John Locke Update / Research Brief

Send it back! And four not-awful ways legislators could use the next round of Covid cash

posted on in Fiscal Insight, Spending & Taxes
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  • Gov. Cooper and the General Assembly should return the state’s $5.2 billion from the $1.9 trillion America Rescue Plan Act
  • There is no need for it; North Carolina has $5.4 billion in unspent revenue and as much as $254 million unspent from the Coronavirus Relief Fund
  • Accepting the money could bar the state from cutting taxes until 2024

As of December 30, 2020, North Carolina still had $254 million unspent from the $3.6 billion it received in the Coronavirus Relief Fund blowout from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The American Rescue Plan Act (ARPA) piles another $5.2 billion on top of those unspent funds. That amount does not count $3.8 billion in the new bill for local governments or $5 billion in targeted funds for education, health care, and payments to individuals and businesses.

That federal largesse is in addition to the state’s unreserved fund balance of $5.4 billion in February, which came about from a combination of $1.5 billion in fund balance at the start of the year, tax receipts running $2.4 billion higher than last year, appropriations $1 billion lower, and a baseline difference of $0.7 billion.

North Carolina should return the money it receives from ARPA

Any state that has $5.4 billion in unspent money should have no need for another $5.2 billion, especially since taking the money could mean no tax cuts until 2024. As reported by The Wall Street Journal,

The bill [ARPA] explicitly bars states from cutting taxes. States “shall not use the funds,” the bill says, “to either directly or indirectly [our emphasis] offset a reduction in the net tax revenue” that results “from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”

Wow. Democrats in Washington are trying to dictate to governors and state legislatures that they can’t change their tax laws if they accept their share of the $1.9 trillion. … The language is so expansive that states could be limited from making any changes to their tax codes that reduce revenue even if they don’t use federal funds as direct offsets.

If the General Assembly does decide to take the money, despite the risk to future tax reform, there are a few things to consider:

  • ARPA money cannot offset a revenue shortfall that does not exist: General Fund revenue for the year is expected to reach $27.6 billion, well ahead of the $26 billion forecast in 2019.
  • ARPA money, like the surplus, is one-time money. It should not be used for recurring expenses, such as salaries or ongoing programs.
  • ARPA money could present a barrier to tax reform until 2024.
  • ARPA money cannot be used “for deposit in any pension fund.”

And some recommendations:

  • Require every agency to account for ARPA money in new fund codes, as the University of North Carolina system has done, to improve tracking.
  • Require the NC Pandemic Recovery Office (NC PRO) to provide receipts, disbursements, and expenditures online with minimal delay.
  • Pay down state debt.
  • Begin paying down the $27.7 billion unfunded liability for retiree health benefits. Fund Retiree Health Savings Plans for individual state employees, particularly those who started in 2021 and are ineligible for retiree coverage through the State Health Plan.
  • Make reasonable investments in water, wastewater, and broadband infrastructure.
  • Provide grants for investments in the human capital of North Carolinians age 25 and younger, including tutoring, tuition, childcare, career training, and related expenses.

Those recommendations would be over and above earlier recommendations for the $5.4 billion in unreserved fund balance, slightly amended here:

  • Deposit $2 billion in the Savings Reserve rainy-day fund.
  • Transfer $1.25 billion to the State Capital and Infrastructure Fund (SCIF).
  • Commit $1 billion to reduce the unfunded liability for state pensions.
  • Provide $1.1 billion to make an initial $500 investment in Education Savings Accounts for children up to age 17.

Rejecting $5.2 billion in assistance from the ARPA would be a small step for North Carolina to move the federal government back to fiscal sanity. It also would preserve the state’s freedom from unconstitutional federal commandeering. There are few good ways to spend $10 billion in one-time money, but these recommendations would reduce the harm.

As Senior Fellow, Joe examines fiscal and tax policy. He previously headed the North Carolina Government Efficiency and Reform initiative within the Office of State Budget and Management, which led to changes in automotive fleet management, natural and… ...

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