More ill-conceived tax cuts and MIA investments: Why the House budget proposal comes up short

More ill-conceived tax cuts and MIA investments: Why the House budget proposal comes up short

ff-budget[Editor’s note: The North Carolina House of Representatives is expected to give preliminary approval sometime later today to its version of a state budget for Fiscal Year 2017, which commences July 1. In response, North Carolina Budget and Tax Center Policy Analyst Tazra Mitchell has prepared a pair of extremely helpful articles that summarize how much House members actually propose to spend, where they get the money, the nature of the new tax cuts they would implement and several of the critical public investments that the proposal fails to make. The following represents a summary of the two articles, which you can read in their entirety by clicking here and here.]  

Doubling down on tax cuts and leaving nearly $127.4 million on the table

The $22.225 billion budget proposal that the state House of Representatives released for the upcoming 2017 fiscal year reflects the limited aspirations for North Carolina that the House and Senate leadership have agreed on. Legislative leadership used a flawed formula to set a low budget target — even lower than the Governor’s $22.33 billion proposal — that has no basis in economic realities or community needs and leaves $127.4 million on the table unspent.

Overall, the House proposal represents a 2.26 percent — or $490.3 million — increase over the current 2016 fiscal year budget. This proposal reflects leadership’s loyalty to severe budget constraints and lopsided tax cuts, which primarily benefit profitable corporations and the wealthy. Lawmakers are allowing these tax cuts to phase in — which will cost more than $2 billion once fully implemented — regardless of the need to replace the worst cuts from the economic downturn and address long waiting lists. In fact, the proposal implements further costly tax changes that limit the ability to meet pressing needs.

The low target helps explain why House leadership is pressed to leave $127.4 million on the table unspent, even after putting money into the savings reserves accounts and despite unmet needs in communities across the state. That is funding that could address the NC pre-k waiting list and hire the additional school nurses needed to improve student health and meet national standards.

In fact, the House budget would keep state support for services below pre-recession levels, when adjusted for inflation. That would be fine if public needs had shrunk. But they have grown. The budget also caps off the only period as far back as 1971 in which state spending would decline as a share of the economy for eight years in a row while the economy itself grows. As such, many unmet needs will persist in programs that support vulnerable communities, despite a slight increase in investments and a modest compensation package for teachers and state employees.

Where the money would come from

  • Revenues are expected to come in above conservative projections by $330.2 million for the 2016 fiscal year. Also, they have access to nearly $498.8 million in unspent money that is expected to be left “on the table” at the end of the current fiscal year. This includes agency reversions.
  • They use about 54 percent of the over-collections and unspent money to boost the state’s main savings account (“Rainy Day Fund”) and the savings account dedicated to repairs and renovations of state properties. They use part of the remaining money to transfer $150 million into the Medicaid reserve fund.
  • They carry over the remaining $215 million into the upcoming budget cycle.

Base revenues are severely constrained by previously-approved tax cuts

  • Most of the revenues will come from taxes, primarily from the state income tax, sales tax, and corporate income tax. The remaining revenue comes from other non-tax sources.
  • The $22.2 billion projection is a modest 1-percent growth rate over the current fiscal year. This modest growth is “below long-term average growth and typical growth during economic expansions,” as state budget officials pointed out earlier this month.
  • That’s mostly due to tax cuts. The revenue total is diminished by the sizeable cuts to the personal and corporate income taxes that lawmakers approved over the last few years. On net, the already-approved tax changes (that also include sales tax expansions) are expected to result in a $1.3 billion loss in the upcoming fiscal year.

Doubling down on tax cuts  

  • Their proposal reduces General Fund availability by $25 million due to raising the standard deduction to a maximum $16,000 from $15,500, based on filing status. It also raises the maximum by $500 each year over the subsequent three fiscal years. This approach is more costly and not as well targeted as restore the state EITC, which does a better job of helping working families and addressing inequities in our tax code.
  • They reduce General Fund availability by another $51.5 million for a tax break exempting mill machinery from state taxes.
  • They also set aside $15.5 million for an unspecified “finance reserve,” which could possibly be used to finance further tax cuts.
  • They boost General Fund availability by nearly $1.4 million due to transfers from the Insurance Regulatory Fund and the Treasurer’s Office.

As this chart documents, the House proposal ultimately leaves nearly $127.4 million “on the table.”

In short, deep tax cuts from past years, the pursuit of additional costly tax cuts and an arbitrary spending limit are preventing House leadership from proposing a bold, visionary state budget for the upcoming 2017 fiscal year.

