Here is a policy decision with long-term implications for education, health, law enforcement, environmental protection, and other functions of state government that deserves more public discussion and debate than was received when the General Assembly approved the 2022-23 budget revisions.
To shore up road and bridge funding, lawmakers diverted 2% of state sales tax revenue — estimated at $193 million for this fiscal year — from the General Fund to the NC Department of Transportation. Legislators intend for the diversion to increase to 4% per year the following year, and then to 6% per year, totaling $628 million per year.
This policy decision violates North Carolina’s longstanding separation between the General Fund and the Highway Fund and its companion Highway Trust Fund. The barrier, though never entirely impermeable, has served to protect schools, community colleges, universities, public safety, prisons, health and social services from being overwhelmed by powerful political forces interested in roads, rails and airstrips to become.
Since the creation of a unified highway system in 1931, North Carolina has followed a user-pays model. The motor fuel tax, freeway use tax, and DMV fees, along with federal funding, now give the state Department of Transportation a $5 billion annual stash. Early last year, the NC First Commission warned that new technologies will snuff out current funding streams and that the state should prepare to spend $7 billion a year over the next decade.
“We are entering a new era marked by dramatic population growth and seismic technological, social and environmental disruptions in the transport sector,” says the Commission. “…More fuel-efficient vehicles, sales of electric and hybrid vehicles, and changes in mobility and travel will reduce the number of gallons sold and exacerbate inequalities over who pays a fair share of using the state’s roads.”
As “long-term modernization”, the Commission identified options such as a “mileage-based user charge”, extended tolls and public-private partnership projects. More directly, the commission proposed to increase the sales tax while reducing the motor fuel tax and transfer the revenue from the sales tax on vehicle rentals and other transport-related goods and services from the General Fund.
The legislator has not increased sales tax. Instead, as commentator John Hood noted, the legislature chose the revenue transfer option.
The sales tax diversion also ties into a decades-long stream of tax cuts in General Fund revenue streams — a core element of the Republican-majority government agenda. Since 2013, lawmakers have lowered both corporate tax rates and personal income tax rates, with more in the pipeline, shifting the burden of overall revenue growth in a way that favors the wealthy more than the middle class and poor.
North Carolina’s corporate tax rate has fallen to 2.5%, the lowest in the country, and is on track to drop to zero by 2025. The state has switched from a tiered personal income tax that previously ranged from 6% to 7.5% to the ability to pay a flat “flat” tax that is expected to decrease from 4.99% to 3.99% after 2026. Overall, the tax cuts will have reduced the General Fund’s annual revenue by as much as $6 billion.
A combination of circumstances gave the General Assembly stronger-than-expected revenue growth for the current two-year fiscal cycle — nationwide pandemic relief, a relatively quick recovery among well-paid North Carolinians, legislative action to expand sales tax to more services and entertainment, and a court ruling over collection of Taxes on out-of-state sales. The state was inundated with unexpected funds.
Of course, unless reversed or replaced, tax cuts will last beyond the fiscal cycle in which they take effect – and beyond the larger-than-expected surplus. Legislation’s diversion of sales tax revenue to the Department of Transportation carries more than a small risk of playing key public goods off against one another. As tax rates fall and diversions rise this decade, the combined momentum is pushing the General Fund of Revenues to address such persistent shortcomings, as the Census Bureau’s most recent report ranked North Carolina 47thth in expenditure per student in relation to personal income.
To maintain its status as one of the nation’s megastates, North Carolina must strive for both a modern transportation system and world-class schools, colleges, and universities. The state needs a solid public debate on how to fund its transportation networks and education systems, which serve as the basic, albeit distinct, infrastructure on which the state’s economic performance and the quality of life of its citizens depend.