Thanks to tax cuts, large budget shortfalls loom in North Carolina

Eric Figueroa

Lawmakers often look at what is happening in other states to determine what Michigan should do. Over the last year, lawmakers repeatedly talked about—and even tried—rolling back our state income tax because of what other states do. Unfortunately, policymakers often don’t learn the lessons from other states, and continue to nick away at our state taxes, putting at risk funding for our schools, our roads and our communities. Just recently, the Michigan Legislature passed what amounts to a token tax cut to families but will have dramatic impacts on our state budget, economy and the vitality of our communities for years to come. Policymakers need to instead look at what happened to states like Kansas and North Carolina when they made drastic tax cuts, learn from their mistake, and say enough. This guest blog from Eric Figueroa, a senior policy analyst with the national Center on Budget and Policy Priorities, explains why.

By Eric Figueroa, Senior Policy Analyst, the Center on Budget and Policy Priorities

Tax cut proponents claim that North Carolina’s tax cutting is a model for other states looking to boost their economies, but the state has not performed particularly well economically compared to its neighbors since the tax cuts took effect and those cuts have put North Carolina on a path to serious fiscal instability.

North Carolina since 2013 has enacted tax cuts that will cost $3.5 billion a year, or 15% of the state’s General Fund budget, once they take full effect in 2019. This massive revenue loss has yet to cause budget shortfalls, mainly because the tax cuts aren’t yet fully in effect, the governor and Legislature have left funding for schools and other services well below their levels before the Great Recession hit a decade ago, and the economy is relatively healthy. But large shortfalls loom in North Carolina’s future.

The Legislature’s budget experts project that the state will avoid shortfalls through the upcoming 2019 fiscal year, but will face major fiscal challenges after that, when more of the tax cuts are scheduled to kick in even as funding needs for schools and other services continue to rise. They project that North Carolina will face a structural shortfall of $1.2 billion in 2020, rising to $1.4 billion two years later. (See chart.)

Faced with such large shortfalls, the state will have a choice: cut funding for state services such as schools, healthcare, and transportation projects, or reverse course and repeal the tax cuts. (The state also could draw on “rainy day” funds, but those funds—which require a supermajority in the Legislature to access—are a one-time source of revenue that the state will need when the next recession hits and state revenues fall as a result.) Funding cuts would be particularly painful because the state already has deeply cut funding for core services. For example, state per-student funding for K-12 and higher education is down 7.9 percent and 15.9 percent, respectively, in inflation-adjusted terms since the Great Recession. The funding cuts have made it very hard for North Carolina to improve its low teacher pay and low per-pupil spending, and reverse sharp increases in college tuition.

Kansas, which like North Carolina faced large budget shortfalls after enacting deep income tax cuts, reversed course last year, repealing major parts of the earlier tax cuts in hopes of restoring fiscal stability.

Click on the following links for other recent posts explaining how North Carolina’s tax cuts:

• Haven’t caused the economy to surge
• Have worsened racial wealth inequities

— Eric Figueroa