Missed opportunities: Investments that are MIA in the proposed budget

Here are just some of the critical investments that House budget writers fail to make in their proposal:

Economic Security and Early Education

  • Fails to restore the state Earned Income Tax Credit, which allows low-income workers to keep more of what they earn. We are the only state to eliminate this anti-poverty tax credit in 30 years. The House Finance committee voted down an amendment yesterday that would have restored and strengthened the state EITC to 25 percent of the federal credit, from 4.5 percent prior to its elimination in 2013. Some members pointed to their plan to raise the standard deduction by $2,000 by 2020, which is not as well-targeted to people with low incomes.
  • Fails to restore previous income eligibility guidelines for the child care subsidy program that made the program more accessible to moderate-income families with children ages 6-12 years old.
  • Fails to make progress on reducing the waiting lists for the child care subsidy program because it keeps spending at current levels. This means thousands of children will not get the early education that they need to thrive and their parents will not have access to this critical work support that helps them stay on the job.
  • Fails to eliminate the waiting list for the NC pre-kindergarten program, which provides high-quality educational experiences to enhance school readiness for eligible 4-year-olds. The budget makes a relatively modest effort to reinvest in early learning by expanding the number of pre-k slots by 800—which is two additional slots per county. Yet, there are more than 7,200 children on the waiting list. This is a classic case of how lawmakers can slightly reinvest but still fall well short of what’s needed.

K-12 and Higher Education

  • Fails to restore the Teaching Fellows Program that lawmakers eliminated in recent years. This means that young adults will not have access to this program that searched for North Carolina’s most talented high school graduates and provided them with scholarships to attend the state’s public universities in exchange for a commitment to teach in a public school.
  • Fails to provide funding to hire additional school nurses to achieve the ratio of one nurse to every 750 students as recommended by the National Association of School Nurses. While the state made considerable progress in lowering the ratio during the mid-2000s, further progress was stalled due to the Great Recession and our ratio stood at 1 nurse for every 1,177 students in 2013. As such, the state has not met that standard in any year in the last 10 years.
  • Fails to reduce tuition in the UNC system and Community College system, which is on an upward trend. In fact, tuition at community colleges has increased by 81 percent since 2009, putting affordable higher education out of reach for some. Tuition and mandatory fees at public four-year universities is up by more than 42 percent while state funding per student has been cut by nearly 15 percent since 2008.
  • Fails to boost funding for UNC Need-Based Financial Aid, which helps make attending public four-year universities more affordable for students from low-income families. State funding for this need-based financial aid, through the use of lottery dollars, has not increased since 2012 despite the rising cost of college at public four-year universities in NC.
  • Fails to restore the senior citizens tuition waiver at community colleges. In 2013, lawmakers eliminated this waiver for tuition that was available for up to six hours of credit instruction and one course of noncredit instruction per academic semester for residents aged 65 or older.

Affordable, Healthy, and Safe Communities

  • Fails to provide a boost to the Housing Trust Fund despite a $12 million drop in state investments since 2007, when adjusting for inflation. Half of renters in the state are unable to afford the cost of fair market housing and unaddressed needs persist.
  • Fails to expand Medicaid, which would give approximately 318,666 North Carolinians access to affordable healthcare and nearly $13.7 billion in economic benefits statewide.
  • Fails to reinvest in local re-entry efforts that help ex-offenders reintegrate into their communities.
  • Fails to restore drug treatment courts that were eliminated in the aftermath of the recession. These courts are a more cost-effective treatment option for nonviolent, high-risk, repeat drug offenders.

Re-employment and Economic Development

  • Fails to develop a comprehensive plan for retraining the long-term unemployed. This budget does not devote sufficient resources to ensure that everyone who wants to work can get the training they need to find a job in the post-recession economy.
  • Fails to put forward a robust rural economic development strategy. The allocation of $1 million in main street revitalization for small rural towns will be insufficient to meet the needs in rural communities and the desire for a vision that can guide smart investments over time.
  • Fails to restore the Displaced Homemaker Program, which provided important workforce development services to residents with barriers to self-sufficiency—such as a recently divorced or widowed low-income working parent.
  • Lacks a plan to end the digital divide in North Carolina: Much of rural North Carolina still lacks reliable high-speed internet access that is increasingly essential to participating in the global economy. This could leave struggling rural communities further and further behind.

Be sure to check back regularly at The Progressive Pulse and for further news and analysis as the budget moves to the Senate next week.