Should Lawmakers Use the Budget Surplus to Refund Taxpayers? | Eastern North Carolina Now

    Publisher's note: The author of this post is Joseph Coletti, who is Senior Fellow for the John Locke Foundation.

    Only four House Democrats refused to sign a letter pledging to uphold Gov. Roy Cooper's budget veto. That is three fewer than the seven Democratic votes needed to override and pass the budget. Cooper himself continues to tour the state campaigning for Medicaid expansion, his minimum requirement for a budget deal.

    With Democrats all but officially closing the door on a budget deal (they still claim to want "everything on the table" in negotiations) Senate President Pro Tem Phil Berger has begun "thinking about how we can provide a refund to the taxpayers of the state of North Carolina."

    This raises three fundamental questions. How much could be returned? How much could you get? Is a refund even a good idea?

    How much could be returned?

    Revenues came in $897 million ahead of budget, $254 million more than expected as recently as May. Agencies spent $287 million under budget, compared to an expected $275 million in the Joint Conference Committee bill. After including other reserves and commitments, the opening balance for the current fiscal year is $1.7 billion. In addition, budgeted revenue is $1.0 billion more than continuing appropriations, including debt service. That leaves $2.7 billion in cash through June 2020 that will not be spent without a new budget.

    The final Conference Committee budget committed $887 million to savings and capital projects. Keeping money available to meet those commitments next year would still leave $1.5 billion available. Legislators left $730 million of that unreserved and ready to be used for emergencies or next year's budget. That would leave $770 million unaccounted, which is just $20 million more than the amount taken from savings last fall in response to hurricanes Florence and Michael. Based on this, one could make a case against any refund.

    At the other end, one could also argue for a refund of the entire $2.7 billion in unappropriated cash balance and new revenue. More often, casual conversation and meaningless speculation have considered refunding the $900 million revenue surplus. Another line of thought would consider refunding the $266 million in extra revenue and reversions since May's estimates.

    How much could a taxpayer receive?

    Refunds could be paid to every household or every income tax filer and could be based on the size of the family in 2018, recognizing that every person directly or indirectly pays taxes with every dollar they earn or spend, or it could be paid a dollar basis, with more going to those who paid more in taxes. Each approach would have its own distribution characteristics.

    North Carolina was home to 10.4 million people in 2018 and roughly 4.2 million full-year resident tax returns filed, of which 900,000 likely had no tax liability. Another 400,000 part-year residents and 100,000 non-residents filed an income tax return.

    An unlikely approach would be to pay a flat amount to each of the 4.2 million taxpayers. Distributing $266 million to them would result in a $66 refund, climbing to $80 if it were limited to those or 3.3 million people with any tax liability. This would benefit single people and married people filing separately more than heads of household and married people filing jointly. It could also leave out people who had no income tax liability, even though they paid sales taxes and other taxes to the state.

    Providing refunds based on the amount paid in income tax would be very distributionally regressive, with more than half of taxpayers each receiving $25 or less of $266 million while top earners would each receive $1,000 or more. This could be made slightly more distributionally neutral by factoring in an estimate for sales taxes paid based on income, but the effect would be barely noticeable.

    If the state returned a set amount for each of North Carolina's 10.4 million residents, the refund would be between $25 (at $266 million) and $260 (at $2.7 billion) per person, but the amount would grow as the size of a household grew, so a family of four could receive between $100 and $920. This would be the most distributionally neutral way to handle a refund and the easiest to understand.

    Is it a good idea?

    The logic of returning money to taxpayers is intuitively obvious when the state has $2.7 billion just sitting idle. In addition, most of the operating changes are a few percentage points or pay for a fixed number of people. It is difficult to argue that holding this money to spend next year will be as effective as if it had been spent this year. Hiring two people a year from now will not have the same impact as hiring one person now who could work through next year. Once the calendar turns, the extra money does no good.

    Savings and capital spending do not have the same limitations. Construction and major repairs or renovations that would have been done this year will still be needed next year. Money is no less saved if it is in cash balance than if it is in the Savings Reserve, though it remains more readily available until it is transferred to the Savings Reserve.

    Arguably, the best use of the surplus, as with any one-time bonus, would be to save it so that North Carolinians do not face higher taxes and fewer services during the next recession. Saving money would also leave open the possibility of reaching an agreement on a budget plan for the current year. Offering a refund to taxpayers, which could be thought of as a dividend for their investment in state government, would accept the steadfast demands of House Democrats and Gov. Cooper for Medicaid expansion at face value. There is no middle ground between them and Senate Republicans opposed to Medicaid expansion. Maybe an offer to refund taxpayers is just the kick needed to get things going.

    There are worse things the state could do with the money.
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