NC public schools could lose billions under proposed state tax cuts, governor's office says

Personal income tax cuts proposed by the North Carolina Senate are broader than previous tax cuts and put at risk the government’s future ability to provide services for a growing population by a few billion dollars, Gov. Roy Cooper’s office said Friday.

Revenue losses could impact education the hardest; school leaders report staffing shortages and the need for more money to attract applicants and expand services.

The biggest line item in the state’s budget each year is public K-12 education, which accounts for more than $11 billion. Combined with the state’s university and community college system, education spending makes up most of the budget. The biggest revenue source for the state is personal income taxes.

“These tax cuts could really damage that stable and predictable source of funding that our schools rely on,” Geoff Coltrane, Cooper’s senior education adviser, told reporters in a call Friday.

Cooper’s office predicts an annual revenue loss of $13 billion for the state by the 2030-31 fiscal year, about 19% of the state’s current general fund, State Budget Director Kristin Walker said. That would result in a $2 billion annual loss to public schools and a $680 million annual loss for higher education.

Walker’s estimate factors in population growth and other economic factors that could contribute to additional tax revenue.

Lawmakers are negotiating the possible expansion of legalized gambling in the state. Walker said potential offsetting revenue from expanded gambling in the state would be unlikely to offset much of the $13 billion loss, perhaps generating only $1.5 billion. Money spent at casinos — where it would go toward gambling taxes — could draw away from sales tax or North Carolina Education lottery proceeds, both of which benefit education.

The state Senate and the state House of Representatives have each proposed personal income tax cuts in their budgets this legislative session, indicating that tax cuts of some kind are likely to pass.

The proposals from each chamber, however, are significantly different. The House budget proposes smaller cuts and implementing safeguards that would prevent taxes from going down if revenue ever became a concern.

Tax cuts have been a top priority of Republican lawmakers since they took over the majority of the General Assembly more than a decade ago. They’ve passed tax cuts of varying kinds, including personal income and corporate income tax cuts.

Republicans argue cuts will spur economic growth, leading to higher sales tax revenue or higher salaries that would shore up personal income tax revenue. State revenues have continued to rise, though it’s unclear what they might have been had taxes not been cut.

Democrats have long expressed skepticism toward tax cuts and argued changes to the tax code have benefitted wealthier residents more than others and hurt rural governments. They also argue that current funding is too low already, so the state should do more than simply protect current funding levels.

Walker said tax cuts in previous years have affected revenues less because of a growing economy in North Carolina and worldwide since the Great Recession. She’s concerned about economists’ projections that an economic slowdown could be in the nation’s near future.

Some prior tax cuts also coincided with a broadened sales tax that could boost sales tax revenues, she said, and the current proposed tax cuts don’t include a plan to offset revenue losses.

What’s being proposed

House and Senate leaders say the tax cuts are currently the main obstacle in their stalled budget negotiations.

The Senate’s proposed tax cut package would accelerate and more than double the cuts that are already scheduled to take effect over the next seven years.

House leaders continue to express concern that the proposed cuts would leave the state with too little revenue to meet its obligations in coming years.

Speaking to reporters Thursday, House Speaker Tim Moore said the two chambers still have “some pretty big differences” on the issue.

“Where the friction is on the tax cuts in the out years, what the tax cuts are projected to look like, say four years from now, five years from now,” Moore said.

Moore, R-Cleveland, noted that tax cuts put into law by one legislature can be repealed or modified by a later legislature. However, that would be politically unpalatable for Republican lawmakers.

He said the House is negotiating for “triggers” that would keep the scheduled tax cuts from going into effect if revenue falls below a certain level.

“We're trying to look at the modeling,” Moore said. “What are the projected revenue numbers that we would need to hit to fund the SCIF, which is the state capital infrastructure fund, [and] to grow at least at a TABOR rate, which is the rate of inflation and the rate of population growth?

“We should be either getting close to a resolution or an impasse, one of those two things,” Moore concluded. “Hopefully we get it done. We're going to get it done right before we get it done quick.”

Senate Leader Phil Berger, speaking to reporters later Thursday, would only say that negotiators have yet to reach agreement on “certain tax aspects.”

“There’s movement,” he said of the budget talks. “There’s no resolution.”

However, Berger, R-Rockingham, said an impasse is “unlikely.”

“I just don’t think we’ve gotten to the point where our thinking is we’re not going to get a budget deal,” he said.

The impact on education

Public schools in North Carolina are mostly funded by the state. Constitutionally, the state is charged with funding education, while counties are charged with funding school and administrative buildings.

Traditional public school systems enroll nearly 1.4 million students, while public charter schools enroll more than 100,000 students.

According to Cooper’s office, a loss of $2 billion annually for education is equivalent to services for about 180,000 students with disabilities, about 11,000 teaching assistants and thousands more school support professionals, such as counselors and psychologists.

Any loss in revenue and spending for education would likely affect every school system, including those in major cities.

North Carolina’s school funding model favors schools in lower-income areas more than most states’ models, with funding adjustments for lower-income areas and small-county schools. That’s resulted in per-student spending that can be higher in less-populated counties than it is in major cities, where counties raise more funds from local property taxes to add staff or other resources and raise pay. Still, even major metropolitan school systems, often seen as wealthy, have less money to spend on their students than most of the rest of the state.

Democrats favor expanding school funding for all public schools under the comprehensive remedial plan agreed to in the nearly 30-year-old lawsuit, Hoke County Board of Education vs. State of North Carolina.

That lawsuit, commonly known as Leandro, has resulted in judicial findings that the state is not meeting its constitutional obligation to provide a “sound basic education” for all North Carolina children.

The remedial plan calls for at least $4.5 billion more in annual education spending by 2027, as well as numerous policy changes related to school turnaround and accountability. Spending would go toward efforts such as higher funding for students with disabilities and expanded early childhood education.

Republicans have balked at the plan and argue a court can’t tell lawmakers how to write their budget. They’ve favored smaller raises for staff than Democrats have and parental school choice. That includes a proposal to expand funding for private school vouchers to more than $500 million by 2030.