THE HOUSE BUDGET: A Responsible Plan Forward

BTC Reports; Vol. 13, No. 3
May 2007

By Meg Gray, Policy Analyst and John Quinterno, Research Associate

Executive Summary

• The North Carolina House of Representatives has passed a two-year budget that would increase state spending over the current year by $1.44 billion, or 7.6 percent, in the first year. Spending would rise by another $51.4 million, or 0.25 percent in the second year.
• The majority of the $1.44 billion increase in FY 2007-2008 funds salary increases for all state employees, one-time fiscal relief for county Medicaid costs, expanded and new education programs, and capital improvements.
  The House budget includes funding for initiatives that support working families, such as additional funding for disadvantage students, affordable housing, child-care assistance and expanded health insurance coverage for children in low- to moderate-income families.
• The House’s revenue plan creates a 5 percent refundable state Earned Income Tax Credit (EITC) that complements the federal program. The state EITC will improve tax fairness, and more than 825,000 North Carolina families – one-fifth of all taxpayers- will benefit.
• The House and governor balance their budgets by extending what remains of the temporary sales and income tax increases first adopted in 2001, appropriating surplus revenues from the current fiscal year, and reinstating the transfer from the Highway Trust Fund to the General Fund. Since the governor released his budget in February, the projected surplus has increased to $1.135 billion from $825 million.
• As the budget moves to the North Carolina Senate, topics of debate likely will include the extension of the temporary taxes, Medicaid relief, infrastructure needs, debt financing, and state support for mental health services.

Overview

The North Carolina House of Representative’s budget for FY2007-2009 is a fiscally responsible plan that invests in working families. As the Governor proposed, the House will extend two temporary taxes to generate adequate revenues for current and future needs. The House also provides targeted tax relief for low-and moderate-income working families through a refundable state Earned Income Tax Credit set at five percent of the federal credit. The House’s spending plan expands on the Governor’s proposal by providing $100 million in one-time Medicaid relief to counties and a greater raise in the average salary of state employees. Critical investments, including a long list of state and local infrastructure needs and increased funding for mental health services, however, largely went unaddressed or under-funded. If the State Senate chooses not to extend the two temporary taxes, there will be little room to maneuver without considering spending cuts or other revenue sources. This issue of BTC Reports analyzes the House’s plan in detail, paying close attention to fiscal responsibility and the potential effects on low- and moderate-income North Carolinians.