Governor Cooper’s budget: Pragmatic progress, but past GOP tax cuts remain a big problem

Governor Cooper’s budget: Pragmatic progress, but past GOP tax cuts remain a big problem

[Editor’s note: North Carolina Governor Roy Cooper unveiled his proposed two-year budget plan today. The Governor touted his proposal under the heading “Common Ground Solutions” and stated that it would make “critical investments in education, health care, economic development and public safety…without raising taxes or fees, cutting services, or borrowing from special funds.”

As the latest edition in the N.C. Budget and Tax Center’s “Follow the Money” series (which appears below) indicates, there is much to support the Governor’s claims as his proposal makes some important strides in reversing several years of negative budgeting trends. Unfortunately, the Governor is greatly constrained in this work by the regressive tax cuts on wealthy individuals and profitable corporations that state lawmakers have enacted in recent years. As a result, even with the Governor’s best efforts, Year Two of his proposal takes overall state investments as a percentage of state personal income to a new low that is nearly 17% below the 45 year average. In short, though it is a promising start, the Governor’s budget takes only the first of several steps that will be necessary to restore sound public investment practices in our state.]      

Follow the money: The Governor’s budget benefits from national economic expansion but remains constrained by tax cuts for the wealthy and profitable corporations

The $23.47 billion budget proposal that Governor Cooper released for the upcoming 2018 fiscal year reflects a pragmatic plan for meeting the pressing needs of North Carolina communities and families.

Rather than follow the flawed limits of arbitrary formulas, the Governor’s proposal seeks to meet key goals for improving the connection of more North Carolinians and communities to economic opportunity while emphasizing that people’s well-being requires public investments to ensure all can achieve their goals.

Overall, the Governor’s proposal represents a 5.2 percent — or $1.16 billion — increase over the current 2017 fiscal year budget.    This is just the beginning, however, in addressing the backlog of unmet needs. The Governor’s proposed budget is just $225 million, or 1.0 percent, above pre-Recession levels.

The Governor’s budget would make only slight progress toward the historic levels of investment relative to the state’s economic health. The 45-year average of state investments as a share of the economy is 6 percent and has allowed North Carolina to sustain the foundations of its economy and make transformative investments in early childhood and career training, for example.

Under the Governor’s proposed biennial budget, the level of state investments would remain below that 45-year average: In the first year, investments are 5.14 percent as a share of the economy, and it drops to 4.99 percent in the second year.

The Governor is constrained by the tax choices made since 2013 that have resulted in $1.9 billion less in annual revenue than would have been the case under the old tax code. These tax cuts have largely benefited the wealthy and profitable corporations. The corporate income tax rate dropped to the lowest in the country on Jan. 1 this year, directing $500 million to profitable corporations rather than public schools and other investments that support a stronger economy and increased well-being of North Carolinians.

While most of the public budget debate this week will be on the spending side (see our initial take here), examining how the Governor pays for his proposal is just as important. Here are some specifics.

  • The state’s tax system is expected to raise $23.1 billion in base revenue — an amount that is severely constrained by previously approved tax cuts.
  • In addition to base revenue, the Governor relies on revenue collections coming in above what officials anticipated ($552 million), money they anticipate agencies will return to the state (known as reversions; estimated at $271 million), and unappropriated dollars from the most recent fiscal year ($108 million).
  • The Governor makes a required $100 million transfer of General Fund dollars in the state’s Savings Reserve fund, per the special session relief bill passed by state lawmakers in December 2016 to aid communities harmed by Hurricane Matthew. The Governor put an additional$312 million into the Savings Reserve and sets aside $150 million for the Retiree Healthcare Reserve.

The second year of the budget proposal is concerning because it does not sustain the progress of the first year. This is because the state’s tax code is not projected to raise the revenue needed to meet needs in communities and because tax credits for child and dependent care and the film industry are proposed.

See the chart below for a summary.

Alexandra Sirota is the Director of the N.C. Budget and Tax Center.