John Locke Update / Research Brief

Budget 2019: Extra Innings

posted on in Fiscal Insight, Spending & Taxes
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The state budget battle has entered extra innings.

Gov. Cooper signed and vetoed another batch of mini budgets, the ninth round of budget-related legislation since his first budget veto on June 28. Health and human service spending is on the docket this week. In between sessions of mapmaking, legislators may consider a bill that tweaks provisions from the vetoed budget.

If Senators override Gov. Cooper’s veto, the N.C. Department of Health and Human Services (DHHS) would not have to move to Granville County. The current bill also would restore proposed DHHS administrative cuts. Other provisions would impose new restrictions on pharmacy benefit managers and reform certificate of need laws.

On November 8th, Cooper signed off on a higher standard deduction, new rules on corporate income taxes and sales tax collections, and experience-based increases for principals and veteran teachers. The same day, he vetoed broader raises for educators in public schools, community colleges, and universities; a lower franchise tax; and funding for the Department of Information Technology. Cooper said the pay increases were too small, and he opposed a $20 million earmark to create a cybersecurity training center at the private Montreat College, “outside the state’s proven university system.”

Tax Changes

A married couple filing jointly would save $75 with the 7.5 percent higher standard deduction in Session Law 2019-246. The law imposes more tax burdens on out-of-state companies with new definitions for a holding company, income earned in North Carolina for corporate income tax purposes, and what a “marketplace facilitator” does and when it sells products to North Carolinians. Earlier this session, the General Assembly specified that businesses that sell goods and services online do not require a physical counterpart in the state. The General Assembly did not provide much useful guidance or restraint on the Department of Revenue’s extra-statutory and unilateral claim to force more out-of-state companies to collect sales taxes.

Other tax changes had mixed results. Gov. Cooper signed targeted tax cuts for airlines, NASCAR, dry cleaners, and historic rehabilitation, but a broader cut in the franchise tax did not receive his signature. This opens two avenues of reform next year that would have a wider impact: lower corporate income tax rate or lower minimum franchise tax obligation. The House has not voted on the Senate-approved proposal to refund $600 million in tax collections to taxpayers.

Cooper also vetoed a $324 million increase in technology funding. Collateral damage from other vetoes included $797 million in capital projects and an $80 million transfer to the Savings Reserve.

The Office of the State Controller has not published a monthly update of spending and revenue this fiscal year because there is no set budget for the year. Mini-budgets signed into law through so far total $23.6 billion, a $400 million increase from the pro forma $23.2 billion in Fiscal Year 2018-19, and $400 million shy of the full budget bill’s $24.0 billion. With revenue projected to reach $24.9 billion and unspent money from the past fiscal year, state government has $26.0 billion available, excluding debt service. That leaves a cash balance of nearly $2.8 billion, which would effectively be savings that can be deposited in the Saving Reserve. But the game is not over yet.

Timeline to date

  1. Jun 28 – VETO Budget (HB966)
  2. Aug 1 – Federal Funds (SL 2019-192)
  3. Aug 30 – Salaries (SL2019-208, SL2019-209, SL2019-210, SL2019-211)
    • VETO Medicaid Transformation Implementation (HB555)
  4. Sep 18 – school safety (SL2019-222), prison safety (SL2019-223), disaster recovery (SL2019-224)
  5. Oct 14 – Raise the age (SL2019-229), Growing Rural Economies with Access to Technology (SL2019-230)
  6. Oct 18 – Transportation (SL2019-231)
  7. Nov 1 – Community colleges (SL2019-235), extend tax credits for airlines, motorsports, historic rehabilitations, and dry-cleaning solvents (SL2019-237)
  8. Nov 6 – other appropriations (SL2019-242)
  9. Nov 8 – standard deduction, holding companies, market-based sourcing, and marketplace facilitators (SL2019-246), teacher supplements and principals (SL2019-247)
    • VETO Teacher pay (SB354), Franchise tax and film grants (SB578), Community college and UNC pay (HB231), IT (HB398)
Joe Coletti is Director of Oversight Staff for the NC House Majority. Joe is a former Senior Fellow at Locke. Here, he examined fiscal and tax policy. He previously headed the North Carolina Government Efficiency and Reform initiative… ...

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