Senate Budget Uses NC Revenue Boon On More Tax Cuts, Capital

North Carolina Senate Republicans unveiled a two-year state budget proposal Monday that sticks to earlier spending limits even with recent news of a massive revenue windfall. They instead earmark billions more now for savings, with plans for deeper tax cuts and more construction projects to follow the rest of the decade. 

The measure also offers pay raises and one-time bonuses to public school teachers and state employees, although the permanent raises fall short of what Democratic Gov. Roy Cooper proposed in his budget in March. 

The bill, which is expected to pass through the chamber by Friday, seeks to spend $25.7 billion in state funds in the year starting July 1 and $26.6 billion the following year, in keeping with a spending cap that senators settled on with House Republicans this month. However, state economists predicted last week that the state would have $6.5 billion more at its disposal over the next two years above and beyond what was anticipated, beginning with an extra $1.9 billion in state coffers by June 30. 

But senators say they're committed to the cap — otherwise concerned that much of the cash influx attributed to a resurgent post-pandemic economy can't be counted on in the long term to pay for permanent initiatives.

"We're in the best fiscal shape here in North Carolina in a generation," Senate leader Phil Berger said at a Legislative Building news conference. "Our budget philosophy is working, and we're going to continue to follow that philosophy."

Instead, the Senate measure injects over $3.8 billion more into the state's rainy-day emergency fund, reaching a record $5 billion by mid-2023. Another $3 billion would go to the state's capital improvement fund as part of a 10-year, $12 billion construction plan for public schools, university buildings and other government agencies. Projects include an upgraded East Carolina University medical school, more North Carolina Zoo exhibits and a relocated Department of Health and Human Services headquarters still in Raleigh. 

Senate Republicans also updated their already disclosed tax plan that would cut the individual income tax rate from 5.25% to 4.99% and increase standard deductions next year. The new plan within the budget would further reduce the rate in annual increments to reach 3.99% in 2026. The current 2.5% corporate rate still would continue on its downward trajectory in 2024 and be eliminated in 2028. Revenues lost due to tax reduction or savings don't count toward the spending caps.

Democratic legislative leaders criticized the Senate Republican plan for an unwillingness to spend more on immediate education and health care as the pandemic ebbs. 

The Senate would offer 1.5% annual raises for two years for state employees and similar average increases for teachers, with one-time bonuses ranging from $1,000 to $1,800. Cooper proposed average annual raises of 5% for teachers and 2.5% for state employees, not counting bonuses. Senators also would set a $13-per-hour minimum wage for K-12 school workers like janitors and cafeteria workers, compared to Cooper's $15 offer. 

Tamika Walker Kelly, president of the North Carolina Association of Educators, called the 1.5% annual raises "pitiful." 

The Senate's 426-page budget measure marks the next step in passing a budget, which is usually the most substantial legislation approved each year. The House likely will pass its own version next month, followed by negotiations between the two chambers on a final plan that will go to Cooper's desk.

No such comprehensive bill was approved in 2019 or 2020 as Cooper and Republican legislators got stuck following a Cooper veto. Legislators and Cooper have talked up finding more consensus this year.

"This is not going to be the final budget," Berger said about Monday's proposal. 

Cooper said in a news release that "real budget negotiations" are needed because for a shared economic recovery "we must invest in education, health care, child care and tax cuts for those who need it, not tax breaks for corporations and people making more than $200,000 per year."

The budget bill also decides how $5.1 billion more federal coronavirus relief funds will be spent. There would be $1 billion in cumulative grants to businesses and nonprofits that struggled during the pandemic, $1 billion for local water and sewer projects and $700 million to expand rural broadband. Federal funds also are being spent for $1,500 bonuses to health workers who worked with COVID-19 patients.

The bill would provide Medicaid benefits for new mothers until 12 months after delivery, compared to 60 days. As previously announced, Republicans won't try to expand Medicaid to cover more adults through the 2010 federal health care law, which Cooper has sought for years. 

The proposal also would create a new Cabinet-level Department of Adult Correction, breaking it out of the Department of Public Safety. There was a stand-alone correction agency until 2012.