Prosperity Watch Issue 52, No. 2: Senate measure runs counter to North Carolinians’ values

North Carolinians value a quality education for every child, a vibrant main street, safe communities and a healthy environment for their families. Many of North Carolina’s investments over the years reflect these core values. But a policy proposal approved in committee by the North Carolina Senate last week would make it increasingly difficult for the state to live out its residents’ values by putting decisions about spending and taxes on autopilot. The proposal includes three measures that would limit the ability of policymakers to follow the people’s will while accelerating massive cuts to key services that support a thriving economy that works for everyone.

Senate Bill 607 would undermine the foundations of the North Carolina economy and make our current challenges much worse by enshrining a suite of extreme changes into the state constitution. These bad policy ideas include:

  • A rigid, arbitrary, and fundamentally flawed formula for spending on key services like education and health. It would require a 2/3rd majority vote of legislators to override this formula.
  • A cap to the income tax at 5 percent, which would significantly reduce the resources available to run our schools and invest in other priorities while also making investments in roads and other infrastructure more expensive.
  • Restricting access the state’s rainy day fund - the Emergency Savings Reserve Fund - by requiring a 2/3rd majority vote of legislators. This would make it much harder for lawmakers to use this fund during recessions as it was intended to protect funding for schools and other critical services.

These amendments to the constitution would harm the economy every day, making it harder and harder to pay for schools, higher education, and other investments that underpin our economy. By failing to make the investments needed to position the state to compete and innovate, the flawed spending formula and income tax cap will restrict our ability to grow new industries, capitalize on efficiencies in technology or the delivery of services and build the human capital necessary to grow.  And limiting access to the rainy day fund in times of emergency leaves North Carolina without a fallback when the next recession hits.

If the spending formula had been in place beginning in 1992, when the only state, Colorado, to have such limits implemented it, North Carolina would have experienced massive and permanent annual losses of revenue and many of our most valued investments of the past two decades would have been impossible to make. For example:  

  • A top notch early childhood education program that reaches North Carolina’s kids in all 100 counties and the establishment of pre-Kindergarten programming.
  • A water and sewer line system that serves rural communities and thousands of homes.
  • A workforce training system and targeted economic development that supported rural communities and small towns as they addressed the decline in manufacturing

In fact, 15 percent of the public investments made since 1992 would not have been possible under the restrictive and flawed formula that allows only for population plus inflation growth, failing to take into account changing demographics such as a growing senior population or costs that increase faster than inflation like health care.  In good times and bad times, North Carolina’s investments would have been arbitrarily constrained well below what would have been possible. This type of damage is why Colorado chose to suspend their spending formula.

The impact over the past twenty years would have been even worse in combination with the proposed constitutional cap on the income tax rate at 5 percent. Fewer dollars would have been available to pay for high quality schools, roads and bridges and community economic development to ensure the economy works for everyone in our state.

Looking forward, the cap on income taxes at 5 percent, below the current low and flat personal income tax rate of 5.75 percent, would result in at least $1.5 billion less annually for the state to invest in education, health care and economic development. And given current revenue projections, the flawed spending limit along with the income tax cap would result in an estimated $2 billion in resources lost to pay for those same services. In the end, state and local policymakers would have to make more harmful cuts or increase the sales tax or property tax, which make our tax system less fair, or both.

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