by Paige Terryberry
Senior Analyst for Fiscal Policy, John Locke Foundation
Four months into the new fiscal year, North Carolina is on the precipice of having a full state budget. The General Assembly released their compromise budget this week, reflecting elements of the House and Senate proposals, and some items that are evidence of their ongoing negotiations with the governor.
Now Gov. Roy Cooper has announced that he will sign the budget he said we “desperately need” despite the “missed opportunities and misguided policy.”
Cooper rightly declared that “the good outweighs the bad” in this budget. He errs, however, in identifying what the “good” and “bad” parts of the budget are.
For instance, he disagrees with key benefits, including tax cuts, saying “we don’t need [the corporate income tax cut],” and objects to a reform that would rightly shackle a governor’s abuses of power in a declared emergency. He promises to “fight to fix its mistakes.” Cooper points to a lack of Medicaid expansion as a huge miss for this budget. He calls the creation of the 2022 Joint Legislative committee on health care “some progress” as it promises to re-address Medicaid expansion in the future.
The NC state budget bill is not perfect, but overall it is a great win for North Carolina. In comparison, Cooper’s own proposed NC state budget had very few of the positive elements of the conference budget that will soon become law.
This NC state budget deserves support for the following nine reasons:
Through fiscal restraint, legislators put North Carolina on the path to a strong recovery and a sustainable future. The General Assembly began this years’ budget process by agreeing to spending limits. Now with a $6 billion surplus and unprecedented federal money allocated to state and local governments, this budget still exhibits fiscal responsibility. Overspending would create an unsustainable future. Current and future working families will benefit from this disciplined approach. As Milton Friedman stated, government spending is the true tax.
At $25.9 billion in the first year, this budget marks a 5.8% year-over-year increase in budgeted expenditures. This spending amount still lies within the Taxpayer Bill of Rights (TABOR) limit, according to one version of TABOR legislation introduced this year. The NC state budget also sets aside a generous $3.1 billion into the Rainy Day fund for the biennium (the Savings Reserve). By 2023, the reserve will have more than $4 billion.
Finally, this budget proposes no new debt. New debt would be unnecessary even without the budget surplus and federal funds.
A Civitas poll from May showed that North Carolina voters care about limiting spending, as 56% said they would vote for a cap on state government spending.
With this NC state budget, the personal income tax in North Carolina will be reduced to 3.99% after 2026. The current rate is 5.25%, and the first reduction will be to 4.99% in 2022.
Additionally, the budget raises the standard deduction from $21,500 to $25,500 for those married filing jointly, meaning families will pay $0 in taxes on the first $25,500 of their income.
When asked what actions might improve their personal financial situation, 47% of likely North Carolina voters chose cutting taxes.
The personal income tax cut is a boon to taxpayers and a direct incentive to work. It also benefits the majority of small businesses in the state. All legislators should support this policy. North Carolina is one of nine states with a smart, flat income tax. Lowering this rate to 3.99% will make the state even more regionally competitive. Tennessee and Florida do not have an income tax at all. South Carolina has a relatively low, graduated income tax, but legislators there have proposed a plan to replace the graduated tax with a flat, 3.5% rate.
This change is an incredible win for North Carolina. The corporate income tax is detrimental to economic growth. This budget brings the rate to 0% after 2029. Although the rate will not begin to decrease until 2025, businesses and workers will begin to see benefits sooner as they anticipate the savings and as more businesses seek to move to the competitive climate.
The corporate income tax is a tax on workers. Removing this tax will benefit workers with higher wages and improved benefits. According to one study released by the National Bureau of Economic Research, the corporate income tax is responsible for significant job and income reductions. The authors found a 1% increase in this tax results in a 0.2% drop in employment and a 0.3% drop in total income. Contrary to arguments on the left, taxing corporations hurts the everyday worker.
Cooper said “we don’t need it,” but this action is popular among likely North Carolina voters. A 2018 poll showed that North Carolinians believe cutting corporate income taxes fosters economic growth more than government spending.
Eliminating the tax on corporate income will make North Carolina a regional leader and bring more businesses to the state. It could also reduce government giveaways, as the state would no longer have reason to target companies with crony handouts.
This budget gives more parents the ability to choose the appropriate education for their child. It expands the popular Opportunity Scholarship program, which currently benefits more than 18,600 students in North Carolina. At present, families making up to 150% of the amount needed to qualify for the federal lunch program are eligible. This budget raises the eligibility for the scholarship to families making up to 175% of the amount needed to qualify for the federal lunch program. The budget also proposes to expand the funding amount per recipient, reducing the burden for low-income families.
