In a press conference Monday afternoon, Republican state senators presented a state budget proposal they say is grounded in North Carolina’s strong fiscal position after a decade of prudent budgeting. The Senate proposes returning a portion of surplus revenues to taxpayers and advancing needed capital infrastructure projects in their version of the two-year budget.

Senate leaders said they expect to pass the budget proposal by the end of this week.

Under the Senate plan, North Carolina’s personal income tax rate would be cut again, falling from 5.25% to 4.99% next year and 3.99% by 2026. The proposed rate reduction would lead to a tax rate less than half as high as the top rate in place during much of the 2000s, when Democrats controlled the legislature and held the governor’s job. The top tax rate reached higher than 8.25% under Democrats. Since taking control of the General Assembly, Republicans eliminated the state’s multitiered tax system. They also have cut income tax rates consistently since 2013.

The Senate’s proposed 2021-23 budget also sets in motion a 10-year, $12 billion cash infrastructure and capital plan, including $3 billion in cash over the next two years for projects.

“Smart fiscal policy has allowed North Carolina to be in a much better position than many other states – and this balanced budget proposal is proof,” said John Locke Foundation President Donald Bryson. “Taxpayers are not a limitless bank where lawmakers can casually make withdrawals.”

“The Senate recognizes that state government revenue flows from the fruit of taxpayers’ labor,” Bryson added. “The N.C. Constitution guarantees citizens the right to the fruits of our labor, so government should take as little of that money as possible. It’s great to see that senators are looking beyond their initial proposal. They want to see the tax rate drop below 4%. If their plan succeeds, prudent conservative fiscal leaders will have cut the income tax rate nearly in half since 2013.”

“This proposal is a win for every taxpayer, including teachers and other state employees,” Bryson said.

As previously reported by Carolina Journal, the Senate budget will include the chamber’s tax reform and reduction plan. Along with the rate reduction, the plan increases the zero-tax bracket from $21,500 to $25,500 for married filers, taking more than 200,000 North Carolinians off the tax rolls completely.

“A decade of responsible budgets and growth-oriented tax policy has North Carolina in the best fiscal shape in a generation,’ said Senate Leader Phil Berger, R-Rockingham, in Monday’s press conference. “This surplus came largely out of the pockets of North Carolina citizens, and they deserve to see some of it returned to them.”

The state Senate’s budget plan also provides for a 3% raise for teachers and state workers over the two years and $1,500 one-time bonuses for all teachers and state employees who make less than $75,000 annually. Those who make more would get a $1,000 bonus.

Corrections officers would get more, with an average 7% raise, depending on experience level.  These would be the first raises any state employees have seen in two years after Gov. Roy Cooper vetoed the state budget last year.

Earlier this month, top lawmakers concluded weeks of negotiations with an agreement to a top-line spending number of $25.7 billion in 2021-22 and $26.7 in 2022-23. That’s a spending increase of 3.45% in the first year of the biennium and 3.65% in year two. The 2021-22 budget year starts July 1.

“Our budget helps North Carolinians by reducing taxes for all citizens and supporting critical infrastructure improvements across the state,” Sen. Brent Jackson, R-Sampson, said Monday.

Senators already voted June 9 to approve most elements of the tax plan. The 36-14 vote featured eight Democrats joining Republicans to support the tax bill.

Bill sponsors say that a family with two children earning $38,000 annually would get a 50% tax cut under this bill, while a family earning $200,000 would see a 7.1% cut. N.C. households earning the median income of $54,000 would enjoy a 21% decrease in their state taxes.

Senators also would phase out the state’s 2.5% corporate tax rate by 2028 and change the way companies calculate their franchise tax burden.

“A decade of smart governance means we’re now in a position to use cash, not debt, to improve North Carolina’s infrastructure — while simultaneously cutting taxes,” said Sen. Kathy Harrington, R-Gaston.

In addition to the budget and tax cut plan, the Senate’s proposal spends $3 billion over the next two years on capital and infrastructure projects. That money is part of a larger 10-year, $12 billion “cash” plan tied to the Senate’s budget.

“Improving infrastructure and cutting taxes will continue to attract families and businesses to North Carolina,” Sen. Ralph Hise, R-Mitchell, said.

A pay-as-you-go approach to capital projects sets the Senate apart from Democratic Gov. Roy Cooper. His March 24 budget plan called for a $4.7 billion statewide bond package. Rather than using cash on hand, Cooper would ask voters to approve borrowing money for building projects.

Less than a week after the Senate approved its standalone tax bill, lawmakers learned that N.C. state government had collected $6 billion more than expected in taxes.

Funding for the following projects is included in the Senate’s proposed budget, according to Senate leaders.

Budget Highlights

  • The total proposed General Fund allocation is $25.7 billion in 2021-22 and $26.6 billion in 2022-23.
  • The total allocation of State Fiscal Recovery funds is $5.1 billion across the biennium.
  • The total State Capital Infrastructure Fund allocation is $4.3 billion over two years, $3 billion of which is available for projects (while $1.3 billion is obligated to pay for previous debt).
  • It replenishes the state’s reserves, including the Rainy Day Fund.

