June 7, 2021
For the first time since the May 13 crossover date, the General Assembly returned to a normal pace, with the Senate holding votes Tuesday through Thursday and the House of Representatives holding votes Wednesday and Thursday.
Slowing both chambers’ progress is the continued impasse over the state budget. The leaders of both chambers have yet to reach an agreement on a total spending number, and the Senate believes it is unwise to move forward until a unified number is reached. The chambers have typically started their budget processes with the same spending numbers with the goal of making conference negotiations much more manageable.
Based on legislative tradition, the Senate was supposed to start the budget process first this year. However, with the end of the fiscal year less than a month away and no Senate Budget in sight, the House has decided to move forward with its budget proposal. House Speaker Tim Moore has stated that his chamber feels that they have a constitutional duty to put forward a budget and plan to do so. House Appropriations subcommittees began holding hearings this week, and leaders expect to have a full proposal on the floor for a vote in the next two weeks.
Based on reporting, the two chambers remain several hundred million dollars apart on their spending target, with the House wanting to spend more than the Senate. Senate President Pro Tempore Phil Berger has indicated that the budget may have to be split into smaller pieces if an agreement is not reached. The state has not enacted a new budget since 2018 and relied on this tactic of mini budgets for the last few years due to budget disagreements between the legislature and Governor Roy Cooper. Under a 2016 law, the state can continue to function based on the spending levels outlined in its most recently-passed budget if a new budget is not enacted.
DEQ Secretary Confirmation Fails
Earlier this year, Governor Cooper tapped Dionne Delli-Gatti to serve as Secretary of the Department of Environmental Quality (DEQ). The post became vacant when former DEQ Secretary Michael Regan left to head the federal Environmental Protection Agency (EPA). This week, the Senate committee responsible for vetting Delli-Gatti for her position made a recommendation not to confirm her, and the Senate adopted that recommendation on Thursday. Democrats expressed opposition to the process underway by committee leaders during the committee hearing, calling the confirmation a “sham” and claiming that the majority’s denial of her confirmation is part of a political conspiracy theory.
In 2016, the General Assembly enacted a requirement for Senate confirmation of cabinet secretaries, citing their power under Section 5 of the State Constitution. This section states that “The Governor shall nominate and by and with the advice and consent of a majority of the Senators appoint all officers whose appointments are not otherwise provided for.” Cooper is the first governor to lead under this law but has not had a cabinet secretary-nominate denied until Delli-Gatti.
Senate Republicans who opposed Delli-Gatti’s confirmation stated that her answers during the committee hearing demonstrated a lack of knowledge of natural gas and petroleum pipelines and were the reason for their denial of her nomination. They cited the recent cyber-attack on the Colonial Pipeline and the state’s gas shortage that followed as a reason to make pipeline and energy infrastructure policy a high priority. Additional reference was made during the confirmation hearing of DEQ’s recent decision by DEQ to deny permits for the Mountain Valley Pipeline (MVP), which would have carried natural gas across Virginia into North Carolina. Senator Paul Newton, a former Duke Energy executive and current Chair of the Joint Legislative Committee on Energy Policy, has stated that the pipeline was crucial to protecting North Carolina from future energy supply issues by adding redundancy to our system. In contrast, Democrats have encouraged more emphasis on cleaner energy technologies.
While Delli-Gatti is the first cabinet secretary nominee to have their confirmation fail, she will remain in the Cooper administration. Shortly after the Senate vote, Governor Cooper announced that she would serve as his Clean Energy Director. John Nicholson will serve as DEQ’s Interim Secretary until the Governor nominates another permanent secretary.
House Unemployment Insurance and Back-to-Work Plan
Last week, the House approved a bill requiring the state to withdraw from the Federal Pandemic Unemployment Compensation (FPUC) program, which gives individuals on state unemployment an extra $300 a week. Supporters of the bill expressed concerns that the increased benefits have discouraged recipients from returning to the workforce, even as the economy has continued to rebound from the COVID-19 pandemic. Numerous businesses, especially those in the hospitality and service industries, continue to experience labor shortages and high numbers of vacant jobs, causing some of them to close or reduce operations.
Currently, the extra $300 in FUPC monies a week is paid for by federal funds and the Department of Commerce reports that 240,000 North Carolinians citizens are receiving the assistance. Ending these benefits would result in North Carolina receiving $75 million less a week in federal funds, or roughly $500 million for the remainder of the program. Some economists worry that forgoing this extra money will hamper the state’s economic recovery since less money leads to less spending.
