The Senate Budget: Featuring Tax Cuts . . . Brought to You by Lower Savings and More Debt

BTC Reports; Volume 13, No. 4; June 2007

BY MEG GRAY, POLICY ANALYST; JOHN QUINTERNO, RESEARCH ASSOCIATE; AND SEAN COFFEY

Executive Summary

• The North Carolina Senate’s version of the 2007-2009 budget spends less on working families, leaves many needs unaddressed, and is less fiscally responsible than the House and governor’s plans. The Senate’s FY07-08 budget is just above $20 billion and is $263 million less than the House’s spending plan.
• The Senate plan includes no funding for targeted tax reductions for working families, the Kids Care affordable health insurance for children, or grants for high-school dropout prevention. It also provides inadequate funding for the education of disadvantaged students and does nothing to help counties with Medicaid costs.
• Unlike the House and governor’s plans, the Senate allows two tax provisions — the top 8 percent income tax rate and an additional 0.25 percent of the state portion of the sales tax — to expire on July 1, 2007 at a cost of approximately $300 million in lost recurring revenue for FY 2007-2008.
• The Senate budget is out of balance, spending more than $291 million of onetime money to pay for ongoing expenses. The Senate spends only $12 million less on ongoing expenses than the House. The majority of the $263 million spending difference between the two chambers can be explained by their treatment of one-time money. Unlike the Senate, the House uses one-time money to provide $100 million to help counties with Medicaid costs, invests $116 million more on capital improvement projects, and fully repays the state pension system at a cost of $45 million.
• The Senate budget saves less than the House by placing only $150 million of the projected $1.2 billion revenue surplus into the Rainy Day Fund, freeing up $165 million more one-time money than the House to spend in FY 2007-2008.
• The Senate plan saves less, relies more on debt, and allows tough decisions to be put off to the (near) future.

Overview

The final phase of the North Carolina budget process began last week when the Senate passed its version of the 2007-2009 spending plan. House members rejected the Senate’s changes to their budget, so now conference committees appointed by both chambers will begin working to sort out the many differences in priorities between the two chambers and the governor.

In lieu of saving for and investing in the future, the Senate cuts taxes and leaves an unexplainable amount of unappropriated money at the end of both years. Unlike the House and Governor, the Senate chose not to extend two temporary taxes resulting in an over-reliance of one-time money ($291 million) to pay for ongoing expenses in their spending plan. The Senate invests less to educate disadvantaged students, to insure children, and to build affordable housing and does not include any targeted tax reductions for low- and moderate-income working families. The plan has also raised criticism for the $1.2 billion in debt it proposes the state take on in the form of certificates of participation to primarily finance university construction while ignoring other critical infrastructure needs. Providing help to counties to pay for Medicaid costs was also left unaddressed in the Senate plan.

The Senate’s claim that they spend less than the House because it allows the two tax provisions to expire is misleading at best. The Senate budget plays a shell game with numbers that gives the allusion of fiscal responsibility, but in the end the plan saves less, spends roughly the same on ongoing expenses, relies more on debt, and allows tough decisions to be put off to the (near) future.