Local governments feel impact of tax, budget decisions in Raleigh

Jun. 15, 2014 @ 10:56 AM

Local communities across North Carolina are already feeling the impact of recent tax policies and budget decisions made by state policymakers. A recent news article in the Greenville Daily Reflector quotes a Pitt County commissioner as lamenting with disapproval that “the state is pushing off on local governments what they should be funding.”

And indeed, the tax plan passed by lawmakers and Gov. Pat McCrory last year results in self-imposed budget challenges today that will continue for years ahead. These challenges, in turn, will result in continued state funding cuts to core public investments that serve as the foundation of economic prosperity.

While critics and other observers rightfully note the state’s net revenue loss under the tax plan, that masks something important that happened when policymakers overhauled the tax code. The tax plan passed last year shifts responsibility for funding core public investments to local governments, in part, by recapturing some of the shared revenue from state sources that went to local governments to help them meet their obligations.

One example of this shift was the decision to repeal and eliminate the allocation of a portion of corporate income tax revenue dedicated to the School Capital Building Fund (SCB Fund). This fund was created in the late 1980s to assist local governments in meeting their public school building capital and technology equipment needs. Prior to the tax change last year, a portion of revenue generated from the state corporate income tax went to the SCB Fund. That practice ends under the new tax plan. Over the next five years, this tax change takes away $382 million from local governments who used the revenue to improve education facilities in their communities.

Accounting for this funding taken from local governments results in a net cost of $2.4 billion over the initial five years under the tax plan. However, the total cost of the tax plan, without efforts to offset it with money that traditionally went to local governments, is far greater – $512.8 million in FY14-15 and to the tune of $2.8 billion over its first five years.

Shifting revenue that would otherwise have gone to the SCB Fund to the state’s General Fund is not new revenue -- it’s simply taking money from one bucket (local governments) and putting it in another (the state’s General Fund). Local school systems also receive a portion of revenue generated from the state-sponsored lottery games to help meet school capital building needs. No additional lottery funding is included in proposed budgets for FY 14-15 to replace the funding that is no longer available via the SCB Fund.

Local governments will likely face even greater budget challenges given actions taken by state policymakers during the current short legislative session. McCrory recently signed a law that eliminates the existing local privilege tax, which results in around $63 million in less revenue annually for public investments in cities and counties across the state.

Local governments are increasingly challenged with finding revenue in other places (increasing local property tax rates, for example), reducing the level of services provided to residents, or a combination of both in response to recent tax policies and state budget decisions made by state policymakers.

Simply put: At a time during which North Carolina should be increasing its commitment to core public investments and rebuilding the damage brought on by the Great Recession, state leaders have chosen a path that threatens the health, safety, economic vitality and quality of life of local communities across the Tar Heel state.

North Carolinians should look for their local governments to continue to endure more and more struggles of this kind for years to come in providing core public services unless and until state leaders reverse course on these key tax policy issues.

Cedric Johnson is a policy analyst at the North Carolina Budget and Tax Center.