Top Ten Things You Should Know About the State Budget Deal

The FY 2015-16 North Carolina state budget has finally been finalized. Was it worth the wait? Rather than wading through 400 pages of text, you can read here about the ten most interesting and important aspects of the budget in this article.

Note: This article does not include education issues, which is highlighted in a separate article. 

1. Total spending is $21.7 billion. That marks an increase of $620 million over last year’s budget, equal to a rise of 3.1 percent. The state budget has more than doubled in the last twenty years – a growth rate nearly three times the rate of population growth. Indeed, over the past 30 years, state General Fund spending per person has grown by 50 percent – even after adjusting for inflation.
2. More tax cuts coming. The state personal income tax rate will drop to 5.499 percent by 2017, down from the current 5.75 percent. The standard deduction will be increased slightly (for example from $15,000 to $15,500 to married filing jointly), and the tax credit for medical expenses is reinstated. Moreover, the corporate income tax rate will drop to 4 percent next year as included in the 2013 tax reform, and will be guaranteed to drop to 3 percent the following year regardless of revenue thresholds. The sales tax base, however, will be broadened to include some services such as repair, maintenance and installation services to tangible property, such as autos. Also, the corporate tax formula will move to a single sales factor, which is projected to amount to a tax cut of about $32 million over the biennium. On net, these tax changes are projected to save taxpayers nearly $400 million over the biennium.
3. Local Sales Tax Distribution. The budget does not include a proposed change in the sales distribution formula that would have shifted most of the sales tax revenue to be distributed on a per capita basis rather than to the county where the taxes were collected. Instead, the additional revenue collected due to the sales tax base expansion is to be distributed by a formula favoring rural counties. For instance, Wake, Mecklenburg and Guilford counties would receive none of the additional revenue.  Moreover, the additional revenue is earmarked for local governments to spend on public schools, community colleges or economic development.
4. Film Grants. $30 million of taxpayer dollars is appropriated for handouts to film production companies.
5. Renewable Energy Tax Credit. North Carolina’s 35 percent state tax credit for “renewable energy” facility construction, which is tacked on to the federal credit of 30 percent, will be allowed to expire. As originally written, the credit was set to expire at the end of 2015; in a vain attempt to save this tax break, the solar industry spent heavily on lobbyists to get the credit extended in the budget.
6. Medicaid reform. $225 million over two years is set aside to aid in the reform of North Carolina’s Medicaid program. Medicaid reform has been vigorously debated the last two years, as legislators seek to move away from the current fee for service model. The Senate has favored a managed care model, while the House has favored an Accountable Care Organization (ACO) model for reform. The details of the reform are expected to be unveiled in separate legislation in the coming days.
7. State employee pay. All state employees will be given a one-time bonus of $750 in this year’s budget. No across-the-board pay raises are included. Salary step increases are included for teachers, and other school administrators, along with highway patrol troopers, court clerks and magistrates. The budget also sets aside funding for pay raises for community college employees and correctional officers.
8. Highway Fund Transfer. The annual $216 million transfer from the Highway Fund to the General Fund is ended. This makes more money available for transportation needs.
9. Savings. A total of $600 million is set aside in the state’s Rainy Day Fund ($200 mil) and the Repair and Renovations fund ($400 mil).
10. No changes to state retiree benefits. In spite of the elimination of health benefits for future state retirees being included in the Senate budget proposal, and rumors of secret meetings to transition state workers to a defined-contribution retirement program, no such changes were included in the budget deal.