Under the Dome

Budget hole projected if $1 billion tax-cut plan passes NC legislature

Sen. Jerry Tillman, right, speaks on a tax-cut bill during a Senate Rules Committee vote at the N.C. General Assembly on March 30, 2017.
Sen. Jerry Tillman, right, speaks on a tax-cut bill during a Senate Rules Committee vote at the N.C. General Assembly on March 30, 2017. cseward@newsobserver.com

The state Senate’s proposal to cut $1 billion in taxes over the next two years will lead to budget shortfalls starting in the 2018-19 fiscal year, according to an analysis produced by the General Assembly’s Fiscal Research Division.

By the budget year that starts on July 1, 2021, there would be a $598.9 million gap between tax revenue and budget demands, assuming school enrollments and other similar factors hold steady, according to the projections.

“The problem with those projections is they’re going to be based on past growth,” Sen. Jerry Tillman, a Randolph County Republican, said Monday night. He had not seen the specific estimate predicting the impacts from Senate Bill 325 – which supporters have labeled the Billion Dollar Middle Class Tax Cut bill – but said such projections don’t account for the economic boons that are courted by tax cuts. “Tax cuts spur more growth. They certainly have in the last six years.”

Still, the document will fuel the three-way debate over how to cut taxes this year between Republican leaders in the House and Senate and Democratic Gov. Roy Cooper. Each of the three plans puts a chunk of money aside for savings while handing back some of the surplus through tax cuts. But the Senate plan is by far the most generous to taxpayers, and costly for state coffers.

The Senate tax bill would expand the standard deduction, or zero bracket, on which taxpayers owe no taxes. It would also reduce the individual income tax rate from 5.499 percent to 5.35 percent, and reduce the corporate tax rate from 3 percent to 2.5 percent over the next two years. The bulk of the bill’s impact is geared toward those making $50,000 or less, according to its sponsors. But Cooper says it is still too generous to corporations and the wealthy.

“These tax giveaways to corporations and the wealthiest will punch a hole in the budget costing the state $336 million in the second year and almost $635 million four years out,” Cooper said Monday night. “This is money that could instead go to middle class tax cuts and education.”

Cooper has argued that the benefits of economic growth should be plowed into spending needs that were cast to the side during the lean years of the recent recession. And while he has said that some tax cuts would be welcome, he has expressed a preference for targeted moves such as expanding the child-care tax credit. However, he has said multiple times he did not want to see corporate income tax breaks or tax cuts for wealthy individuals drive down spending.

The governor’s budget envisions raising teacher and state worker salaries, while also expanding pre-kindergarten, expanding Medicaid and putting money toward Hurricane Matthew recovery. The Senate has yet to roll out its own budget, but is expected to do so in early May, and Senate leaders insist they can meet spending commitments such as raising teacher pay at they same time as they put their tax cuts in effect.

Republicans leaders in the House have rolled out their own tax proposal, although it is more modest in scope than the Senate plan. It expands the standard deduction and gives corporations relief by way of expanding a tax credit for heavy machinery. Like the Senate plan, it also trims franchise-tax collections.

Over the last few budgets, neither the Senate nor the House have gotten their way on taxes entirely. Rather, the two chambers have tended to settle on some middle ground.

The Fiscal Research document envisions no budget changes, but does anticipate that state spending would keep pace to maintain current levels of government services. Under that assumption, the state would have a $487.3 million surplus under the Senate tax plan in fiscal year 2017-18. Then taxes would fall $336.3 million short of projected budget needs in 2018-19. That shortfall would expand in each of the next three years.

Those projections are based on a 10-year revenue-growth average of 4.2 percent, according to a footnote in the document. It projects future costs based on a combination of inflation, projections for student enrollment growth and other factors.

Tillman said that long-run average doesn’t account for a spike in tax collections from economic growth created by the tax cuts. And if the state does experience shortfalls, he said, there are budget areas that can be cut as well as reserves that could be tapped.

“I’m always skeptical of estimates that don’t figure in how we’re really going to grow,” he said.

Mark Binker: 919-807-1879, @binker