Building on transformational reforms begun in 2011, North Carolina’s elected leaders continued changes in 2015 to curtail spending, instill fiscal responsibility, rein in regulations, improve education, make government open and accountable, and create the best possible conditions for economic growth. This year’s work was all about making North Carolina economically stable, North Carolinians independent, and our state First in Freedom.
Building on transformational tax reforms of 2011 and 2013, the 2015 reforms reduce the personal income tax rate from 5.75 percent to 5.499 percent beginning in 2017, and the corporate income tax rate falls to 4 percent (the lowest of any state that imposes a corporate tax). In addition, the standard deduction increases by $500.
Deductions for medical expenses and charitable contributions are unlimited. Due to 2015 reforms, taxpayers will keep more than $2 billion of their own money over the next five years. Combined with 2013 reforms, North Carolinians will pay over $4 billion less in state taxes.
The $21.7 billion General Fund budget for 2015-16 increased spending by just 3.1 percent — less than the combined rate of inflation and population growth. Even with a $450 million surplus in revenue, legislators and the governor resisted powerful special interests urging them to spend more. Fiscal discipline and respect for taxpayers won the day.
More than $600 million went into savings accounts, building toward reserves of $1.6 billion to deal with natural disasters, a downturn in the economy, or other unforeseen expenses. And those reserves create a safety net guarding against future tax increases.
A $216 million diversion each year from the Highway Fund to the General Fund stops. Coupled with a long overdue revision to Division of Motor Vehicles fees, the state will now have a reliable, steady stream of funding to pave roads, shore up bridges, and relieve congestion based on data and need, not political favors. Finally, highway funds will build and maintain highways.
A new Internet portal will function as a one-stop information disclosure site for state agencies, cities, counties, and local school districts — all online, easy to find, sort and decipher, featuring monthly updates on budgets and expenditures. North Carolina leads the way for government transparency.
Nearly four decades of taxpayer-subsidized special treatment for Big Solar ends Dec. 31, 2015. From 2010 to 2014, these credits amounted to a $224 million haul for the solar industry at the expense of everyone else. The 35 percent state tax credit will not be extended. Lower energy costs fuel a strong economy.
Through an opportunity scholarship voucher of up to $4,200 per year, income-qualified parents of kids whose education needs aren’t being met by a traditional classroom can attend the private school of their choice. Funding is available for 4,400 low-income students next year. In addition, special-needs students are eligible for an $8,000 per year voucher to attend the best school to meet their needs. During the 2015-16 school year, nearly 1,600 low-income and 770 special-needs students received scholarships.
Spending is up
K-12 education spending is up almost $470 million for 2015-16, with $66 million in additional funding for digital learning, textbooks, and supplies. The General Fund expenditure per student is $7,920, above the national average of $5,806.
North Carolina spends a greater percentage of tax revenues on higher education than any other state.
Taking care of teachers
To attract the best and brightest, new teachers will make at least $35,000 per year, a $2,000 increase in first-year pay. All other teachers received a “step” increase between $3,000 and $35,000 annually and a $750 bonus.
The average salary and compensation package for a teacher on a 10-month contract is now $60,000, nearly $5,000 higher than the year before.
Overall, teachers received a 24 percent increase in their compensation package during this period. The average teacher will receive over $15,600 in benefits during the current school year.
From 2009-14, 8,500 teachers chose to come to North Carolina to teach. During that same time, 2,194 teachers resigned to teach in another state. Teachers are not leaving in droves. More teachers are choosing to come to North Carolina from other states.
Fixing what’s broken:
Medicaid, the health insurance and health care provider for 1.9 million North Carolinians, has long been plagued by massive cost overruns and concerns about how to achieve better health outcomes. Reforms moving to a hybrid of provider-led and managed care systems will encourage better-quality care through a closer relationship between doctors and patients, more predictable costs, and less risk to taxpayers.
A fairer and simpler tax code makes a big difference. But for many people, the biggest impediment to starting or expanding a business is an oppressive regulatory burden. Reform has been attempted many times, but this group of elected leaders is doing something about it. Their reforms:
• forbid state environmental agencies (but not the legislature) from imposing rules that are more stringent than federal environmental regulations.
• offer guiding principles for new state rules.
• require cost estimates for many kinds of rules.
• require that at least two alternatives be proposed alongside any proposed rule with “substantial economic impact” (i.e., a projected economic impact of greater than $500,000).
• apply sunset provisions with periodic review to state regulations.
Since mid-2013, North Carolina employers have added 234,000 net new jobs, a 5.8 percent growth rate, higher than the 4.9 percent national average and 5.2 percent regional average.
Per-capita income has grown 3.6 percent. Over the most recent 12-month period, North Carolina ranked ninth in the nation in the rate of employment growth and 10th in per-capital income growth.
The state unemployment rate is now 5.7 percent, down from 9.7 percent in December 2011. Previously discouraged North Carolina workers have been returning to the labor market at far higher rates than the national average during the past few months.
Because North Carolina has paid off its unemployment insurance debt to the federal government and built its trust fund back up to above $1 billion, employers of all sizes benefit. Payroll taxes will automatically drop by $300 million this year and $250 million next year.
Reforms have catapulted North Carolina from No. 44 to No. 15 in the Tax Foundation’s State Business Climate rankings.
Employment is growing in every sector except government. The size of government is actually shrinking while construction, professional and business services, and all other sectors are growing at 2 percent or more.
General Fund revenues faced a $650 million shortfall for the 2011 state budget cycle, with a $450 million shortfall in 2013. In 2015, there was a $446 million surplus. Combined with unspent funds reverting to the state treasury, the overall budget surplus topped $860 million. Through October 2015, General Fund revenues are running nearly $400 million above what they were at the same time last year and about 1 percentage point above the consensus revenue forecast for this year.
We are clearly on the right path. This year’s reforms have moved North Carolina closer to full employment, economic stability, and greater opportunity for all. North Carolina has become a regional and national model. But this is no time to rest on our laurels.
To promote further economic growth, the next phase of tax reform should focus on eliminating business-to-business taxation and removing taxation of investments. The tax on capital gains should be repealed, phased out, or reduced. Business expenses should be fully deductable when incurred rather than on a depreciation schedule.
Recognizing that children are a valuable investment, the per-child tax deduction should be increased, or — as an alternative — the standard deduction should be increased.
To ensure health care costs are low and quality care is accessible, certificate-of-need laws must be repealed.
North Carolina ranks No. 43 among the 50 states in the regulatory burden of occupational licensing. Reining in licensing requirements will ensure that people willing to work hard will have every opportunity to succeed and will be free to pursue their dreams.
Subsidies, whether for targeted industries, favored companies, special carve-outs or government-funded bribes, have no place in a fair, market-driven economy. They should be shunned by the business community, not tolerated by taxpayers, and rejected by smart leaders.
Building on previous reforms, 2015 saw great progress toward economic recovery and growth. 2016 holds great promise for even more improvement, moving North Carolina closer to being First in Freedom.
Becki Gray (@beckigray) is Vice President for Outreach for the John Locke Foundation.