John Locke Update / Research Brief

House Budget Plan Features Tax Cuts, Assertive Infrastructure Spending, and Pay Raises

posted on in Economics, Education, Education (PreK-12), Fiscal Insight, Spending & Taxes
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  • The House budget plan, per previous agreement, would spend about the same total amount as the Senate plan
  • Differences exist, however, primarily with a less aggressive tax cut plan and more aggressive pay raises to teachers and state employees
  • Similar to the Senate plan, the House proposal would set aside significant funds in the Savings Reserve and Capital Infrastructure funds

The North Carolina House’s FY 2021-22 state budget plan largely focuses on capital spending, tax cuts, state employee salary bumps, and shoring up infrastructure for the future while paying down debt. The $25.7 billion spending total is nearly identical to the Senate’s proposed budget, while coming in at $1.6 billion less than Gov. Roy Cooper’s recommended plan.

The proposed House budget would be a $1.2 billion increase over the last fiscal year’s budgeted expenditures, marking a 4.95% year-over-year increase.

Thanks mostly to $6.2 billion in tax revenue above projections last year, budget writers had roughly $6.3 billion in unspent money carried over with which to work.

In Monday’s press conference, lawmakers emphasized the “historic nature” of capital provisions in this budget. Indeed, the bill proposes an additional $2 billion transfer to the State Capital and Infrastructure Fund (SCIF) for future capital projects on top of the statutorily required $1.3 billion transfer. Most of those funds would be dedicated to capital projects, with some going toward reducing state debt (more below).

Teachers would receive an average pay increase of 4% in the first year (5.5% for the biennium), along with a $300 bonus. This proposal is substantially larger than the Senate’s 1.5% increase for the first year, yet smaller than Cooper’s recommended 5.7% increase (10% for the biennium). Most other state employees would receive a 2.5% raise.

Using the American Rescue Plan Act money, state and local education employees who worked during the pandemic would receive a $500 bonus. State workers may be eligible to receive additional bonuses based on salary level. Medical providers in the state’s Medicaid and NC Health Choice would receive bonuses of $2,000.

The tax cuts in the House’s plan warrant praise — but they fall short of the Senate’s plan to give even more back to North Carolina’s workers. House lawmakers, however, noted there was not “huge disagreement” and the distinctions were “just a matter of timing.”

Below are additional highlights from the House’s budget proposal:

Tax Cuts

  • The House budget proposal would reduce the personal income tax rate from 5.25% to 4.99% while increasing the standard deduction, beginning in 2022. The standard deduction would increase from $21,500 to $25,500 for married filers, and from $10,750 to $12,750 for single filers. It would also eliminate taxes on military pension income. These changes would save taxpayers a projected $1.3 billion in 2022. Notably, the Senate bill would go a step further — lowering the personal income tax rate to 3.99% after 2025.
  • Unlike the Senate bill, the House bill does not propose an increase in the child tax credit.
  • It would reduce the corporate income tax rate from 2.5% to 2.25% beginning in 2024, then to 1.99% in 2025. This cut would save businesses more than $200 million annually once fully implemented. In contrast, the Senate version would reduce the corporate income tax rate to 2% in 2024 and then phase the tax out entirely after 2027.
  • The House budget would also eliminate the franchise tax property base and instead calculate the tax based on net worth only, a change projected to save businesses more than $180 million per year.

Capital Spending

  • The House budget proposal would set aside $3.3 billion this year through SCIF to fund capital and construction throughout state.
  • SCIF spending would include approximately $228 million to capital projects within the UNC System in FY 2021-22, including nearly $14 million to renovate the nursing building for UNC–Chapel Hill and $18.3 million for a new STEM building at NC State.
  • SCIF funding would also contribute to roughly 480 capital projects, ranging from state parks, country courthouses, and community college buildings to local high school athletic fields and town sidewalk improvements.
  • A sampling of miscellaneous projects include $4.2 million for a new exhibit space at the Graveyard of the Atlantic Museum, $2.5 million for a “dueling dinosaur” exhibit at the North Carolina Museum of Natural Sciences, and $4 million for “a new Esports mobile arena truck.”
  • SCIF funds would also be used to reduce state debt proactively by paying for $200 million’s worth of CONNECT NC projects in lieu of issuing new debt.
  • The House budget would appropriate $1.5 billion to university repairs, including $100 million for community college repairs.
  • It would appropriate about $941 million in total funds dedicated to expediting and expanding rural broadband access.
  • It would spend $1.6 billion on clean water initiatives across the state.

