House and Senate Republican leaders unveiled a long-awaited budget compromise Monday that eliminates controversial cuts while reducing income taxes and expanding sales taxes.
The $21.74 billion spending plan would restore funding for teacher assistants, driver’s education, historic preservation tax credits and a tax deduction for medical expenses – items that had been on the chopping block this year.
The bill also includes cuts to personal income tax rates and additional sales taxes on services that aren’t currently taxed. Overall, House Speaker Tim Moore said the changes will result in $400 million in “tax relief.”
As part of the compromise, local school districts will lose the flexibility to use teacher assistant funding for teacher positions and other programs – a change the House had opposed. The Senate also won its bid to kill tax credits for renewable energy projects, including solar.
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Senate leader Phil Berger noted the legislature’s delay – more than two months – in reaching a budget deal after the last fiscal year ended June 30. “Yes, it has taken us longer than we would have liked,” he said. “We’re concerned about the length of time, but the more important thing is that we get it right.”
Moore and Berger hadn’t previously provided details of the deal, saying they wanted to inform Republican legislators before the public. Republicans hold nearly two-thirds of the seats in the General Assembly. And the bill still wasn’t scheduled to be released until Monday evening, they said. The only information provided by Monday afternoon was in a 30-minute news conference hosted by Moore and Berger.
Senate leaders plan to hold the first vote on Tuesday – meaning rank-and-file senators will have less than one day to read a complex spending bill that reportedly spans 500 pages. That timeline drew strong criticism from Senate Minority Leader Dan Blue, a Raleigh Democrat.
“This process has been an absolute disgrace to the taxpayers of this state,” Blue said in a news release. “Legislators and the public alike will have less than 24 hours to read and digest a final budget that is expected to be well over 500 pages, and will drastically affect the livelihood of the state over the coming two years. With all negotiations taking place behind closed doors, one has to wonder what the budget writers are hoping to hide from the public.”
Moore said the budget has had plenty of time for review because most provisions were in either the House or Senate budget bills. “We’ve tried to air a lot of these provisions out there and made sure there was time for ample public input and discussion,” he said. “That’s one thing that we’ve tried to highlight in this budget: transparency, openness and input.”
Several House Democrats were on the official “conference committee” set to negotiate the deal, but they weren’t involved in the talks until a meeting Monday afternoon. According to Rep. Duane Hall of Raleigh, Moore asked the Democrats to sign on to the agreement, but none did.
House Republicans discussed the details in a three-hour private caucus meeting Monday morning. Rules Chairman David Lewis said he’s confident that enough Republicans will vote yes to ensure the budget passes the House. Eleven GOP House members voted against the original budget in May, citing concerns about industry-specific tax credits and other provisions.
“I actually feel we’ll get more Republican votes on this budget than we did on the first one,” he said.
House members will have more time than their Senate counterparts. The chamber’s rules require the budget agreement to be public for 72 hours before a vote, which means the first House vote can’t happen until Thursday. Lewis said the House could reduce that waiting period to two days, but won’t suspend the rule if Democrats object.
The legislature has a Friday deadline to pass a budget or extend the temporary budget that has kept government running at last year’s spending levels since the new fiscal year began July 1. Even if the bill is finalized this week, this year’s budget will be the longest-delayed spending plan since 2002.
“If it passes and goes immediately to the governor, then he’d need to sign it almost immediately to keep state government running,” said Rep. Chuck McGrady, a House budget writer.
And over the weekend, McCrory told The Associated Press that he doesn’t want major tax changes included in the budget bill. He voiced concerns about new sales taxes on services – something Senate leaders proposed earlier this year.
“This is reopening a new tax scheme and redistribution scheme behind closed doors” at the end of the session, McCrory told the AP. “Let’s vote on them separately.”
Lewis said he was surprised McCrory took issue with the sales tax change. “There’s nothing in this bill that wasn’t in the 2013 tax reform House package that he supported, so I don’t understand what’s changed now,” Lewis said.
In a statement Monday, McCrory spokesman Josh Ellis said the governor thanked legislators for their work. “The governor and his team will thoroughly review the proposal to ensure it is fiscally responsible and aligns with our state’s priorities in key areas that the governor has championed including job creation, education, healthcare and transportation,” the statement said.
Berger said the tax changes represent an overall cut. “What you’ve got to do is look at the overall package, and the overall package represents a net tax cut,” he said.
The tax plan: The budget’s tax change would continue a Republican-led shift from income taxes to more sales taxes.
