When defending their pay-as-you-go statewide school construction plan, Republican legislators sometimes appear perplexed. Why don’t their critics like a plan that promises to devote more money to buildings, with cash available more quickly, and at a lower overall cost than a bond package?
There’s a relatively simple answer. It focuses more on tax rates and government spending than details of school construction needs.
Most Republican legislators have adopted an unwavering opposition to raising tax rates. They have chipped away at personal and corporate income tax rates substantially since 2013. Even in years when they have not lopped off a portion of the tax rate, they have removed income from taxation by raising the zero tax bracket.
It should surprise no one, then, that Republican lawmakers looking to devote roughly $2 billion to school construction would seek an option that’s least likely to lead to a future tax increase. Some see a statewide bond referendum as a viable option. Others view the additional debt tied to a bond as a significant threat to future tax rates.
In contrast, most Democratic critics maintain no fundamental devotion to preserving or lowering existing tax rates. Instead they focus on the importance of maintaining or increasing current levels of government spending. They often describe their goal as increased “investment” in state priorities.
Some, but not all, advocate higher tax rates today. However they view current rates, they are less likely than Republican colleagues to fear a future of mounting government costs, including higher debt obligations. When forced to decide between raising tax rates and cutting government costs — reducing investments, in their words — their choice is easy.
When assessing options for state subsidies of local school construction, they are more likely to prefer the option that builds on existing state spending levels. A bond package fits with that mindset.
The competing views about taxes and spending surfaced during last year’s debate over a state constitutional amendment. It was designed to reduce an existing cap on state income tax rates. Voters had the chance to drop the cap from 10% to 7%. With an existing personal rate of 5.25% and a corporate rate set to fall to 2.5%, the amendment had absolutely no impact on the existing tax structure. Still, it generated plenty of debate.
Some fiscal hawks grumbled. Their original proposed amendment would have lowered the cap to 5.5%, virtually guaranteeing no future personal income tax hike. A gap of 0.25 percentage points between the current and maximum rate is about as close to shutting the door on future tax hikes as the state is likely to see.
Instead the GOP legislative caucus compromised on a 7% rate cap. That new maximum rate would permit a future General Assembly to raise the personal income tax rate by 33% and the corporate rate by 280%.
Even with that amount of leeway, most Democratic lawmakers objected. They didn’t want to lower the rate cap at all. They complained that a lower cap would limit the General Assembly’s options in a future time of crisis. Without saying so directly, the amendment’s critics essentially argued that North Carolina would need one day to raise income tax rates higher than 7%.
An advocate of low, stable tax rates never would consider that option. It makes sense only to those who prioritize government spending over keeping tax rates in check.
This brings us back to the legislature’s pay-as-you-go plan for school construction. It’s based on the relatively new State Capital Infrastructure Fund. That fund gets 4% of state tax revenue, plus one-fourth of any unreserved money left over from the prior year’s budget. Lawmakers also can choose to devote more money to SCIF beyond those minimum requirements.
Republican legislative leaders want to use SCIF instead of a bond to fund the state’s portion of a projected multibillion-dollar school construction bill. More than half of the $1.3 billion now available to SCIF pays for debt service on existing state bonds. But a growing percentage of SCIF proceeds can cover new construction in future years as the state retires its debt. The compromise state budget deal spells out a multiyear SCIF-funded construction plan.
By the time money connected to a November 2020 bond vote would be available for use, SCIF already would have funded four years of K-12 and community college projects. The amount of money available would top $600 million for public schools alone.
Not only is money available more quickly through SCIF — supporters say the total amount of funds available for school construction would be higher. Plus the state could avoid $1 billion or more in interest payments tied to a bond.
It sounds like a win for everyone concerned — unless you focus on the other items that 4% of state tax revenue could be funding today.
In the eyes of Gov. Roy Cooper and many of his Democratic colleagues, SCIF raids or robs the current budget. It diverts money from other “investments” to pay for construction projects that ought to be funded instead through new debt.
Rather than dedicate 4% of existing state tax proceeds to high-priority construction projects, critics want to keep that money flowing to lower-priority items. At the same time, they believe the state should take out new loans to permit additional spending for the new construction. If increased spending ends up outpacing revenue in future years, there’s no problem. The state can raise tax rates. For the children, of course.
That idea will appeal to few fiscal hawks. But it does align well with the views of those who prioritize government spending over keeping tax rates low.
As Republican lawmakers recognize the fundamentally different approach most Democratic colleagues take toward taxes and spending, the SCIF scuffle will start to make more sense.John Locke Foundation Perspective