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Thanks to Tax Cuts, Large Budget Shortfalls Loom in North Carolina

Tax cut proponents claim that North Carolina’s tax cutting is a model for other states looking to boost their economies, but the state has not performed particularly well economically compared to its neighbors since the tax cuts took effect and those cuts have put North Carolina on a path to serious fiscal instability.

North Carolina since 2013 has enacted tax cuts that will cost $3.5 billion a year, or 15 percent of the state’s general fund budget, once they take full effect in 2019. This massive revenue loss has yet to cause budget shortfalls, mainly because the tax cuts aren’t yet fully in effect, the governor and legislature have left funding for schools and other services well below their levels before the Great Recession hit a decade ago, and the economy is relatively healthy. But large shortfalls loom in North Carolina’s future.

The legislature’s budget experts project that the state will avoid shortfalls through the upcoming 2019 fiscal year, but will face major fiscal challenges after that, when more of the tax cuts are scheduled to kick in even as funding needs for schools and other services continue to rise. They project that North Carolina will face a structural shortfall of $1.2 billion in 2020, rising to $1.4 billion two years later. (See chart.)

Faced with such large shortfalls, the state will have a choice: cut funding for state services such as schools, health care, and transportation projects, or reverse course and repeal the tax cuts. (The state also could draw on “rainy day” funds, but those funds — which require a supermajority in the legislature to access — are a one-time source of revenue that the state will need when the next recession hits and state revenues fall as a result.) Funding cuts would be particularly painful because the state already has deeply cut funding for core services. For example, state per-student funding for K-12 and higher education is down 7.9 percent and 15.9 percent, respectively, in inflation-adjusted terms since the Great Recession. The funding cuts have made it very hard for North Carolina to improve its low teacher pay and low per-pupil spending, and reverse sharp increases in college tuition.

Kansas, which like North Carolina faced large budget shortfalls after enacting deep income tax cuts, reversed course last year, repealing major parts of the earlier tax cuts in hopes of restoring fiscal stability.

Click on the following links for other recent posts explaining how North Carolina’s tax cuts