June 1, 2021
The legislature continued the slow pace that it has taken since the May 13 crossover deadline. Much is in limbo as the House and Senate have been unable to reach common ground on a budget spending target. For the last several years, the two chambers have reached an agreement on a spending target before they each wrote their own budget, which makes a compromise budget much easier to attain. The two chambers are currently around $500 million apart, with the House wanting to spend more than the Senate. According to custom, the Senate is to start the budget process this year, but Senate leadership has indicated that it does not wish to proceed with a budget until a common number is reached.
Going against tradition, the House is moving forward with the budget process, scheduling preliminary hearings this week in key budget areas. Speaker Tim Moore has said that the House has a constitutional duty to put forward a budget and that his chamber will eventually pass one. Senate Leader Phil Berger is less optimistic about the state getting a budget this year. North Carolina has not had a new full budget since 2018, when the Democrats gained enough seats to sustain a veto. Many are expecting the state to rely on mini budgets again this year, where spending items are broken up into small, subject-specific bills. The state’s fiscal year ends on June 30, but under a 2016 law, the state will continue operating on its previous budget if a new one is not enacted before the deadline.
Senate Finance Package
The Senate unveiled a broad sweeping tax reform bill last week, seeking to drastically lower taxes and eliminate some altogether. The bill comes with a $2.16 billion reduction in collections over the next five years, with $644 million in fiscal year 2021-22 and $1.45 billion in fiscal year 2022-23.
Part one of the bill establishes the JOBS Grant Program aimed at helping businesses that received forgivable state or federal loans as part of COVID-19 recovery efforts, most notably, the federal Paycheck Protection Program (PPP). Currently, North Carolina allows businesses to exempt forgiven PPP loans from income for tax purposes, but businesses cannot deduct business expenses paid for by PPP loans. The federal government allows businesses to deduct those expenses, and North Carolina is one of a few states not conforming to this decision. The Senate’s plan does conform to the federal code on this issue but uses the JOBS Grant Program to award grants to businesses that received COVID-19 loans. The Senate’s plan is also broader than just PPP loans and covers all state or federal loans related to COVID-19. Grants would be calculated by multiplying a business loan by 7.5% but would be capped at $250,000. Therefore, no grant could be larger than $18,750 per COVID-19 loan.
The JOBS Grant Program will be funded with $1 billion of federal stimulus money that the state received under the American Rescue Plan. However, with an award limit of $18,750, many businesses are arguing for the House approach on PPP loans since their tax liability is often larger than the maximum award amount.
Part two of the bill contains numerous tax cuts, which Senate leadership claims is the right thing to do, given the state’s current budget surplus. Senate Finance Co-Chairman Paul Newton echoed a common talking point used to argue for tax cuts, claiming that when the state takes in too much money, then it is obligated to give it back to the taxpayers. Democrats argue that the extra revenue should be used to fill needs across the state that have gone unmet for years. Senator Newton, on the other hand, claims that the state can afford to do both tax cuts and fund needs.
The tax cuts include a reduction of the personal income tax from 5.25% to 4.99%, and the standard deduction in all filing classes is raised by an average of 18.5%. The childcare tax credit is also increased, and the cutoff income level is raised from $120,000 to $140,000. The bill phases out the corporate income tax by .5% a year, starting in 2024. This will eliminate the corporate income tax in 2028. The franchise tax will be reduced by eliminating the book value and 55% appraisal basis for calculating the tax base, and the state will rely solely on net worth.
Part three of the bill contains the IRC update, which is an annual provision where the state chooses which sections of the federal tax code for conformity.
Part four of the bill contains recommendations from the Revenue Laws Study Committee, which are largely administrative and technical in nature. The bill also includes a provision to eliminate transfers from the Highway Fund to the General Fund and a provision to move $1.4 billion from the General Fund to the Savings Reserve (Rainy Day Fund).
Of note, the bill does not contain a provision that the House included in its PPP tax plan to exempt Unemployment Insurance benefits from taxable income. The Senate Finance and Appropriations Committees approved the bill last week, and the bill is expected to receive a floor vote this week.
Federal American Rescue Plan Funds
Lawmakers are debating how to spend the nearly $5.7 billion the state will receive over the next two years as part of the federal American Rescue Plan (ARP). Last week, the House approved The G.R.E.A.T. Broadband Expansion Act, which would use a large portion of that money to expand broadband across the state.
The bill allocates $350 million in ARP funding to the State’s Growing Rural Economies with Technology (GREAT) program, which has for several years focused on expanding broadband in Tier 1 and 2 (lower income/population) counties and certain areas in Tier 3 (wealthier) counties. The Program awards grants to private service providers to expand access to underserved areas.
The legislation also creates a second GREAT program called Creating Access to Broadband (CAB). The CAB program will work very similarly to the GREAT program but will provide grants to counties which partner with private providers to expand broadband. The program will work under a matching funds ratio of 35% State, 35% county, and 30% private formula in most circumstances. Counties will use their ARP funds for their match. No county will be allowed a total match greater than $4 million under the bill. The bill would allocate $400 million in future ARP funds to the CAB program.
2021 Session Laws
So far, 26 bills have become law this session. Click here to see these new laws.
List of All Filed Bills: https://www.ncleg.gov/Legislation/Bills/WithAction/2021/10