Takeaways from the Senate Budget

This week the Senate leadership presented the chamber’s state budget proposal. After a day or two of social media reaction and topline numbers, it’s time for a real look at what this contains before it runs the legislative gauntlet. A theme runs through this budget: Fix what’s broken, maintain what we know is working, and improve quality and accountability. No gimmicks. Just responsible, restrained government, and opportunities for citizens.

First, there’s A LOT of money.
North Carolina’s economy is in good shape. In addition to a healthy fund balance, revenue projections are up $6 billion over the next two years. That’s in addition to a flood of federal funds – most recently $5.7 billion in federal American Rescue Plan relief money. This is a far cry from where the state’s economy was in 2011 when Republicans won the majority in the legislature. At that time we were facing a $650 million revenue shortfall and a $2.6 billion unemployment debt to the federal government. Today we have a huge surplus of money and a healthy balance in the rainy-day fund. As we begin the legislative budget process, let’s not forget what got us here: restrained spending, lower taxes, less burdensome regulations, and the right investments in infrastructure and education.

Restraining the growth of government is good policy.
It has proven economic benefits and instills certainty and discipline in spending while ensuring the core functions of government are funded. A benchmark adopted and adhered to for 10 years by the Republican-led General Assembly limits the growth of the budget to the increase in population plus the growth of inflation. The House and Senate agreed to a spending growth number; 3.45% over last year’s spending for the first year and 3.65% for the second year. The Senate budget keeps that growth at 3% over last years’ spending, under the cap agreed to and well within the population plus inflation calculation. Coming in under the number sets a fiscally responsible bar and gives them a little wiggle room should they need it with further negotiations to cement a final deal. Nicely done.

The budget’s tax package is the most transformational tax reform since the changes made in 2013.
Just a reminder, when Republican supermajorities in both the House and Senate and a Republican governor started, our tax system was unfair, burdensome and a cog in the wheel of economic growth. Prior to 2013, NC had a marginal personal income tax of 7.75%, 7% or 6%; the corporate income tax was 6.9%, the standard deduction for married filing jointly was $11,600. There was a death tax and a myriad of exemptions, carveouts, and credits. Today, we have a flat income tax of 5.25%, corporate income tax is 2.9% and the standard deduction (zero tax bracket) for those married and filing jointly is $21,500. The death tax, and many of those carveouts and exemptions have been removed.

The Senate budget proposes transformational reform; lowering the personal income tax to 4.99% in 2022, down to 3.99% by 2026, phasing out the corporate tax, increasing the standard deduction for those married and filing jointly to $25,500, and invests in families by increasing the per-child tax deduction by $500 per child. That’s a 37% tax cut for a family of four earning a median household income. This budget recognizes that hard-working families and businesses should keep more of their money. It also recognizes that an infusion of billions of dollars into our economy as we’re coming out of this pandemic, returning money to the folks who earned it will result in economic growth, jobs, and opportunities. We saw it in 2013 and we’ll see it again with this budget.

This is not a bumper sticker campaign slogan budget.

This is a fiscally responsible, fix what’s broken, long-term plan. They pump money into the rainy-day fund, pay off debt, allocate over $4 billion for capital and infrastructure projects, set money aside for road resurfacing and bridge repair, prepare for the next storm including removing debris from streams, and creeks, invest in medical facilities as well as university buildings. State employees and teachers get raises and bonuses but most importantly they fully fund the state retirement and state health plan, making good on promises made long ago.

The budget invests more than $21 billion in K-12 education over the next two years, including extending funding and eligibility for opportunity scholarships. The budget expands need-based scholarships at the community colleges and universities, fully funds the NC Promise program, improves broadband in rural areas, and increases child-care grants for community college students with young kids. There’s funding for water and sewer facilities and stormwater management. There’s help for families to access healthcare, supporting long-term care, for opium addiction treatment, for those suffering from mental illness, for rape and domestic violence victims, and for free and charitable clinics. There’s more, of course. The spending is smart, thoughtful, and strategic for continued economic success.

This budget uses non-recurring funds, about $500 million in federal Covid relief money for non-recurring needs.

Those non-recurring needs are items like bonuses for state employees and frontline direct care workers, education needs related to the pandemic, expanding rural broadband, water and sewer infrastructure, post-covid assistance for businesses, state attractions, and community colleges to replace lost receipts during the 15-month shutdown. This budget uses $25.2 billion in recurring funds, from ongoing tax revenues, fees, and other revenue we can reasonably anticipate to come in to pay for recurring needs. Recurring expenses include teacher and state employee salary increases, investments in ongoing road and bridge repair, increased mental health and addiction services, enrollment growth in our schools, infrastructure, and capital projects over 10 years.

States get in trouble when they use non-recurring money to pay for recurring expenses. The money runs out, but the need continues. This kind of faulty budgeting has gotten NC in trouble before and only with discipline and fiscal responsibility over the last 10 years has NC set a course on the right path. But caution and care are still needed. No one knows what’s ahead. Putting money into rainy day funds, paying down debt and not incurring more, setting aside reserve funds for education and health care, and funding the state retirement and health insurance programs is responsible, smart, and ensures NC’s economic health for years to come.

The budget process has just started. It’s off to a good start. Kudos to the Senate.