Why are N.C. Republicans Brawling Over the State Budget?

When House lawmakers showed up to vote on their budget proposal on May 21, they were met with support from an unusual ally and a threat from an unexpected enemy. 

Club for Growth, an influential D.C.-based conservative group, threatened to pull support from any House Republican who backed the budget. Democratic Gov. Josh Stein, meanwhile, publicly endorsed House GOP leadership’s proposal, giving Democratic lawmakers cover to support the two-year spending plan.

In the end, all 66 Republicans present and 27 of the chamber’s 49 Democrats backed the bill—an unusual level of bipartisan support compared to recent years. House Republicans brushed off the threats from within their party, saying they had produced a responsible bill.

“I’ve been here 11 years. I’ve gotten a few threats over my career, and I’m still here,” said GOP Rep. Donny Lambeth of Forsyth County, the House’s top budget writer. 

But the vote infuriated many Senate Republicans, who said the House bill would undo tax and spending agreements they’d made years ago.

Lawmakers entered this session of the General Assembly optimistic that a changing of the guard from House Speaker Tim Moore to Destin Hall could yield a smoother relationship between the House and Senate GOP and get a budget passed on time. Yet as lawmakers return to Raleigh this week after the Memorial Day hiatus, Republicans are preparing for a rough month or more of negotiations over a spending plan.

Ralph Hise, a Mitchell County Republican and the Senate’s lead budget negotiator, isn’t hopeful the two sides will be able to strike a deal by the time the fiscal year ends on June 30. If they don’t, state government operations and recurring spending will continue at existing levels.

“I’ve never gone into a conference process feeling like we were further apart than we are at this point,” Hise said. “It starts with renegotiations of things with settled budgets years ago.”

Testy Over Taxes

Before unveiling their proposals at the start of a new session, both chambers are supposed to agree on how much they plan to spend, but how to get there is left to each chamber. Tax cuts are perhaps the biggest point of contention between the House and Senate plans this year.

Stein has called for lawmakers to pause their planned tax cuts for individuals and corporations amid financial uncertainty and an approaching fiscal cliff. 

In the 2021 state budget, lawmakers agreed to reduce the corporate income tax rate from 2.5 percent to 2.25 percent starting this year. The rate would then drop to 2 percent in 2026 and 2027, 1 percent in 2028 and 2029, and zero thereafter. Neither the House nor the Senate budget proposals changes that agreement.

But the individual tax side is another story. North Carolina’s current personal income tax rate is 4.25 percent. Under a 2023 budget compromise, the tax rate is slated to drop to 3.99 percent in 2026 and 3.49 percent in 2027.

The House and Senate agree on 3.99 percent for next year, but Republicans are divided on whether subsequent tax cuts are appropriate in light of weaker projected revenue and looming budget deficits. 

The House proposal would leave the 3.99 percent tax rate in place through 2027 unless the state hits a more ambitious revenue target (which it’s not on track to achieve). The Senate wants to go forward with the planned reduction to 3.49 percent.

Senate leaders and outside groups have accused House Republicans of pushing for a tax increase.

“More money out of the pockets of North Carolinians as a result of tax policy sounds like a tax increase to me,” Senate leader Phil Berger said last month.

The Senate budget proposal seeks to accelerate tax cuts, dropping the personal income tax rate to 2.99 percent in 2028, regardless of how much the state takes in. Tax rates would then drop further if revenue targets are hit, potentially as low as 1.99 percent.

Hall said the House budget wouldn’t raise taxes and includes breaks the Senate version doesn’t have. The House proposal calls for the first $5,000 in tipped wages to be exempt from income tax, which would mean up to $200 in savings for tipped workers. The bill also would restore the state’s back-to-school tax holiday and increase the standard deduction.

“Every year, we hear it from the other side and both chambers that we couldn’t be more far apart,” Hall said. “And we somehow always find a way to get it done.”

The stakes in this year’s budget negotiations are high, as nonpartisan analysts have projected the state to reach a roughly $2 billion annual shortfall starting in the 2027-28 fiscal year. Recent estimates revised the state’s anticipated revenue in the coming years down by about $620 million, compared with their February forecast. After the 2027 tax cuts kick in, revenue is projected to dip in the 2026-27 fiscal year.

“I have never seen a situation where the revenue is less in the second year of the biennium than in the first,” State Budget Director Kristin Walker said earlier this year. “Truly, you have to go back to the Great Recession. … This is unprecedented. We’ve not sat down to prepare a two-year budget where there’s less revenue in the second year than in the first.”

Many Republicans see the fears as overblown, saying negative forecasts in the past didn’t always come to fruition due to business and population growth and new revenue channels, such as online sports betting.

Sticking Points

The tax fight is far from the only policy disagreement between the two chambers. The Senate’s budget plan would raise the base pay for new teachers, currently $41,000, by $510 over the next two years, or 1.2 percent. The House proposal would increase starting teacher pay to $50,000 over that period, a 22 percent boost.

Rep. Erin Paré, a Wake County Republican who has spearheaded the GOP’s effort to raise teacher pay, said she’ll push for the Senate to be more generous.

“This is something to fight for, and I think it’s time that we do something very significant for our teachers,” Paré said. “I look forward to that process. We have a great case to make about why North Carolina should be top in the Southeast.”

The budgets also diverge on several initiatives Berger and Senate Republicans have championed, contributing to the hostile reaction from the upper chamber.

NCInnovation, a private nonprofit established to bolster public university research, was a top priority of Senate Republicans and got $500 million in the 2023 budget. The program has been controversial among some prominent conservatives from the outset, including prominent GOP donor Art Pope. The Senate plan would reclaim that money and redirect $400 million of it to a planned children’s hospital, while still giving NCInnovation $25 million annually over the next four years. The House would take back all of NCInnovation’s funding and put it toward hurricane recovery.

The House budget plan also would trim the amount previously authorized for the NC Children’s Hospital from $320 million to $216 million. Berger has been a big backer of the hospital, which would be a partnership between UNC Health Care and Duke Health.

‘A Bad Product’

House and Senate negotiators must now work out the differences between their two plans. During the weeklong Memorial Day break, legislative staff began combing through the proposals. Now, budget leaders from both chambers can begin ironing out details this week.

From there, Berger and Hall will give their input and decide whether a joint proposal is ready to be put to a final vote. If it passes both chambers, Stein has 10 days to act. If he vetoes the spending plan, House Republicans can override him if two Democrats are absent during the vote, or if one Democrat crosses party lines (assuming all GOP members are present).

For now, the budget fight is less a battle between Democrats and Republicans than one between the desires of House and Senate Republicans.

Rep. John Bell of Wayne County, the House rules committee chairman, said his Senate counterparts “are going to have to go home and answer to their constituents on why they supported such a bad product.”

Asked to respond, Berger quipped, “We didn’t support the House budget.”