Four important takeaways from the Governor’s budget proposal

Last week, Gov. Cooper released his recommended budget on the use of funds in the state’s primary bank account, the General Fund. In his first comprehensive plan for the state since 2019, the Governor would plan would shift the course of North Carolina’s spending trends, increase investments modestly in state infrastructure, and implement common sense policy changes that help families secure the health and well-being that supports strong communities and economies. 

Notably, the governor’s proposed plan for the state does not include funds passed as part of the federal American Rescue Plan, which includes approximately $5.3 billion for the state to address COVID-related needs, an estimated $1.3 billion for child care, and additional dollars to address the rising costs of the pandemic and the economic downturn.

The governor’s budget makes no effort to raise revenue; however, it does provide bottom-up tax credits targeted at North Carolina families who face the greatest harm from our state’s upside-down tax code and who have been hit hard by the pandemic’s employment and income impacts.

Here are four key takeaways:

1. The plan proposes a modest increase in spending across the state budget.

Breaking nearly a decade-long streak in decreased investments compared to the state’s economy, the governor’s budget represents 4.84% of the projected state economy in the first year and 4.89% in the second year. This remains well below the 45-year average by $5.4 billion; however, it would be a change of course for the state budget which has been constrained by policy choices that have held down spending arbitrarily.

The COVID-19 pandemic has shone a light on the inequities in our state, as well as the consequences of under-investments in public infrastructure that have meant delays in the delivery of dollars and services to households, local government entities, and communities. Recovering and responding to the effects of the pandemic will take robust investments in infrastructure across the state.

2. The governor proposes tapping into the state’s substantial unreserved cash balance but leaves dollars on the sidelines.

Gov. Cooper’s budget pays for the recommended investments by using most of the unreserved cash balance, but his proposal leaves more than $1.7 billion in available dollars on the table while doubling the size of the already healthy Rainy Day Fund to $2.2 billion. While millions of people across the state continue to experience hardship because of the public health and economic crises, saving dollars that could otherwise be put toward an ongoing state emergency makes more sense. Moreover, the more than $1 billion put into the Rainy Day Fund meant to assist the state during emergencies – nearly half of which is above the statutory obligation –  would then require a supermajority to put to use, making it harder to access.

3. The governor’s budget didn’t propose equitable revenue policies that would provide the resources needed to invest in a systemic solution to our current challenge.

North Carolina voters support raising the tax rates paid on corporate profits and very high incomes in the state. Amid a pandemic and economic downturn that have left many facing great hardship, some corporations are reaping record profits and the recession is effectively over for the best-paid North Carolinians.

Raising tax rates on those who are doing well today is good fiscal and economic policy. It can ensure that our public institutions have the funding needed to serve people and do so equitably across the state. It will also will ensure that North Carolina can connect more people to opportunity, improve quality of life, and support health and well-being. The pandemic has made clear that tax cuts of recent years have left our capacity to commit to each others’ well-being diminished. Before COVID-19, North Carolina was spending $7.4 billion below the historic spending levels as a share of the economy. It will require more than year over year revenue growth to catch up on years of foregone investments and to meet increased need.

4. The governor’s proposal includes common sense policies to advance family and community well-being.

Gov. Cooper’s proposal includes Medicaid expansion, a reinstatement of the state’s Earned Income Tax Credit (EITC), and an expansion of child care subsidies, all of which are long overdue for North Carolina.

Estimated to benefit more than 850,000 North Carolina families, the EITC is a bottom-up tax credit for low-income working families, and it is the largest safety net program already in use by the federal government and many other states. North Carolina is also one of only 12 states that has not expanded Medicaid, which would provide health care coverage to over 500,000 people in the state. The governor’s proposal includes a modest increase in the child care subsidy rate and an increase of 1,700 child-care subsidy slots.

Overall, this plan would set North Carolina on a different path beginning in the new state fiscal year, with a modest increase in investments from the decades-long under-investment that has deprived the state’s infrastructure of the resources it needs for a robust response to the COVID-19 pandemic and beyond. The proposal falls short in a number of ways – including by not generating additional revenue from high-income earners and stashing away public dollars during an emergency – leaving room for improvement as the budget process begins in earnest.

Suzy Khachaturyan is a Policy Analyst at the Budget & Tax Center, a project of the NC Justice Center.