- We assess the 2026 legislative session.

Now that lawmaker attention appears to be focusing on a possible budget deal.

And the governor says capping state income taxes will uncork a rise in sales taxes.

This is State Lines.

- Quality public television is made possible through the financial contributions of viewers like you, who invite you to join them in supporting PBS NC.

♪ - Welcome to State Lines.

I'm Kelly McCullen joining me today.

Great crowd of analysts.

Morgan Jackson of Nexus strategies.

Jim Perry of NC capital strategies to his right.

Former North Carolina state Senator Mary Wills Bode and Pat Ryan of Ryan Public Relations in Seat 4.

Hello everyone.

You're supposed to be a week off for the legislature, but all kinds of stuff happened, including people making comments.

Some people that you know and work with closely.

Let's talk about the legislative sessions activities first.

They appear they'll be focused for now on passing that previously announced budget framework into a full fledged state budget law.

The current budget spends about $32 billion a year.

Republican lawmakers haven't announced what the spending levels would be for a new budget bill.

Law enforcement and teachers appear you'll be getting the largest pay increases among state workers.

Medicaid is fully funded through June 30th.

It looks like that program will need over $1 billion in new funding.

Any new budget bill that would begin July 1st.

Pat Ryan, that's a few bills out there for the spring session.

They have been focused few bills, large impacts.

- For sure.

And look, this is a long time coming, right?

The House and Senate were feuding pretty intensely for the last year and a half that sold a lot of progress and a lot of policy items, and some of it got personal.

But as Clemenza says in the Godfather, these things gotta happen every five years or so.

10 years helps get rid of the bad blood.

So in that spirit, things are moving now.

As you mentioned, Kelly, which is a good thing.

We have proposed constitutional amendments, capping taxes, which will get into, I think a little bit later, and I think this momentum hopefully will continue when some of the personal issues that may have played out with past year and a half are cast aside and never thought of again.

Everything can move on.

- Mary Wills, you're no longer a senator, but you've been in it.

Does does the breakthrough give you hope that better governance is on the way?

Or but but but truthfulness.

The government is kept running in spite of everyone saying there's no budget and there's no activity.

- Sure, yeah, so you know the rest of North Carolina is paying for the dysfunction in the legislature and the Republicans like to remind us that we have a function.

They have a functional supermajority in the House and a supermajority in the Senate and they still can't get a budget passed and that's a problem.

So teachers are still teaching in the classroom, corrections officers are still keeping us safe.

Thousands of North Carolina state employees are still showing up to do their jobs, but the legislature isn't, and that's affecting real people in their real day to day lives, and those real people are voters, and they're going to let their frustration be heard at the ballot in November because enough is enough.

And we've been in a budget impasse for too long and people have been kept in limbo for far too long as well.

- Jim, as an ex Republican senator, it when does a policy?

When does all the work in Raleigh go from being just business to he gets personal like Pat says, you know, there gets to be personal beef between people.

- Yeah, I think that depends on the parties involved and how long that conversation has been going on.

You know the same thing happens in your homes.

If you're married, you have a spouse.

Let's not pretend you agree on everything that you talk about and that you're on the same sheet of music about every issue, and I think the longer that drones on, your patience tends to be worn down.

But to Clemenza's earlier point, you do have these periods of time when you can hit refresh and you kind of flush some of those things out.

- Morgan, how does this affect the Democratic side of things?

The GOP seems to be getting together and it looks like we will have a budget.

Will have some 8% pay raises, double digit pay raises for law enforcers and things the governor actually likes.

Does everyone get to declare victory if this budget passes the way it's or the way we're hearing it might?

- Well, I think you still have to wait to the devil's in the details.

I mean what we've seen so far, let's be clear as a framework that was an agreement.

We've seen this in past where framework is put together and it sounds on the face of it like a good budget and then when the devil's in the details you see all of the hidden policy things that are snuck into the budget as well as some slights.

They may give teachers money, but then fund education less as far as what they give to public schools.

And I think there's the devil's always in the details.

These things listen.

I think you know Mary Wills makes an excellent point.

It's been two years for a lot of folks since they've had a raise and look at what's happened on inflation in those two years.

And so while an 8% teacher raise is really great and we all everybody wants to slap on the back about it.

How great job the truth is that's that's actually not keeping up with inflation from two years ago.

And so you've got teachers that affect you even with an 8% raise that will be making less money than they were making three years ago because everything costs more.

Everything they purchased from groceries to health care to child care to mortgage or rent.

Everything costs more and so you.

This is one of those things about the budget is I think you have to take it a reset and remember you have to invest in your people long term if you want to keep a growing and thriving state.

- Pat, how can Republicans declare victory over a quote pay raise when most everybody now that's an adult has now dealt with an inflationary period and they know that even if it's an 8% pay raise, inflation is about 3.5% a year.

- Well, look, first of all, I think it's the largest teacher pay raise since 2005 or 2006 if I remember correctly.

And second of all, look, it's easy when you're the opposition party and I've been in that position as well to poke holes in anything.

The Republicans in the legislature have to balance a budget that prioritizes tax cuts as they've done for 15 years.