Capital/Infrastructure

  • Fully funds the UNC System’s repairs and renovations request over the next four years, with $500 million allocated this biennium.
  • Provides $400 million to state agencies for repairs and major renovations.
  • Funds construction of the Brody School of Medicine with $76 million. The total authorized cost of the project is $215 million.
  • Provides $55 million for N.C. State University’s new STEM building. The total authorized cost is $80 million.
  • Funds the UNC-Pembroke Health Sciences Center with $32 million. The total authorized cost of the project is $91 million.
  • Provides $64 million over the biennium to Elizabeth City State University for a residence hall, sky bridge, dining facility, and flight school. An additional $20 million to complete the flight school is also authorized.

Tax Cuts

  • Increases zero-tax bracket to $25,500.
  • Cuts the personal income tax rate from 5.25% to 3.99% by 2026, starting with 4.99% in 2022.
  • Increases the child tax deduction by $500 per child.
  • Otherwise mirrors the tax plan that previously passed the Senate.
  • A family of four earning the median household income would see a 37% income tax cut.

Salaries and Benefits

  • 3% raises over the biennium for most state employees, including teachers and UNC/community college employees.
  • Creates a new experience-based salary schedule for correctional officers, which results in an average 7% raise.
  • Bonuses for all state employees using federal funds: $1,500 for state employees who make less than $75,000, and $1,000 for state employees who make more than $75,000. Law enforcement, correctional officers and staff, and 24-hour residential or treatment facility employees receive $1,500.
  • Gives an additional across-the-board teacher bonus of $300 from repurposed state funds previously appropriated for performance bonuses that cannot be paid due to COVID-19 related data issues.
  • Gives an across-the-board additional principal bonus of $1,800 previously appropriated for performance bonuses that cannot be paid due to COVID-19 related issues.
  • Provides a $13 minimum wage for noncertified employees in local public schools and community colleges.
  • Fully funds retirement and state health plan, and appropriates $300 million to the State Treasurer to pay down unfunded retiree benefits.
  • Uses $100 million of federal funds to provide a $1,500 bonus for eligible direct care workers who have worked on the front lines throughout the COVID-19 pandemic. An additional $17.5 million will be used to increase direct care worker wages.

K-12 Education 

  • $10.4 billion in 2021-22 and $10.5 billion in 2022-23, which represents an additional half-billion dollars in state dollars to public school education.
  • $40.9 million each year for school psychologists, which includes an additional $9.8 million to ensure that every school district has at least one psychologist.

UNC System

  • Fully funds UNC building reserve request of $54.9 million over the biennium.
  • Fully funds NC Promise tuition program at $137 million over the biennium.
  • Consolidates two scholarship programs for students with special needs into the North Carolina Personal Education Student Account for Children with Disabilities Program, and fully funds the program by adding $15.6 million per year.
  • Increases the University of North Carolina Need-Based Financial Aid Program by 5%.
  • Funds N.C. A&T doctoral programs with $11 million over the biennium.
  • Fully funds the NC School of Science and Math Morganton campus so it can open in 2022.
  • Expands eligibility and increases funding for the Opportunity Scholarship program by $76.8 million.

Community Colleges

  • Funds community college system at $1.26 billion in 2021-22 and $1.32 billion in 2022-23.
  • Allocates $76 million in federal funds to stabilize community college budgets due to enrollment declines.
  • Provides $15 million in federal funds to improve broadband access for 25 rural community colleges.
  • Increases the Community College Need-Based Assistance Program by 7.5%.  Information Technology
  • Allocates nearly $700 million in federal funding for rural broadband, plus $30 million over the biennium using state funds, to the NC GREAT program.

General Government

  • Allocates a combined $21.4 million for organizations to assist victims of domestic violence, sexual assault, and human trafficking.
  • Provides $4 million in additional funds to Scholarships for Children of Wartime Veterans, bringing the total program amount to $21.8 million over the biennium.

Justice and Public Safety

  • Allocates $10 million for testing of new rape kits and clearing the state’s rape kit backlog.
  • Funds a $16 million grant to keep 150 victim services coordinators in district attorneys’ offices across North Carolina.
  • Funds the creation of use-of-force database and officer discipline and decertification database.

Health and Human Services

  • Allocates almost $40 million of federal funds across the biennium to long-term care facilities that care for low-income residents and residents with developmental disabilities.
  • Fully funds critical projects for the state to transition Medicaid from a fee-for-service system to one in which insurance companies are fully responsible for managing the health care needs of Medicaid patients.
  • Extends full Medicaid benefits for eligible postpartum mothers from 60 days to 12 months beginning April 2022.

Once the Senate votes and passes its budget proposal, the House will study the Senate plan and offer its own version. A conference committee of appointed budget negotiators from both chambers will draft a final plan. Both chambers will vote on that plan, then send it to the governor for his approval or veto. Cooper has vetoed every budget sent to the executive branch since 2017 during his tenure as governor. If a budget is not signed, and if lawmakers fail to override a veto, state law establishes that the previous year’s budget continues to remain in effect.