Follow the Money: The Senate once again chooses tax cuts

The Senate released their $22.225 billion budget proposal a little before midnight last night.  Like the House, the proposal represents a 2.26 percent — or $490.3 million — increase over the current 2016 fiscal year budget.

The arbitrary spending target agreed to at the outset of the budget process has led to a whole host of bad decisions in the proposals from the House and Senate.  Most fundamentally, it has meant our leader’s loyalty to severe budget constraint and lopsided tax cuts, which primarily benefit profitable corporations and the wealthy, are making it impossible for them to meet the needs in communities and for families.

While most of the public budget debate this week will be on the spending side (see our initial take here), examining how the Senate pays for their proposal is just as important. They pay for their 2017 budget proposal in the following way:

 To start out, the Senate, like the House, relies on revenue collections coming in above what officials anticipated, money they anticipate agencies will return to the state (known as reversions), and other one-time dollars to help finance the budget.  Revenues are expected to come in above conservative projections by $330.2 million for the 2016 fiscal year. In addition they rely on money that the agencies return through the course of the year through reductions in services or because of changes in costs to delivering services.  Because they left money unappropriated last year, this $175 million is one-time money used in their budget.

• The Senate contributes $584 million to the Rainy Day Fund. This is double the contribution made by the House, which takes a slightly more pragmatic approach to saving while also meeting needs today.  The Senate’s aggressive effort to contribute to the Rainy Day Fund is ill-timed given the unmet needs in communities.
• On top of the money that the House expects to carry over at the end of this fiscal year, they expect to receive $22.2 billion in base revenue — an amount that is severely constrained by previously-approved tax cuts. The $22.2 billion projection is a modest 1-percent growth rate over the current fiscal year. This modest growth is “below long-term average growth and typical growth during economic expansions,” as state budget officials pointed out earlier this month.
• The revenue total is diminished by the sizeable cuts to the personal and corporate income taxes that lawmakers approved over the last few years. On net, the already-approved tax changes (that also include sales tax expansions) are expected to result in a $1.3 billion loss in the upcoming fiscal year.

Perhaps most interesting in the Senate’s availability statement is the decision to double down on tax cuts and the resulting ways in which they seek to hold the cost down. 

• First, the Senate raises the standard deduction at a cost of $145 million. This approach is more costly and not as well targeted as restoring the state EITC, which does a better job of helping working families and addressing inequities in our tax code.
• They offset this revenue loss in part by phasing in more services that are subject to the sales tax.  This was the bill that was discussed yesterday in Senate Finance and identifies new services to which the sales tax would be applied and which were not specified in prior law.  The anticipated increase in sales tax collections fully realized under that proposal would be $140 million according to Fiscal Research, effectively eliminating the tax cut delivered through the standard deduction.
• The other source of revenue for their budget is to eliminate the state contribution to local sales tax distribution by $17.6 million, another blow to local governments across the state.
• They reduce General Fund availability by another $4 million to further reduce the tax on airplanes and boats and repeal certain service contracts.
• They take $3 million from the NCGA Special Fund which was intended for use to support the operation of the General Assembly.
• They boost General Fund availability by nearly $1.7 million due to transfers from the Insurance Regulatory Fund and the Treasurer’s Office.

See the chart below for a summary.