North Carolina: Lawmakers begin budget negotiations with a $552 million surplus

Blog Post
For tax years beginning on or after January 1, 2017, the Tar Heel state’s corporate and personal rates are set to drop, from 4 to 3 percent, and 5.75 percent to 5.49 percent, respectively. These reductions, contingent on hitting certain revenue growth targets, were part of the tax reform package passed in 2013, the Tax Simplification and Reduction Act
The state’s current fiscal situation is strong. There is a $552.5 million surplus, and consensus projections from the Fiscal Research and the Office of State Budget and Management that anticipate stable, modest growth during the next biennium. Thus, in early March, when Gov. Roy Cooper kicked off budget negotiations with his proposal for the biennium 2017-2019, Common Ground Solutions for NC, his $23.5 billion plan included an additional $1.1 billion of spending, a 5.2 percent increase over the current budget. Beneficiaries include teachers’ and state employees’ pay, Medicaid and other health-care related services, and infrastructure. 
Now, lawmakers are rolling out their chambers’ proposals for tax policy changes. According to North Carolina Policy Watch, “[w]hile things are in decent shape in some urban and suburban areas, the latest numbers show that, on the whole, North Carolina has not participated nearly as fully in the national recovery as it might have.” More specifically:
The first economic reading for 2017 shows an alarming number of areas across North Carolina either moving in the wrong direction or not making solid progress. Most communities still have more people looking for work than before the Great Recession, and several counties that clawed their way back to pre-recession employment levels have lost ground.
Indeed, the group opined that Gov. Cooper’s greatest challenge is an “unremittingly hostile legislature led by lawmakers, particularly in the Senate.” 

The Senate’s tax policy ideas

In mid-March, the Senate released its latest proposal for tax policy changes. In reporting on these recommendations, WUNC pointed out that the Senate’s plan proceeds with the tax reduction trends by reducing the corporate rate from 3 percent rate to 2.75 percent, the individual rate from 5.49 percent to 5.35 percent, and increasing the standard deduction for married couples filing jointly from $17,500.
One lawmaker, Senator Tommy Tucker, was very pleased with the work, declaring that 99 percent of individual income tax payers would either “receive a tax cut or pay zero income tax…. This is by far the best tax cut package that I’ve seen. And my co-chairs and I and staff worked through 13 or 14 different scenarios to get that.” North Carolina Policy Watch disagreed, claiming that the proposal ”will do nothing to boost the wages of working people nor will it help connect rural communities to opportunity, despite Senators’ claims.” 
The North Carolina Justice Center (Center) is equally skeptical of the Senate proposal. In a report titled “Still Walking the Path to Zero - Senate tax plan will harm North Carolina’s goal of building a stronger, inclusive economy,” the group calculated that the proposal would “result in a loss of nearly $1 billion in revenue, meaning that the state’s tax code in the next fiscal year will bring in $3.2 billion less than it would have under the tax code pre-2013 changes.” 
More specifically, the Center observed: “the top 20 percent of income earners in North Carolina would receive nearly half of tax cuts…That is more than $300 million annually being channeled to the state’s wealthiest taxpayers.” This is a losing strategy, the Center declared, because it precludes the possibility of “invest[ing] in the education of residents, economic development of struggling communities and infrastructure that supports connecting workers to jobs.” 
The Center similarly frowned on another Senate proposal, SB 75, that would amend the state’s constitution with a 5.5 percent limit on the income tax rate. The bill calls for the measure to be put before the voters on the November 6, 2018, general election. The Center’s Budget Director contends that SB 75 imposes a “low and arbitrary” cap that would “lock in what is essentially a giveaway to millionaires and likely shift the state’s reliance to the sales tax, while also putting more pressure on local governments to raise property taxes. This has always been a bad idea for North Carolina, and it still is.”

The House’s plan

The House’s Tax Reduction Act of 2017, also introduced in mid-March, is generating a lot less chatter. It increases the standard deduction for married couples filing jointly, but by less than the Senate would, to $18,500 instead of to $20,000. It otherwise does not reduce corporate or income tax rates, but it does simplify the franchise tax by allowing companies with extensive operations in North Carolina to reinvest more money, and by providing $85 million in tax relief per year.

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