Proposed budget offers mixed news for North Carolina nonprofits

David Heinen
David Heinen

David Heinen

Special to Philanthropy Journal

Last Wednesday, North Carolina Governor Pat McCrory released his budget proposal for the next two years.  Overall, the 323-page proposal – which includes a 2 percent increase in state spending for next year- offers mixed news for nonprofits. The governor’s budget would total $20.6 billion in FY 2013-2014 and $21.3 billion for FY 2014-2015.

Some nonprofits – particularly those in health and human services and early childhood programs – could see a reversal of the recent trend of increasing reductions in state funding each of the past four years. The Governor’s budget fully funds growth in Medicaid with an additional $575 million in support. It also would provide $52 million to expand the state Pre-K program, which is largely administered by nonprofits (see Status of Women).

Unlike the last two state budgets, the governor has not proposed that the Department of Health and Human Services (DHHS) make unspecified cuts to grants and contracts with nonprofits. Currently, about a dozen nonprofits had one-time pass-through funding through DHHS. The proposed budget continues funding for about half of these organizations.

Arts and humanities nonprofits would see only slight reductions in state funding. However, advocates for cultural organizations are concerned that arts nonprofits continue to see steeper reductions in grant funding that other programs funded within the Department of Cultural Resources.

While the governor’s proposal is somewhat encouraging for many nonprofits, it is particularly troubling for economic development organizations. It eliminates all state funding for several nonprofits with strong track records of creating jobs and fostering economic opportunity in rural areas and in communities with high levels of poverty. It also takes away the $65 million per year that the Golden LEAF Foundation was due to receive from the tobacco master settlement and cuts support for the N.C. Rural Economic Development Center by about 60 percent. This appears to indicate a shift in the state’s economic development philosophy, with the centralized Department of
Commerce playing a larger role than community-based nonprofits.

Economic development nonprofits and others that are concerned about the governor’s budget still have ample opportunity to make their cases with policymakers. The budget now moves to the Senate, where appropriations subcommittees will look carefully at the governor’s recommendations and make changes.

Legislators from both parties have said that they understand that strategic investment in nonprofits can be a great bargain for taxpayers. As lawmakers work on the details of the state’s spending plan for the next two years, it will be critical for nonprofits to quantify the impact of taxpayers support for their work.

As nonprofits analyze state budget proposals, they will need to consider how North Carolina’s spending fits into the broader national context.  At the federal level, across-the-board sequestration spending cuts were implemented at the beginning of March, but their effects are just starting to be felt by nonprofits and the communities they serve. These cuts will likely mean less money for a broad range of nonprofits, including those providing affordable housing, domestic violence services, healthcare and early childhood programs. Reductions to government safety net programs will also mean that more North Carolinians will turn to nonprofits for basic services, likely adding to the 93 percent of nonprofits that saw an increase in need for services last year.

Notably missing from the governor’s budget was a tax reform plan. Governor McCrory and legislators have stressed that a comprehensive overhaul of the state’s tax system is a top priority this year. The proposed budget anticipates revenue-neutral changes to individual and corporate income taxes and repeals the North Carolina estate tax.  Otherwise, it leaves tax changes for later discussion.

Nonprofits are particularly concerned that tax reform protects tax exemption and charitable giving incentives, such as the state tax credit for individuals who do not itemize on the federal taxes. While initial discussions about tax reform suggested that nonprofits’ sales tax refunds may be in jeopardy, there is now reason for optimism that legislators understand the importance of fully exempting nonprofits from state taxes.

The day after Governor McCrory released his budget proposal, the first tax reform legislation (S.394) was introduced in the Senate. The bipartisan legislation maintains nonprofit sales tax refunds and exempts nonprofits from a new business privilege tax (except for unrelated business income). To offset lower income tax rates, the bill eliminates most credits and deductions on individual income taxes.

However, by creating a new tax credit for contributions to nonprofits, the proposal’s sponsors acknowledge that charitable giving benefits the public and is not merely a tax “loophole.” The state tax credit for charitable giving would likely be a greater incentive for low and moderate income North Carolinians than for its wealthiest citizens since it would be limited to the first $10,000 of contributions per year.

Like the state budget, the initial tax reform proposal is far from final. Nonprofits still need to remind policymakers that nonprofits provide public benefit (and give up the right to make a profit and engage in partisan politics) in exchange for tax exemption.

David Heinen is the director of public policy and advocacy for the N.C. Center for Nonprofits.

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