North Carolina’s state government leaders will make some heavy-duty decisions over the next few days. A new state budget is supposed to be in place by July 1, and the Republicans who control both chambers of the General Assembly and the governor’s office take pride in meeting budget deadlines. This year, the process of crafting a spending plan is more complicated because it’s intertwined with Republican efforts to revamp the tax code.
Many campaign promises were made to cut taxes, and that’s what the legislative majorities want to do. Their problem is they haven’t yet agreed how to do it.
For example, to recoup some of the revenue that would be lost from cutting the personal income tax, one plan from Senate leaders would have reinstated the state sales tax on food. That idea got such a frosty reception that the Senate reversed course entirely. Its latest plan would eliminate even the 2 percent local food tax unless local officials decided to put it back.
What a spot for those officials to be in: Add back the food tax, raise property taxes or do without revenue that supports local services like police, parks and street repair. House members have been insisting that the local food tax should stay.
Then there’s another Senate brainstorm: Make Social Security benefits taxable. Those benefits now are deductible from income when figuring state income taxes. Under the plan that has the blessing of Senate President Pro Tem Phil Berger, that deduction would be lost. Berger asserts that retirees who have no income other than Social Security would pay no more under his plan than they do now and might pay less. But it’s no wonder that the idea of taxing Social Security benefits – a red flag among older voters — makes many legislators nervous.
Shifting the burden
At this writing, Berger has sent his plan back to the Senate Finance Committee as negotiations with the House and Gov. Pat McCrory proceed. The House’s approach has featured an expansion of the sales tax to cover a range of the service transactions – installations and repairs, for example — that have come to play an important part in the economy. The thinking is that putting a tax on services would help offset the revenue losses from cutting personal and corporate income taxes.
Republicans see those income tax cuts as key to their goal of stimulating business and creating more jobs. Maybe those jobs would materialize someday.
What’s certain, however, is that the immediate benefits of proposed income tax changes would accrue mainly to high-end earners and large, profitable companies. The relative tax burden would shift down the income ladder – even more so if the sales tax is broadened.
Further, none of the tax overhaul plans now being considered would leave the state with as much money as it currently collects. That would put the squeeze on programs and services throughout state government. Some conservatives see reduced spending as a worthy goal in itself. But after four years of belt-tightening because of the national recession, there’s little room for further cuts that won’t be felt among people who count on the state to provide good schools and universities, to safeguard the environment, to uphold public safety and protect public health.
Berger’s tax plan, for example (it’s a rewritten version of House Bill 998), is projected to cut revenues by the following amounts during the five fiscal years beginning July 1: $173.8 million, $523.2 million, $1.108 billion, $1.415 billion and $1.382 billion. The latest version of the state budget bill, approved by the House but rejected by the Senate, contemplates tax cuts of $38.5 million in the coming fiscal year and $381.1 million in Fiscal 2014-15.
Scrimping on schools
Overall spending from the General Fund would be $21.16 billion during that year, according to the House budget. So the impact of tax cuts and corresponding revenue losses could be seen as relatively modest.
Still, consider the effect on spending for the public schools, which would drop by $79.3 million in the coming year. With public education the largest budget component at a projected $7.91 billion, the cut would amount to a mere 1 percent. But as enrollments continue to grow, spending is under enough pressure that legislators, evidently to save a few bucks down the line, would phase out the additional pay now given to teachers with graduate-level degrees.
What an incentive that will be as the state struggles to attract and retain teachers who are highly qualified. Perhaps the irony was lost on legislators who, in the same budget bill, move to set up the “North Carolina Educator Effectiveness and Compensation Task Force” — one of whose duties would be to study “effective strategies for retaining effective teachers.”
Telling teachers who go to the effort and expense of earning an advanced degree that they won’t get a corresponding pay raise has to rate as counterproductive. But the same could be said about budget and tax strategies making it harder for North Carolina to maintain its investments in strong education systems and other civic assets. Those are the investments that have spurred the state’s prosperity over the last half-century. A proper concern for the well-being of our neighbors will lead the state to tax its people both fairly and adequately, so that it can do what it should do to extend opportunity and make North Carolina an even better place for all of us to live.
— Steve Ford, Volunteer Program Associate