RALEIGH — The newly approved North Carolina budget with its tax cut plan could contribute to a $1 billion-plus annual gap between revenues and projected government expenses by 2020, according to an analysis by the General Assembly’s nonpartisan staff.
The shortfalls were projected in the analysis requested by state Senate Democrats and received a week after the legislature adjourned their annual work session June 30. Republicans said Monday the gaps won’t happen or are getting covered by careful spending. The GOP pointed to revenue surpluses since 2015. They attributed those to economic growth, lower tax rates passed since they took command of the legislature, as well as tight spending. They say flush emergency reserves also will help.
For Democrats, however, the report reinforces their viewpoint that the tax changes they opposed would blow holes in future budgets, requiring spending cuts, higher taxes or a combination to balance them.
While the latest tax reductions benefit nearly all taxpayers, Democratic Gov. Roy Cooper vetoed the budget with the cuts contained inside in part because they gave breaks to the wealthy and to corporations. Republicans overrode the veto.
“The numbers are clear — tax cuts have taken priority over our state’s core responsibilities,” Senate Minority Leader Dan Blue of Wake County said in an emailed statement Monday. “This is not healthy and it is not a responsible way to operate.”
Republicans who wrote up the spending and tax plans say they won’t spend at the 4 and 5 percent growth rate envisioned in the five-year report generated by the Fiscal Research Division. They also said they will keep to fiscal conservatism to cover necessary government services.
“We are not projecting that kind of growth in government spending because we are not going to automatically spend every dime we get out hands on,” said Rep. Bill Brawley of Mecklenburg County, a House Finance Committee senior co-chairman. The three chief bond-rating houses also recently reaffirmed their top credit ratings for North Carolina, noting its economic outlook and ability to address downturns quickly.
The tax provisions reduce the individual income rate from 5.499 percent today to 5.25 percent in 2019 and lower the corporate income tax from 3 percent now to 2.5 percent in 2019. Standard deductions also would grow by $1,000 to $2,500, depending on filing status. There are other small changes.
The analysis is based on a baseline of revenues agreed to previously by economists at the General Assembly and Cooper’s state budget office through mid-2019, followed by a 10-year average of revenue growth. Expenditures would cover the “current level of services,” including inflation and school enrollment growth.
The report estimated a $1.19 billion difference between revenues and expenditures in the 2019-20 fiscal year, growing to $1.37 billion in 2020-21 and $1.44 billion in 2021-22. The gaps equal at least 5 percent of total anticipated revenues.
In an attachment with the analysis, the Fiscal Research Division downplayed specific numbers but wrote that the forecast is designed “to predict potential gaps in revenue and spending streams assuming current policies remain unchanged.”
The division offered Senate Democrats several potential ways lawmakers could close shortfalls, including restricting spending increases for Medicaid and salaries and health care for state employees. Income tax reductions set for 2019 also could be repealed, the report said, something Republicans likely won’t be interested in doing.
“Our track record of spending restraint and middle-class tax relief has led to consecutive budget surpluses and a booming economy,” said a release from Amy Auth, a spokeswoman for Senate Republicans. The statement criticized Democrats for multibillion shortfalls when they led state government.