The N.C. Budget & Tax Center recently released their report on North Carolina's 2015 budget and its effect on our state's competitiveness. Think spoke with Budget Analyst Tazra Mitchell, who co-authored the report, to discuss their findings.
You and the BTC analysts have pored over North Carolina's 2015 budget. What are the most pressing issues you've identified?
The big takeaway from our analysis is that the fiscal year 2015 budget is inadequate and unsustainable, largely because of last year’s tax plan, which significantly reduced available revenue.
At base, the budget undermines North Carolina’s competitive position in a 21st century global economy by underfunding education, failing to protect the health and well-being of the state’s most vulnerable citizens, and missing a critical opportunity to reinvest in struggling communities so that all North Carolinians can thrive.
Legislative leadership is touting the fact that they are spending more now compared to last year. But lawmakers can spend more overall and still fall short of what’s needed to meet the needs of children, families, and communities. State investments in the 2015 budget may exceed those in the 2014 budget overall, but spending today is still 6.6 percent below pre-recession levels.
If we zoom in on just the public school budget, this point gets even clearer. Today’s public education budget falls short of what’s needed to maintain education service levels that were in place last year, and it spends about $700 million less than the education budget that was in place when the recession hit.* So, lawmakers can increase public investments overall but still fail to catch up and keep up with the needs of a growing population.
The 2013 tax plan will continue to make it difficult for the state to reinvest and reposition itself to compete nationally and globally. That is because the tax plan reduces the available revenue needed to invest in an educated workforce, a modern infrastructure, and vibrant communities. All this is happening at a time when other states are seeing their revenues recover.
Legislative leaders and the governor failed to acknowledge the tax plan’s growing cost in the 2015 fiscal year budget, likely because they knew that the huge revenue losses put the state on a financially irresponsible and unsustainable path. By the end of the fiscal year, the revenue shortfall could reach as high as $600 million—for a total cost of more than $1.1 billion—according to the non-partisan Institute on Taxation and Economic Policy (ITEP). If ITEP’s projections are correct, much deeper cuts will be necessary before the fiscal year is over.
*Assumes pay increases are in the Salaries and Reserves section of the budget to follow precedent so that overtime comparisons can be made.
How did lawmakers miss the size of the shortfall their budget would create?
Days before Governor McCrory signed the budget into law, news broke that the cost of individual income tax cuts will rise to $1 billion by 2016, and will total more than $5 billion over the next five years. The Fiscal Research Division, which estimates the cost of the tax plan, based those amounts on new Internal Revenue Service data on the incomes and personal income taxes North Carolinians paid in 2012. The new data showed the higher-than-expected cost of the tax plan.
Rather than acknowledging that the tax plan is putting North Carolina on an unsustainable path, policymakers proceeded to cut vital public programs. If ITEP’s projections are correct, much deeper cuts will be necessary before the fiscal year is over.
Is it possible that these tax and spending cuts could stimulate our economy?
No. Lawmakers’ promises that tax cuts will deliver a much-needed economic boom to the state are not supported by real-life experiences. There is an extensive and growing body of careful academic work showing that income tax cuts are a poor strategy for producing economic growth. From this body of research, we know the states that passed the largest income tax cuts in the 1990s experienced slower economic growth thereafter. The promises that lawmakers are making are empty ones that put North Carolina’s economic future at risk.
What is essential to economic growth is adequate state investments in the building blocks of a strong economy—a high-quality education for all children, programs that protect natural resources, community-based economic development programs, and health and human services for our vulnerable residents and older adults. Yet, lawmakers are failing to make adequate levels of investments in these services that are essential to economic growth. By neglecting to make such investments, state leaders are hampering the recovery of struggling communities and failing to build a foundation for an economy that works for all. These shortcomings undermine North Carolina’s competitive position in the 21st century global economy—now and in the future.
How soon will the state start feeling the effects of our projected budget shortfall?
The average North Carolinian has already felt the consequences of underfunding core public services—larger class sizes, outdated and too few textbooks, and long waiting lists for early childhood development programs and in-home and community care programs for older adults. Further cuts at the governor’s direction will only cause further damage—all with little public debate.
On top of the ITEP revenue estimates, there are already official reports that revenue is coming in under projections. Moreover, the Office of State Budget & Management already issued a directive to state agencies to reduce their budgets by 2 percent for the next budget cycle.
If another revenue shortfall exists by the end of the year, lawmakers will continue to turn to agencies to plug the gap, reducing the reach and quality of public services across the state. That is what Governor McCrory did to balance the 2014 budget in light of a $452.6 million shortfall. In the spring of this year, he ordered state agencies to curb spending and return money totaling $396.3 million. These are dollars that fund public investments, and these reductions directly harm families and the state’s economy.
Are there other any states in similar situations? How do things look for them?
Yes. Unfortunately North Carolina is following in Kansas’ tax-cutting footsteps, which is not a model for how to grow a state’s economy. Kansas implemented what’s believed to be the largest tax cut ever enacted at the state-level—and it’s showing. They’re facing extraordinary revenue losses that are resulting in great harm to children and communities. This becomes exceptionally apparent in their education budget. Lawmakers are investing 20 percent less per student in public schools than they did before the recession, according to the Center on Budget and Policy priorities. Funding for other state services—such as libraries and public health programs—is also on the decline, according to the Center.
Also, as expected, the tax cuts in Kansas aren’t boosting its economy. And just like in North Carolina, Kansas’ tax plan is lopsided and is primarily benefitting the wealthy. Meanwhile, ordinary Kansans and North Carolinians have been left to pay the price.
What can lawmakers do to solve these budget problems?
The 2013 tax plan is hampering North Carolina’s progress, and draining the resources we need to put North Carolina on a path to success. In order to reverse the troubling direction the state is taking, lawmakers should stop the further tax cuts that are scheduled to go into effect in January 2015.
After stopping the next round of tax cuts, lawmakers should reevaluate the 2013 tax plan and reinstate the progressive income tax structure. Not only will this restore some equity into the tax system, but it will also allow the state to raise more adequate levels of revenues that can be invested in the building blocks of a stronger economy.
Lawmakers must recognize that there are better choices available to put North Carolina on a stronger path. By failing to invest in a strong foundation for the economy, North Carolina is jeopardizing its success in the future and the well-being of families.
Click here to read more of Tazra Mitchell's work at the Budget & Tax Center.