State Employee Salaries and Benefits

  • The House budget proposal would provide teachers with a 4% average raise for the first year, along with a $300 bonus. Most other state employees would receive a 2.5% pay raise.
  • It would reinstate a policy allowing teachers to receive a 10% increase in pay if they earn a master’s degree.
  • It would utilize $578 million in federal Covid relief funds to pay for bonuses for full-time state workers who worked through Covid ($500 bonus to all full-time eligible workers, plus another $1,000 for those earning under $75,000 per year, and $500 for those under $40,000). Medical providers in Medicaid and NC Health Choice would receive $2,000 bonuses, requiring another $133 million in federal relief dollars.
  • Similar to the Senate’s proposal, it would raise the salary floor for noncertified public school and community college personnel to $13 an hour this year, then $15 an hour next year.

Savings and Debt

  • The House budget plan would set aside $1.24 billion in the state’s rainy-day fund (the Savings Reserve), which would bring the total balance to more than $2.3 billion.

Health Care

  • The House budget, like the Senate plan, includes no Medicaid expansion, which is in contrast with Gov. Roy Cooper’s budget plan.
  • It would budget federal receipts from the American Rescue Plan Act’s Covid-19 Vaccination Supplement to support statewide vaccination efforts. It includes the following two federally directed initiatives: $94.8 million for “Funding equity and prioritizing populations disproportionately affected by COVID-19” and $7.7 million for “Funding Vaccine Confidence.”
  • It would provide $62.3 million in federal receipts to “establish, expand, train, and sustain a state and local public health workforce to support jurisdictional Covid-19 prevention, preparedness, response, and recovery initiatives, including providing funding for clinical staff for school-based health services.”

Education

  • The House budget proposal would consolidate the Special Education Scholarship for Children with Disabilities and Personal Education Savings Accounts (ESAs) and would allocate those funds to the newly established ESA Program. Funds provided to ESAs will be allocated to the Personal Education Student Account Fund Reserve.
  • It would expand funding for the ESA program by $15.6 million — bringing the allotment for the new program to $31 million annually.
  • It would direct $79.98 million of federal relief funds for “budget stabilization” in the community college system to offset the enrollment decline due to Covid.
  • It would add another $338.7 million in federal relief funds dedicated to K-12 education. The total revised requirements and receipts from federal Elementary and Secondary School Emergency Relief funds (ESSER) would be $3.6 billion.
  • It would direct $100 million in federal relief funds to private universities and colleges to offset lost revenue due to Covid.

Policy Changes

  • It would reform the Emergency Management Act by requiring the Council of State’s concurrence in emergency declarations. A statewide state of emergency declared by the governor or General Assembly would expire after seven days if the Council of State did not concur. The Council’s concurrence would be required for any state of emergency extension.

Corporate Welfare and Pork Spending

  • The House budget plan would include a $7 million increase for the taxpayer-funded corporate handout program the One North Carolina Fund.
  • It would create a $5 million annual recurring expense for grants to recruit e-sports events to NC.
  • It would give $1.5 million in additional funds to the High Point Furniture Market.
  • It would provide millions of dollars to more than 20 local towns for various projects, including more than $2 million to Cleveland County for a youth baseball league.
  • It would provide $51 million to local motorsports and speedway venues.
  • It would allocate $96.7 million federal recovery funds to replenish lost revenue due to Covid for 21 attractions, including state parks, science museums, Tryon Palace, the North Carolina Zoo, the North Carolina Symphony, and the Carolina Ballet, Inc.
  • It would appropriate $1 million to fund “cultural trails related to moonshine and motorsports.” 

Note: Click here for a brief exploring the Education portion of the House budget proposal in greater detail.

Paige Terryberry is a Fiscal Policy Analyst with the John Locke Foundation.  She works with the research team to distill and assess policies key to North Carolina’s fiscal outcome. Prior to joining Locke, Paige worked in political consulting at Baron… ...

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