May 27, 2011. RALEIGH, NC -- The state budget debate is coming to a head.  Each week we receive a This Week @ the Capital report from the North Carolina Chamber of Commerce.  Whether you agree or not with the Chamber's position on any legislative measures, the organization's summary is well presented and fairly objective, without seeming to follow either Democratic or Republican rhetoric.

Senate Budget Unveiled

Quick Glance

The Senate Appropriations Committee approved a $19.4 billion budget proposal Wednesday (5/25) after reviewing and rejecting several Democratic amendments. The 376-page document spends $129 million more than the House budget. However, it spends $473 million less than the Gov. Perdue’s spending plan for the next fiscal year. Republicans refuse to extend a temporary penny sales tax and an income tax surcharge scheduled to expire in June. Perdue wants to extend three-quarters of the penny sales tax increase to generate $827 million in revenue for the state. The disparity in spending between the Senate plan and Gov. Perdue’s proposal is primarily a result of the expiring taxes. The Senate is scheduled for the first of two floor votes on May 31.

Tax Package

The Senate tax package reduces the rate for all individual income tax brackets by a quarter-percentage point, dropping the rates to 5.75, 6.75 and 7.5 percent. Additionally, the measure would exempt the first $50,000 of net business income of small and start-up companies whose gross receipts do not exceed $825,000. Sen. Bob Rucho (R-Mecklenburg), co-chairman of the Senate Finance Committee, said that Senate Republicans want to focus on small business, and he estimates the plan could create 15,000 to 20,000 jobs over the next two years. The plan also saves the state an estimated $18 million by repealing the tax deduction for severance wages, the tax credit for recycling oyster shells, the sales tax holiday on energy-efficient appliances, among others.

Education Budget

The education budget remains a large point of contention between Senate Republicans and Gov. Bev Perdue. The Senate budgeted $10.7 billion for education, over $62 million more than the House proposed, which would provide higher spending for public schools and the UNC system. The Senate cut the university system 12.5% versus the House cut of 15.5%. Gov. Perdue allotted $11.2 billion for education and remains concerned about cuts to community colleges and teachers’ assistants included in the Senate plan. The bill seeks to begin reducing class size to the targeted ratio of 1 teacher for 15 students in early grades by hiring over 1,100 teachers. The plan would eliminate funding for teachers’ assistants in all grades except kindergarten, which accounts for 13,000 positions. The Senate budget also includes $1 million to research and develop a performance-based pay model for teachers and $115 million for district school construction. After the Senate approves its budget, House and Senate members are aiming to negotiate differences between their respective budget proposals and present a final plan to Gov. Perdue in June. Perdue said that she will have to veto the budget if it “undermines our schools and fails to protect the quality of our education system.”

Health

In health, the Senate proposal raised concerns over their plan to eliminate Medicaid coverage for an array of optional services including physical, occupational, speech, and respiratory therapy, and would limit dental care to emergency cases, unless the patient is pregnant. These services would be cut mid-2012 according to the budget. The Senate Appropriations Committee rejected an amendment proposed by Democrats to retain some of these services. Additionally, the Senate plan would dissolve the NC Partnership for Children, the central office for Smart Start, and moves supervision of Smart Start to the state Department of Health and Human Services. This act would save the state $5 million. Democrats proposed an amendment against the move arguing that it would impede Smart Start’s ability to raise outside funds; however, this amendment was also rejected.

Transportation

Bridge repair and highway maintenance were top priorities in the Senate transportation budget, while state spending for transit and turnpikes projects was reduced drastically. The plan would eliminate funding for the Mid-Currituck and Garden Parkway toll projects. The $50 million that would be saved in annual appropriations for these two projects would be used replace school buses and help construct urban loop highways. The $41.4 million earmarked over the next 2 years for urban transit would also be eliminated, negatively effecting projects such as an extension of Charlotte’s light-rail service to the UNC-Charlotte campus. Under the Senate plan, the state Department of Transportation would need legislative approval on any federal grant that costs the state more than $20 million in matching capital funds or in annual maintenance and operation costs. The DOT would also have to begin collecting tolls on the four ferry routes that are currently toll free. While the House plan exempts two ferries from toll collections, they proposed increasing toll revenues by $5 million in fiscal 2011-2012 and $7.5 million the following year. The Senate, however, proposes a $2.5 million increase in tolls this fiscal year and $5 million next year. Spending is increased in both the Senate and House plans to replace substandard bridges and to reduce the amount of structurally deficient bridges by 36% and 24% in their respective proposals. Additionally, both the Senate and House proposals use revenue estimates from Gov. Perdue’s budget that includes an approximate 34.2 tax rate for next year. According to a legislative formula that reflects changes in wholesale gas prices, the current state gas tax of 32.5 cents per gallon is expected to rise to 35 to 35.1 cents per gallon by the start of next fiscal year, July 1. While there has been discussion in the legislature about reducing the gas tax or capping it at 32.5 cents per gallon, there has been no action taken on the bills addressing this issue.

Has a Deal Been Reached?

While it seems that a lot of differences exist between House and Senate budgets, on Thursday afternoon, it appears that a compromise to the budget has been reached. However, House budget writers sound more optimistic than their Senate counterparts. In the potential compromise, the Senate would amend its budget plan to include $300 million more, mostly for public schools and also agreeing to some changes by the House budget writers. This additional money has been added at the request of the five House Democrats who voted with the majority in the House budget. Their support is critical to avoid a gubernatorial veto. If this compromise is reached, it would avoid a conference committee budget plan.