fast-rising prosperity.

Under the McCrory budget, public schools would still receive almost 6% less in inflation-adjusted dollars than they did in 2007-08. Colleges and universities would receive 12.3% less. Moreover, despite the modest pay hike for most teachers, $19.8 million would be cut from teaching assistants, state support for childcare would be cut, the N.C. Center for the Advancement of Teaching would be eliminated, and dozens of other important programs and services would be reduced or ordered to make do with less.

Meanwhile, in the Senate, of course, McCrory’s pennywise-pound foolish approach has been taken to almost laughably extreme levels. Were the Senate budget enacted into law as it left that body in the middle of the night this past weekend, it’s safe to say that North Carolina would soon be unrecognizable in many important respects. The Senate budget is a Tea Party budget on steroids and what my colleague Chris Fitzsimon rightfully described last week as “easily the most cynical and damaging spending plan in modern [North Carolina] history.”

And if you think this is bad….

Fixing this dreadful situation would be difficult under the best of circumstances, With overall state tax revenues now mired 7% below pre-Great Recession levels, even the most progressive and visionary state leaders would have their work cut out for them in the years to come in beginning to repair the damage. As a result of the tax cuts that went into effect in January of this year, the state budget gap for the coming fiscal year could well be more than $600 million. This is on top of the much lower-than-projected revenues that ultimately materialized for the year that ends this month.

But wait, it gets worse – much worse.

The current state leadership isn’t finished. As crazy as it may seem, last year’s tax cutting binge didn’t come to full flower in 2014. There are still more cuts in the offing for calendar year 2015!

Unless policymakers act to delay or repeal them, a second round of rate reductions on the personal income tax and corporate income tax will go into effect next January 1. The cost of these additional tax cuts will be nearly $100 million for Fiscal Year 2014-15 and $300 million for the entire calendar year 2015.

And, not surprisingly, the majority of these cuts will inure to the benefit of the wealthy. As the experts at the N.C. Budget and Tax Center reported last August:

Nearly two-thirds of the net tax cut (combining changes to the personal and corporate income, sales, franchise and privilege taxes) would go to the richest 1 percent of North Carolinians, who have an average income of $940,000.”

It’s really a remarkable state of affairs; at a time in which public structures and services are starving for resources – a time in which the state Senate has already approved a proposal to slash everything from teacher and teacher assistant positions to school nurses to the courts to health care for the aged, blind and disabled – the plan is to make the situation even more dire next year. Like some barbaric medieval doctor “treating” an anemic patient, state leaders have prescribed yet another good bloodletting for the state in 2015.

Unnecessary and self-inflicted pain

The tragedy of this situation is that it didn’t have to be. Gov. McCrory demanded a tax reform plan in his 2013 State of the State speech that would have been “revenue neutral.” Had lawmakers simply followed that extremely conservative course instead of slashing revenue further, the state would be vastly better positioned today and in the coming year to meet its most pressing needs. Indeed, as this chart shows, if the state were to simply reverse the 2013 tax cuts, it could:

  • retain the state Earned Income Tax Credit for low-income working families,

  • restore K-12 textbook funding to its peak level,

  • keep all teacher assistants and nurses in place,

  • fully fund the pre-K waiting list for at-risk four year olds,

  • preserve current eligibility for childcare subsidies,

  • reverse a planned 2015 “flex” cut to the UNC system,

  • reverse last year’s Community College tuition hike,

  • maintain Medicaid eligibility for thousands scheduled to be cut off, and

  • much more.

Even a less drastic step could help significantly. If North Carolina merely enacted a measure recently proposed by a large group of progressive House members to return the state income tax to its 2013 level merely on individuals with incomes of a $1 million per year or more, state revenues would spike by hundreds of millions of dollars.

At a minimum, do no more harm

But of course the simplest, easiest and most politically feasible course for lawmakers at present is to stop the bleeding by simply repealing or delaying the cuts scheduled for 2015. No one – not even the most rabid tea partiers – could legitimately attack lawmakers’ tax cutting bona fides in the 2014 election merely because they kept the personal income tax at a flat 5.8% and the corporate income tax at 6% rather than allowing them to fall again to 5.75% and 5%, respectively. Good lord, they could still brag to high heaven about last year’s cuts. They could also rightfully respond to any criticism by noting that the overwhelming majority of these cuts will be enjoyed by the top 1% of individuals and a tiny fragment of the state’s businesses.

Perhaps even more powerfully, they could, as John Kasich, the conservative Republican governor of Pat McCrory’s native state of Ohio, said to critics of his decision to expand Medicaid in the Buckeye state:

Now, when you die and get to the meeting with St. Peter, he’s probably not going to ask you much about what you did about keeping government small. But he is going to ask you what you did for the poor. You better have a good answer.??”

Sadly, however, absent some fundamental and unforeseen turnaround in the ideological make-up of the North Carolina General Assembly (or the physical make-up of Gov. McCrory’s backbone) even such a modest, stay-the-course, do-no-further-harm scenario seems outrageously optimistic.