Just one week into the 2010-11 "short" legislative session, the North Carolina State Senate released its recommended budget adjustments for the coming fiscal year that begins July 1. The budget plan was quickly approved by the Senate, and is slated to move to the House for further changes within the next two weeks.
Like Governor Perdue’s recommendations, the Senate spending plan would increase real spending over the tentative appropriations approved in last year’s biennial budget bill. Curiously, however, the Senate would reduce the appropriations for public education and public safety. The Senate plan also includes a sensible tax cut on small businesses that would – unlike Perdue’s proposal – help create jobs in North Carolina.
A Look at the Numbers
Total spending on state programs in the Senate plan comes to $20.59 billion, slightly less than the Governor’s plan.
Total spending includes $18.99 billion outlined in the state budget, plus $1.04 billion in federal funds replacing state funds (but counted as cuts), and $561 million in additional federal funds added this year and dedicated primarily to the state’s Medicaid program.
The $20.59 billion in state spending would mark a $200 million increase over the budgeted real spending of $20.4 billion (including federal funds) included in the current 2009-10 budget.
Indeed, compared to 2008-09 actual appropriations of $19.65 billion, the Senate’s proposal would increase state spending over a two year period of nearly one billion dollars – roughly 4.8% – during the "greatest recession since the Great Depression."
Curious Spending Priorities
Similar to Gov. Perdue’s budget recommendations, the Senate’s plan reduces planned spending on public education and public safety, while increasing spending on virtually every other state agency.
The Senate’s plan would decrease appropriations on public education by $219 million relative to the spending plan first established last year in the state’s two-year budget. Similarly, Justice and Public Safety spending would decline by $83 million in the Senate’s 2010-11 budget proposal. Most of the cut in JPS would come from corrections.
Conversely, Community Colleges, the UNC system, Natural and Economic Resources and Health and Human Resources (aided by federal funds) each would see a bump in appropriations. Meanwhile, General Government would see a minor cut of 1.3 percent.
The largest planned spending increase by the Senate would occur in Natural and Economic Resources, with an expansion of 9.4 percent. The increase would come mostly from an increase in the state Commerce Department expenditures on "economic development" measures.
Real Relief for Small Businesses
The Senate budget plan follows Gov. Perdue’s lead in targeting North Carolina small businesses for tax relief. The Senate’s proposal, however, differs greatly from Perdue’s.
The Governor’s targeted tax relief featured a set of ineffective tax credit gimmicks and rebates, without any change in the actual tax rates faced by entrepreneurs in the Tar Heel State. In contrast, the Senate’s budget plan includes a reduction in the top marginal tax rate paid by businesses filing the individual income tax form. Nearly all small businesses in North Carolina, and most businesses generally, are organized as a "pass-through" business and pay taxes according to the individual income tax schedule rather than corporate taxes. The Senate’s plan, therefore, would be an effective tax rate cut on a significant number of small businesses throughout the state. Early estimates suggest that about a quarter million North Carolina businesses would receive a break from this tax cut.
The Senate’s tax rate reduction on small businesses clearly represents a better means of stimulating more economic activity and job creation.
Also included in the Senate plan, however, is $10 million set aside for "Commerce Business Recruitment Initiatives." This money will likely go toward ineffective targeted tax breaks or some other sort of corporate welfare scheme. A better alternative would be to use this $10 million to drive down the tax rate on small businesses further still.
New Fees of $22 Million
The Senate plan does not include the DMV fee increases that Gov. Perdue advanced, nor does it include the "State Mobility Fund" the fee increases were designed to finance.
Instead, the Senate includes $22.2 million in increased Justice & Public Safety fees. The fee hikes include primarily court costs.
Revenue Set to Fall Off a Cliff Next Year
Like Gov. Perdue, the North Carolina Senate fails to look beyond a patch-work budget for the current year and ignores the massive fall-off in revenue coming next year. Their reliance on more than $1.5 billion in non-recurring federal stimulus funds and $1.3 billion in temporary tax revenue to help balance this year’s budget establishes a massive structural deficit of nearly $3 billion for next year’s 2011-12 budget.