The personal income tax rate would drop from 5.75 percent to 5.499 percent in 2017. And the standard deduction would increase, meaning a married couple filing jointly wouldn’t owe income taxes on the first $15,500 in income starting next year.
Those cuts would be partially offset by new sales taxes on repair, maintenance and installation services. The plan wouldn’t tax veterinary visits, pet grooming and advertising as an earlier Senate proposal called for.
State revenue has been “overly dependent on income taxes,” Berger said. “When we had problems with the overall economy, that’s when we saw those wild swings” in revenue.
Senate and House leaders also agreed to restore a tax deduction for medical expenses. Eliminating that deduction in previous tax legislation had prompted an outcry from seniors. The budget deal would allow taxpayers of all ages to use the deduction without any caps.
Funding rural needs: A Senate proposal to shift sales tax revenues from urban to rural counties has been drawing fire for months, and Berger said Monday that the formula for distribution won’t change this year.
But he said the budget will include efforts to boost rural counties’ revenue to help them with school and economic development projects. He said that will come from a “formula for distribution of certain funds” and won’t result in less money for urban counties. But he declined to provide further details.
“It’s a fairly complicated mechanism, probably a little more complicated than I can explain in the next 15 minutes,” he told reporters.
Raises and benefits: State employees and teachers would each get a $750 bonus this year, less than the 2 percent raise in the original House budget. Starting pay for teachers would increase from $33,000 to $35,000.
Highway Patrol members and correction officers would get raises, and the budget would also create a fund for targeted raises for hard-to-fill and hard-to-retain positions.
DMV fees, road money: House leaders approved a Senate proposal to halt the use of gas tax funds to pay for the Highway Patrol in order to increase state spending for highway construction and bridge and road maintenance.
The agreement ends the annual transfer of $216 million from the Highway Fund to the General Fund.
Both chambers had proposed increases of 25 percent to 30 percent in the fees collected by DMV for everything from driver’s licenses to car and truck registrations – enough, in the Senate proposal, to generate an additional $77 million a year for the Department of Transporation. It would be the first DMV fee increase since 2005.
The original Senate proposal would raise the cost of an eight-year driver’s license from $32 to $40, and the annual car registration renewal from $28 to $34.
The new budget also was expected for the first time to set aside funds each year for capital improvements at the state’s two ports in Wilmington and Morehead City.
Historic tax credit returns: Despite initial objections from the Senate, the budget deal includes funding to restore tax credits for historic preservation projects.
McCrory’s administration had lobbied hard for the credit, touring downtowns throughout the state and highlighting its role in revitalization.
The new credits would pay property owners less than the original program, with an expected annual cost to the state of $8 million. The available credit would be larger in the state’s poorest counties.
Renewable energy tax credits: In a victory for the Senate, the agreement cuts credits for solar and other renewable energy projects – despite efforts from McCrory and House leaders to extend them another year.
McCrory’s budget had called for letting solar credits expire because the industry had “matured,” while keeping other renewable credits. The House wanted to keep both.
Internet in schools: Rep. Craig Horn, a Weddington Republican and education budget committee chairman, said the budget funds $2 million this year to expand broadband connectivity in public schools. The state House had proposed $12 million. He expects the state will still be able to use federal money and bring the total to $60 million.
The budget includes about $26 million for textbooks and “digital resources,” Horn said, bringing total spending to $60 million.
The House had proposed $48.3 million for textbooks and digital instructional materials in its budget for this year.
Medicaid overhaul: The budget spends $225 million over two years to transform Medicaid from the system where the state pays for every doctor’s visit and procedure to a per-person payment. Although details on how the money would be spent were not available Monday afternoon, Sen. Louis Pate, a Mount Olive Republican, said the money would be used to “stand up the new entity and keep the existing entity going.”
A separate bill that would transform the Medicaid program calls for statewide commercial Medicaid managed care companies to operate alongside regional Medicaid health plans offered by hospitals and providers.
The state now contracts with Community Care of North Carolina, networks of doctors, to manage Medicaid patients’ care. The budget would allow CCNC to continue to operate until 2017, Pate said.
Rep. Chuck McGrady, a Henderson County Republican, tweeted that the budget does not eliminate CCNC.
Staff writers Bruce Siceloff, Lynn Bonner and Taylor Knopf contributed
What’s in the budget deal?
▪ Teacher assistants
▪ Driver’s education
▪ Personal income tax rate cut to 5.499 percent
▪ New sales taxes on repair and maintenance services
▪ Funding to overhaul Medicaid
▪ Historic preservation tax credits
▪ $750 state employees bonuses and raises for state troopers and correction officers
▪ Higher Division of Motor Vehicles fees