Tactically, the budget links per-student scholarship funding to the prior years’ average state spending per pupil rather than capping the scholarship grant at $4,200. This change will result in significantly more funding per student in need.
A January 2021 Civitas poll found that more than 66% of respondents strongly or somewhat supported the Opportunity Scholarship program.
The budget also increases funding to the Personal Education Savings Account, which would be consolidated into a fund with the Personal Education Student Accounts for Children with Disabilities.
The governor has vetoed teacher raises four times. This budget would address teacher and state employee pay in a generous way. Most state employees would receive a 5% compensation increase over the biennium.
The base teacher salary schedule would increase by 2.5% in each year of the biennium. The budget goes a step further, creating a fund of $100 million per year to increase salary supplements for teachers based on their county’s median household income and other factors.
The budget also implements a $13/hour minimum wage for this fiscal year and a $15/hour minimum wage for the 2022-23 fiscal year for local public school and community college employees.
On top of these benefits, the budget provides a variety of generous, recurring bonuses, such as a $3,500 annual salary supplement for school psychologists and a $1,000 annual salary supplement for school counselors, among others.
Looking to the future, it adds significant funds to shore up the Teachers’ and State Employees’ Retirement System and Retiree Health Benefit Fund and increases the one-time cost-of-living supplements to retirees.
Numerous other thoughtful benefits exist in this budget, including a bonus to recruit teachers and other personnel in low-wealth areas, increases in principal and assistant principal salaries, and one-time bonuses for various state employees.
Similar to the House and Senate versions, this bill has hefty capital provisions. The bill adds a $3.4 billion cash infusion to the State Capital Infrastructure Fund (SCIF) on top of the statutorily required $2.6 billion for the biennium. Using SCIF to finance capital projects on a pay-as-you-go basis enables the state to avoid taking on more debt to fund such projects.
Projects funded include construction and repairs at UNC system facilities, local airports, etc., and transfers of significant funds to the Land and Water Trust Fund, the Parks and Recreation Trust Fund, and the Highway Fund, among others.
The SCIF also gives generous grants to community colleges, hospitals, dams, local police and fire stations, and historic sites, for a total of about 600 projects of varying sizes. Much of these projects are nonrecurring, exhibiting sustainable spending.
Some examples include:
In a huge win for North Carolinians, the bill does not broadly expand Medicaid.
Medicaid expansion would have failed to address the systemic issues in our health care system. Its poor track record of subpar health outcomes would have continued, harming the most vulnerable. Adding thousands of able, working-age adults to Medicaid would have been the wrong decision.
As a concession, the bill does create a study committee to reconvene on “access to healthcare and Medicaid expansion” in 2022. The committee is required to submit proposed legislation on the subject. The General Assembly should continue to refuse offers from special-interest groups that would benefit from more federal funds to Medicaid.
A collusive lawsuit is one in which both sides are not actually adversaries but share the same desire for an outcome contrary to established law — an outcome they cannot achieve by persuading legislators to vote for it. So one sides sues the other, then they agree to a “settlement” giving them the change they already wanted and then present it to the judge to enforce it. By doing so, also known as a “sue and settle” scheme, they circumvent or alter the laws otherwise unfavorable to them.
A law against collusive settlements already exists, but this budget proposes to close the remaining loophole that has allowed judges to remove legislative intervening defendants from involvement in the process. The executive branch would no longer be able to alter laws to reach collusive settlement, thus protecting the separation of powers.
As it exists currently, the Emergency Management Act is vulnerable to abuse. To ensure North Carolina is no longer subject to abuses of emergency powers, this vulnerability must be addressed to maintain checks and balances, regardless of the party in power.
The bill would revise the Emergency Management Act to require a vote of the Council of State to extend a statewide emergency beyond 30 days (effective Jan. 1, 2023). As of this writing, Cooper has kept North Carolina under a declared state of emergency for 617 days and counting.
This bill takes reasonable steps to ensure no one person wields emergency power over the state, though more steps should be taken to expand oversight. Additional provisions to ensure any emergency order is limited in scope and duration would go a step further to safeguard North Carolinians’ rights.
This bill’s substantial tax cuts and limited spending respect the taxpayers and benefit hard-working North Carolina families. Careful investments in education choice will benefit more low-income families, aggressive savings means a state far better prepared to weather the next economic downturn, and prefunding capital projects wisely enables the state to avoid adding to its debt.
With this budget as law, the fiscal conundrums of a potential piecemeal budget to access funding will be over. This solid budget is good for North Carolina.