State budget compromise unveils big plans for tax cuts, but not until 2019

Includes broad teacher and state employee raises, 1 percent COLA increase, cuts Pre-K waiting list, bolsters state reserves

Eamon Queeney—North State Journal
House members look over the Health and Human Services section of the budget during the North Carolina House of Representatives' Appropriations Committee meeting at the Legislative Office Building in Raleigh onMay 31.

RALEIGH — After only two weeks of closed door negotiations, Republican lawmakers introduced their state budget compromise on Monday. The $22.9 billion biennium budget appears to include significant personal and corporate tax cuts, incremental pay raises for teachers, and a large deposit into the state rainy day fund. “I want to thank all those who worked really exceptionally hard, I think we have a really good relationship — we spent a lot of time together, know each other a little bit better, and we’re happy with the results,” House budget chair Nelson Dollar (R-Wake) said, followed by laughs from his colleagues, during a press conference Monday evening. The quick compromise is a departure from the conference processes of years past. In 2015, for example, Senate and House leaders signed three continuing resolutions, drawing negotiations out for more than four months before adjourning in late September.The full budget text and money report were posted around 11:30 p.m. Monday night. On that timeline, leaders hope the Senate can vote Tuesday and Wednesday, and the House to follow Thursday and Friday. And one week ahead of the fiscal year deadline, the Republican-led legislature is ready to face a new governor that doesn’t share their enthusiasm for conservative budgeting. “Last time I stood before you, I told you the General Assembly’s budget and Gov. [Roy] Cooper’s budget contain many of the same funding priorities — the same is true today,” said Senate Leader Phil Berger (R-Rockingham). “In fact, I understand that he sent an email to his supporters over the weekend calling for a budget that spends more in education — this one does; more in health care — this one does; funds economic development — this one does; and funds public safety — this one does.”Cooper, the Democratic governor just six months into his term, could be inking up his veto stamp. After Republicans wrapped up their press conference, the governor’s spokesman, Ford Porter, released a statement saying, “While we wait for details, the budget outlined by legislative leaders continues to shortchange education, economic development and middle class families in favor of more tax giveaways that help the wealthy and large corporations. Those are the wrong priorities.”Berger and House Speaker Tim Moore (R-Cleveland) were said to have briefed the governor on their budget proposal in a private meeting at the Executive Mansion around 6 p.m. Personal TaxesWith or without the governor’s approval, lawmakers are seeking to make significant strides to reduce the taxpayer burden, offering around $530 million in both personal and business tax cuts this budget cycle. However the vast majority of the changes will not go into effective until the end of the decade.Effective Jan. 1, 2019, the personal income tax will drop from 5.499 to 5.25 percent. On the same timeline, lawmakers will increase the standard deduction, allowing North Carolinians to write off more of their earned income. Married filing jointly taxpayers and surviving spouses will see a jump from $17,500 to $20,000, heads of household from $14,000 to $15,000, and single and married filing separately taxpayers from $8,750 to $10,000.Another change will come in the form of child care relief, as lawmakers have moved from a tax credit to a deduction. Parents making up to $120,000 a year will be able to include child care expenses as part of their tax-free income, with the highest potential at $2,500 for families earning $40,000 a year.With the average household income in North Carolina hovering around $47,800 a year, this would mean most families will be able to deduct close to half their taxable income once these changes go into effect. Business TaxesPiggybacking on the economic success of the last few years, Republicans continue to move toward imposing zero taxes on corporations that set up shop in the state. Also effective Jan. 1, 2019, the corporate income tax will be reduced from 3.0 to 2.5 percent. The budget also simplifies and reduces the franchise tax on small businesses by cutting what is effectively a statewide property tax on small businesses and creating a flat $200 tax on the first $1 million of a business’ net worth.Also, $4 million in additional funding will go toward tourism, domestic and international advertising to promote economic development in North Carolina. Another $4 million will go toward bolstering revitalization grants to help towns and cities across the state restore property attractive to businesses.The only tax changes that will occur in 2018 involve business-to-business transactions, including repealing the mill machinery purchasing tax and offering a sales tax exemption to businesses looking to set up large warehouses in the state.”In the 21st century, fulfillment centers are a key component to economic development, and create hundreds of jobs,” House Finance Committee Co-chair Rep. John Szoka (R-Cumberland) said in a statement. “Increasing our competitive advantage in the region with a lower corporate tax rate will play a significant role in the years to come.” Teacher, state employee pay raisesRepublicans plan to invest an additional $100 million this year to attract and retain talent in North Carolina public schools.The new teacher pay scale appears to closely resemble the House version, awarding almost every career level a pay increase. Teachers with 17 to 24 years of experience will see the biggest bump, while starting teachers — who have received the most attention from the legislature in the past couple of years — will not see a pay increase at all.On average, teachers will get a 9.2 percent pay raise over the next two years. “Look at the investment we’ve made in teachers over the past three to four years,” said head budget writer Sen. Harry Brown (R-Onslow). “A teacher three years ago took 30-some years to get to the top of their pay scale. Our plan would get them there in 15 years.”Also carrying over from the House plan, veteran teachers with more than 25 years of experience who commit to remain in the classroom will also be eligible for a sizable bonus.The budget incorporates a new plan to recruit and retain highly qualified teachers by allowing those who accept positions in low-performing schools or are licensed in special education or STEM to begin at a higher pay grade on the salary schedule. Bonuses will also be available for these teachers, based on their student growth scores.School leadership is seeing a big boost from lawmakers this year, with $35 million dedicated to substantial increases to principal and assistant principal pay, as well as additional performance-based bonuses. Principals can expect an average 8.6 percent increase, assistant principals a 13.4 percent increase. State employees, including correctional officers and state troopers, will receive a $1,000 across-the-board raise this year, and retirees can count on a 1 percent permanent cost of living increase — an adjustment they have been hoping to see for years.Education and human servicesThe plan increases funding for public education by nearly $700 million over the next two years and allocates more than $100 million from lottery funds for grants to economically struggling, rural counties to assist with critical public school building needs. An additional $11 million will go toward textbooks and digital resources.In a compromise that strikes right down the center of both House and Senate proposals, Republicans are investing $27 million to add an additional 3,525 new pre-kindergarten slots, estimated to cut the current waitlist by approximately 75 percent. “We will continue to work on that, but this is the largest single investment that I can remember in that area,” Dollar said about the push to help more parents get their children into early education. Similar to Opportunity Scholarships, a new Education Savings Account program established in the budget will supply $3 million in scholarships to students with physical or mental disabilities to attend a private school. The two chambers also agreed on language for Raise the Age legislation, paving the way for 16- and 17-year-olds to be tried as juveniles by Dec. 1, 2019. The measure, both in policy and funding, will be part of the budget bill with the compromise narrowing the eligibility down to only two classes of felonies. The provision will provide for 31 new assistant district attorneys across the state and $13.5 million toward building a brand new youth detention center in Rockingham. Funding to help modernize the child welfare system and $10 million to support opioid and substance abuse treatment centers across the state is also included. Rainy day fundsLawmakers will bolster state reserves with a $363 million deposit into the state rainy day fund, bringing the grand total to $1.838 billion — accounting for an unprecedented 8.2 percent of the total state budget. An additional $125 million will be set aside to manage vital repairs and renovations to state-owned and university buildings. “Looking at the bigger issue, when you go back in history when you saw budget increases of 8, 9, 10 percent, those simply were not sustainable,” said Dollar. “Funds weren’t being saved back then, and you come to the great recession and our state was in just a horrendous situation. We never really want to be there again.”The 2017 plan is a 3 percent increase over the base budget.