State Government


Finally, the State Has a Budget to Start the Year

By Steve Tuttle

For the first time in three years, school systems across the state will open their doors later this month knowing exactly how many teachers they can have on the payroll. Local governments know to the penny the appropriations they can expect from Raleigh, and state agencies know what program budgets they will implement.

That’s because for the first time in three years — and even then just barely— the General Assembly adopted a budget before July 1, the start of a new fiscal year. Gov. Mike Easley signed the legislation into law on June 30 after House and Senate leaders resolved a six-week impasse during a rare weekend session. With the clock ticking away on the old year, the governor at first threatened to veto the budget compromise but backed down as a government shutdown loomed.

The $14.747 billion final budget is about 7 percent higher than last year’s $13.8 billion spending plan but it’s actually the smallest of three earlier versions crafted by legislators and the governor. It’s $607 million below the one the governor submitted to the General Assembly on March 5. It’s $182 million less than the budget passed by the House on April 17 and $301 million less than the budget passed by the Senate on April 30.

The budget delays the sunset on two taxes for two years — the additional half-cent state sales tax and the 8.25 percent top state income tax rate on wealthy individuals. It allows two middle-class tax breaks to take effect as scheduled — a child tax credit and an increase in the standard deduction for married couples. The budget gives state employees small raises — 1.8 percent for teachers and a one-time $550 bonus for other state workers, plus 10 days vacation, that together will cost $132 million. Plus, the budget earmarks $96 million for teacher performance bonuses.

In another year of tight finances, education fared better than most in the state budget and will receive $8.488 billion — or about 58 cents of every tax dollar. Gov. Easley’s two educational initiatives received additional funding. The More at Four preschool initiative received $8.6 million in additional money. The plan also provides $25.3 million for his plan to reduce class size. There was no money appropriated for the One North Carolina Fund for economic development.

Near the end of the budget drama, Easley warned he would veto the legislation because he said overly-optimistic revenue projections left it $421 million out of balance. The compromise spending plan assumes the state’s economy — and therefore its tax revenue — will grow 3.5 percent in the year ahead and 5.5 percent in the second year of the biennium. Many believe the economy will grow about 3 percent in the second half of this year and about 3.75 percent next year.

The way Easley ran the numbers, the higher growth estimates would leave the state $118.9 million in the red by this time next year, and $420.8 million down in two years. But he backed away from his threatened veto when legislators handed him a fig leaf in the form of legislation that, among other things, specifies he is free to tap the $150 million the budget earmarks for the rainy day fund to close the anticipated revenue gap.

Everyone in Raleigh breathed a sign of relief that the looming government shutdown would not occur, and legislators weary from the two-month budget impasse began assessing how quickly they could go home.

The budget assumes the state will collect about $13.03 billion in taxes during the year that began July 1, plus $788 million in non-tax revenue. Changes in tax law enacted during the session should generate another $877 million during the year. Together, that should produce $14.939 billion in revenues to spend, and the budget signed into law by the governor spends all but $163 million of it.

The rainy day fund gets $150 million infusion and $50 million goes to the repairs and renovations fund.


Onerous Provision Struck from Tax Reporting Bill
Sometimes the best offense is a good defense, which NCCBI chief lobbyist Leslie Bevacqua demonstrated recently. She was paying attention when the Senate passed an administrative bill intended to help the state Department of Revenue gather information on how state revenues would be impacted if North Carolina allowed corporations to file consolidated returns. But Bevacqua was astonished at how much information the state thought businesses should submit.

A provision in the bill required companies who have affiliates outside the state to disclose those financial numbers as well as the numbers for the N.C.-based company. The provision also targeted entities operating in tax haven countries. As written, the provision would require, to the extent a taxpayer is a member of a consolidated federal group, that the taxpayer include with its North Carolina return the gross receipts, cost of goods, total income, deductions and federal taxable income before net operating losses reported on the affiliated group’s federal consolidated return.

Taxpayers also would be required to provide, among other things, the numerator and denominator of the property factor, payroll factor, and sales factor and whether the member files a North Carolina return on a separate entity basis.

Bevacqua assembled several other business lobbyists and they fanned out around the House when the bill arrived there. Their strong arguments led the House to vote 93-24 to strike the provision. The amended bill was returned to the Senate which concurred with the final version.

“We realized these additional tax reporting requirements would be burdensome on many businesses, and we worked hard to get it changed,” Bevacqua said after the House vote. “I’m very happy we accomplished this for NCCBI members because we saved them a lot of time, expense and red tape.” 


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