Side view of a piggy bank with the flag design of North Carolina
Report

Governor’s recommended budget a modest step forward

Last week, Governor Cooper released his recommended budget for the upcoming year, marking the first public step in the state budget process. This proposal reveals both the fiscal and moral priorities of the head of the state. It prioritizes closing the Medicaid coverage gap and laying the foundation in early childhood education and environmental protection that can pave the way to a better future, while also missing the opportunity to drive more of our dollars into K-12 education and housing.

The budget proposal, which the Governor is mandated to put forward each year by the state constitution, suggests changes to the second year of the two-year (or “biennial”) budget enacted jointly by the NC General Assembly and Governor, and is crafted after consideration of the needs of state agencies.

Earlier last week, the state’s economists released their updated state revenue forecast, which shows a whopping $4.2 billion above the previously estimated amount, thanks to bold COVID-19 relief legislation enacted by the federal government last year, which has helped to buoy the economy amid the pandemic, and the strong performance of the stock market. The revenue forecast is a critical piece of information for those crafting the state’s budget, since the state’s spending is restricted by how much money is generated in revenue through the state’s tax code.

Notably, the Governor’s budget does not include further tax cuts, which have been championed by leaders in the General Assembly for nearly a decade, but neither does it reverse the tidal wave of impending tax cuts for the wealthy and corporations enacted last year, which will result $8 billion in lost revenue annually when they are fully in effect.

Proposed spending higher than the amount enacted last year

The Governor’s recommended budget proposes spending 8.5 percent more than the amount in year two of the enacted budget last year, not adjusted for inflation. This summer’s short session’s budget will focus on changes to what was enacted last year for the fiscal year beginning July 1, 2022, and ending June 30, 2023.

Put into historical perspective, the Governor’s proposed budget would bring the state slightly above the state’s current spending level, at 4.27 percent of the state’s economy as anticipated in the optimistic revenue forecast, which projects 14.9 percent growth in the fiscal year that’s winding down, and 6.8 percent growth for the fiscal year that begins July 1, 2022.

Still more than $10 billion down from the 45-year average, North Carolina’s state tax cuts since 2013 have meant that fewer dollars are available in the state’s coffers to pay for the programs and services needed to fund a growing state that’s still responding to multiple crises and escalating threats, such as climate change and an ongoing pandemic.

Diverting more funds to reserves for capital uses

The Governor’s budget also puts more funds in reserves than the General Assembly proposed last year, which was already well above the statutory requirements set forth in either the State Budget Act or more recently enacted legislation. The recommended budget includes an additional $1 billion in transfers to the State Capital and Infrastructure Fund, which would begin to address the well-known backlog of capital needs of state government agencies and public schools. The Governor’s budget also proposes an additional $1.4 billion in transfers for a variety of specific reserves, including the Economic Development Project Reserve, Workforce and Economic Development Reserve, and Affordable Housing Reserve.

Keeping tax cuts in place leave NC worse off

Most problematic in the Governor’s budget is its failure to roll back major tax cuts that were enacted last year with his signature. This includes a reduction to the already flat personal income tax, from 5.25 percent to 3.99 percent over six years, and the elimination of the corporate income tax over six years beginning in 2025. The combined changes are estimated to reduce our state’s revenue by $8 billion annually, meaning our state will have much fewer dollars available to pay for government programs and services. This will likely mean an increase in more regressive forms of taxes, which ask those with lower incomes to pay a greater share of their income than those with higher incomes, in order to try closing budget gaps.

In addition, the Governor does not propose a bottom-up tax credit for working families, as he has in the past. A state Earned Income Tax Credit, or EITC, would directly benefit approximately 900,000 North Carolinians with low wages and would cost the state a very small fraction of the cost of cutting taxes for the wealthy and corporations.

Instead, the tax cuts passed last year will overwhelmingly benefit North Carolinians with the highest incomes. Together when fully implemented, those with the highest 1 percent of incomes in the state will receive an average tax cut of $47,000 annually, while the bottom 80 percent of the income distribution will receive a tax cut of approximately $680 annually.

A statewide approach that makes modest advances to equitable policymaking

It’s worth noting the Governor takes a statewide approach to budgeting, versus the General Assembly’s approach, which is to fund specific projects in specific localities by earmarking funds for special projects in some districts and not others. A statewide approach ensures that the needs of North Carolinians across the state are met, and while localized projects can mean a targeted approach to support communities most marginalized, that is often not how it plays out in the state’s budget process.

  • Positive provisions that make progress toward a stronger future include:
  • Expanding Medicaid
  • Funding year 3 of the Leandro plan to ensure every child receives a sound, basic education
  • Directing dollars to the Housing Trust Fund, the state’s most flexible source of funding for affordable housing
  • Investing in ways to strengthen environmental resiliency in the face of climate change
  • Supporting reentry for North Carolinians leaving prison
  • Improving funding for child-care providers through more equitable payment rates for subsidized child care

The path forward

Much of the remaining budget process now lies with the NC General Assembly, where each chamber is supposed to craft a version of the budget based on what the state needs, and within the bounds allowed by the state’s revenue. In recent history, including last year, the legislature’s budget process has happened largely in private, where North Carolinians are left to wonder how decisions were made and whose interests they represent. This budget year is an opportunity to practice a new way of doing things by prioritizing the interests of everyday North Carolinians for a change.