Five strategies for a fiscally responsible state budget

Five strategies for a fiscally responsible state budget

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Paying for investments that spread prosperity

(Editor’s note: The following is excerpted from a recent BTC Brief released by the North Carolina Budget and Tax Center.)

North Carolina’s ability to compete and thrive in a dynamic 21st century economy requires a tax system that raises adequate revenue for public investments that promote broadly shared economic prosperity. Five years into a national economic recovery, North Carolina has failed to achieve financial stability. The slow pace of job creation is one reason, but the major cause is the reduction in revenue that resulted from the 2013 tax plan passed by state lawmakers, which largely benefited well-off North Carolinians at the expense of middle- and low-income earners.

In the first 100 days of the legislative session five strategies should be at the top of policymakers’ agenda to ensure a financially responsible biennial budget is put in place. The following five revenue options should be on the table to close the anticipated gap between state revenue and what we need to fund education, health and other building blocks of a strong economy:

  1. 1. Restore an income tax rate structure that ensures that all taxpayers carry an appropriate share of the tax load.

  2. 2. Restore a vital tax credit for low-income working families before any further expansion of the sales tax.

  3. 3. Make sure that large, profitable corporations are paying to support the services they use and enjoy.

  4. 4. Eliminate special-interest tax breaks that aren’t helping the state’s economy.

  5. 5. Avoid short-sighted budget cuts and the sale of state resources.

While the majority of states are seeing a recovery in revenue that affords them the opportunity to start undoing the worst spending cuts made during the Great Recession, North Carolina continues to face a gap between the amount of revenue it is generating and what is needed to fund basic services like education and public safety. The state’s revenue collections are 8 percent below pre-recession levels. North Carolina is one of just seven states whose revenue collections have declined over the past year as the economic recovery strengthened across the country.

Official estimates project that revenue is coming in nearly $900 million lower than would have been the case in the absence of tax changes made in 2013, which included large tax cuts for the highest earners. The total loss could be more than $1 billion, according to estimates by the Institute on Taxation and Economic Policy, a non-partisan research group. This loss in revenue is likely to generate a shortfall in the state’s current fiscal year budget, putting at risk North Carolina’s ability to meet its obligations to students, working families, the elderly, and others. Unless lawmakers change the way they are doing business, fewer dollars will be available for these investments for the foreseeable future.

More than likely, policymakers will also have to grapple with the growing cost of the tax plan in the next fiscal year, which begins July 1, 2015 and ends June 30, 2016. This is because the revenue loss is compounded by the phase-in of additional personal income and corporate income rate reductions that went into effect on January 1, 2015.

The chronic shortage of revenue caused by the 2013 tax changes is making it more difficult for North Carolina to compete as our neighbors benefit from the economic recovery and reinvest in their schools, colleges and other assets. What follows are five strategies that should be at the top of state policymakers’ agenda during the first 100 days of the 2015 legislative session to ensure a responsible approach is taken to address anticipated budget shortfalls and the development of a sustainable two-year budget.

Click here to read the rest of this report, including more details on each of the five recommended strategies.

Alexandra Sirota is the Director of the North Carolina Budget and Tax Center.