The bill also includes previous House-passed tax provisions coupling the state to two federal pandemic-related tax provisions. The first would allow businesses to deduct expenses paid for with federal Paycheck Protection Program (PPP) loans, which are currently taxed at the state level but not at the federal level. The second allows individuals who received unemployment insurance to deduct the first $10,200 from their taxable income. The Senate has already expressed opposition to both of these changes, so the bill’s future remains unclear.
This bill also seemed likely to receive a veto from Governor Cooper until an amendment introduced on the House gathered some Democrat support. The amendment appropriates $250 million of federal stimulus funds to the childcare subsidy program. Supporters claim that this will solve individuals’ inability to return to work because they cannot afford childcare while their kids are out of school for the summer.
While not supportive of the House’s proposals, the Senate has taken a different approach to get people back to work, recently passed a bill that would offer individuals a $1,500 bonus check for taking a job and keeping it for six months. This payment would be paid for with federal money; however, concerns have been raised that this approach would require federal authorization.
Senate Finance Package
Last week, the Senate unveiled a broad sweeping tax reform bill that focuses on drastic reductions in taxes and eliminating some. The bill would result in a $2.16 billion reduction in collections over the next five years, with $644 million coming in the fiscal year 2021-22 and $1.45 billion in the fiscal year 2022-23. In addition to these cuts, the bill includes four main parts.
Part one establishes the Jobs Grant Program, aimed at helping businesses who received forgivable state or federal loans as part of COVID-19 recovery efforts, such as through the federal Paycheck Protection Program (PPP). Currently, North Carolina allows businesses to exempt forgiven PPP loans from income for tax purposes, but companies 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 House recently passed a bill that would conform to the federal code and allow those expenses to be deducted. The Senate’s plan does not conform to the federal code but instead uses the Jobs Grant Program to award grants to businesses that received these loans. The Senate’s plan would include PPP loans and all state or federal loans related to COVID-19. The grants would be calculated by multiplying the business’ loan by 7.5% with a $250,000 cap, setting the highest grant allowable at $18,750 per COVID-19 loan.
Under the bill, grants would be awarded in three phases. The first phase would require the Department of Revenue (DOR) to automatically identify eligible businesses that received loans before June 30, 2021, and award grants by September 30, 2021. The second phase will have an October 1, 2021, to November 19, 2021 application period, and grants will be paid on a rolling basis. If funds remain, the third phase will have a January 1, 2022, to February 18, 2022 application period, and grants will be awarded on a rolling basis.
The Jobs Grant Program will be funded with $1 billion of federal stimulus money that the state received under the American Rescue Plan. With the Jobs Grant Program limiting awards to $18,750, many businesses argue for the House approach on PPP loans, since their tax liability is 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 Chairman Paul Newton echoed a common talking point used to argue for tax cuts, claiming that when the state takes in too much money, it is obligated to give it back to the taxpayers. Democrats expressed that any extra revenue should be used to fill needs across the state that have gone unaddressed for years. Senator Newton claims that the state can afford to do both tax cuts and fund needed projects.
The tax cuts include a reduction of the personal income tax from 5.25% to 4.99%. The standard deduction in all filing classes would be increased by an average of 18.5%, while the childcare tax credit is also increased, and the cutoff income level is raised from $120,000 to $140,000. The bill will phase out the corporate income tax by .5% a year, starting in 2024, eliminating the corporate income tax by 2028. The franchise tax will be reduced by removing the book value and the 55% appraisal basis for calculating the tax base. Moving forward, the state will rely solely on net worth for tax calculations.
Part three of the bill contains the Internal Revenue Code (IRC) update, an annual provision where the state chooses sections of the federal tax code to conform to the state law.
Finally, part four includes recommendations from the Revenue Laws Study Commission, which are primarily administrative and technical. The bill also has a provision to eliminate transfers from the Highway Fund to the General Fund and move $1.4 billion from the General Fund to the Savings Reserve (Rainy Day Fund).
The bill does not contain a provision that the House included in their tax plan to exempt Unemployment Insurance benefits from taxable income. The Senate Finance Committee and Appropriations Committee approved the bill last week, but it has yet to receive a floor vote.
2021 Session Laws
So far, 27 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
2020 Summary of Substantive Legislation
The Legislative Analysis Division has published the 2020 Summary of Substantive Legislation, which breaks down new laws by subject matter. Below is a link to the document: https://www.ncleg.gov/Legislation/SummariesPublication/Subjects/2020/