Teacher pay raise, correctional officer pay raises, capital, it's a lot that goes in there and there's always going to be something that somebody can say, well, you could have done more here.

And that's what the opposition side can and does do in the legislature.

And it's an easier job messaging wise.

But I think on the whole, you look at the teacher pay raises, correctional officer pay raises, tax cuts, the state has been booming for 15 years now, all of that adds up to a winning governing philosophy.

- Governor Josh Stein is warning North Carolinians that if income taxes are capped in a statewide vote, it's sales taxes that will eventually rise on you.

But the governor says regular North Carolinians will pay more when and if the state needs new revenue in the future under a tax cap.

Everyone pays the sales tax, not, it's, you know, it's not progressive, it affects everyone.

The governor was defending the need for pay increases for state employees, and in this case, correctional officers.

The governor says the correctional officer turnover rate is now 24%.

We can talk about corrections officers, but back to the tax cap.

First time I've heard Governor Stein just really step out there, issue the one line, cap taxes if you want, they're just gonna raise the sales tax, increase fees, now the other side of the equation.

- Well, and I'll tell you, the governor put a sort of finer point on it, he called it a political con job for voters, and that's the reality of what we're talking about, is there's nothing in these amendments that will lower one person's tax this year.

Nobody will pay less taxes because of these amendments.

What it does is insulate the wealthy moving forward in the fact that their taxes can never be raised on their personal income tax.

So what it means, functionally, we're gonna have another recession.

Listen, I don't care who's the governor, who's the legislature, the economy is cyclical.

We all have lived through many in our lifetimes, and what this puts in place is a lack of availability to find additional revenue to keep paying for schools and police officers and correctional officers.

And so what happens is, when the state needs to find more revenue, it means they're gonna raise the sales tax.

It means that everyday purchases will get more expensive, and we've seen that.

Again, we're talking about inflation.

The sales tax going up is bad for working people.

The second thing is the property tax amendment, which he was talking about a little bit as well.

If you cap local government's ability to fund services at the local level, they have to raise utilities rates on people.

And you talk about another crunch is people's utility rates, whether it's water or energy that keep going up with inflation, those bills are gonna get more expensive.

You're gonna have to find revenue somewhere.

- Jim, how does a voter enter the ballot and go in there and they look at that tax cap?

It looks like one thing, but a simple question can have some profound effect on the state.

What's your take on the tax cap?

- I think nothing is more unifying in the state for Democrats and Republicans than paying less taxes.

And those things are always so popular.

No one wants to pay more.

I think it's a little much to call it a con job.

I think people are smarter than many give them credit for.

And I think they know exactly what they're doing.

They want to prevent their taxes from going up in the future.

I think it is reasonable to say if they have a need for another revenue source, if there's an unforeseen expense that comes up, this could make it more difficult to raise money more quickly.

But sales taxes will come in the door within what, 90 days to implement them, 180 days you could receive income from sales tax.

We saw sales tax was also popular in the city of Charlotte, Mecklenburg County on their transportation tax that they passed.

And I think there's a lot of North Carolinians who would consider different fee structures or tax structures.

It is change and change is hard.

It's not how we've done everything forever.

But I think that there is a path forward that will please a lot of voters.

- What makes caps popular with both sides?

It's a partisan debate in Raleigh, but voters and rural voters, I don't see anyone who's just adamantly opposed to a tax cap of any kind if you drop that term.

Liberal, conservative, it doesn't matter to me, from what I hear.

- Yeah, I mean, I think that people are hurting.

Things are more expensive and people want more money to spend on their families, their vacations, their everyday expenses.

And so I think a cap kind of provides some relief.

However, to Jim's point, in places like Charlotte or in states like Tennessee and Louisiana, where there's Nashville and New Orleans, sales tax can make sense because they rely on people coming from out of state that use their infrastructure, their police officers, their healthcare system, their roads, and that's a way to capture money back.

But in North Carolina, increasing sales tax would be very burdensome to working families across our state.

And if we do find ourselves, or when we do find ourselves in a recession, again, people will go to South Carolina or Virginia to buy their goods.

Local businesses will suffer.

And people are going to be buying less because we are in a recession.

And so I think we need to be very thoughtful.

The people of North Carolina are smart, but they're also looking for relief.

And so I think elected officials need to reassure them that they're going to spend their money wisely, but also be preparing for the future, because that is a big part of fiscal responsibility.

- So I think people may well go to South Carolina and Virginia to buy goods in a higher sales tax environment, but they'll be living in North Carolina.

And to continue the theme of states should use their tax policy to attract other visitors, you mentioned New Orleans and Nashville.

Well, North Carolina has used its tax policy to attract full-time residents and businesses because of their low income tax rate and low corporate income tax rate.

So just this year, North Carolina government will have about $600 million extra alone from residents who moved here and therefore brought their income and their taxes here.

So lowering the income tax and capping it, which I think is a brilliant move, in some ways solidifies and ensconces this policy and governing philosophy that's resulted in families and businesses continuing to move here and bringing a cumulative billions of dollars in tax revenue with them.

And I think that's a good competitive way for a state to run itself.

- But I don't think it's just because our corporate tax rate is low that people have moved here.

People move here for our wonderful higher education system, our safety, so many things, RTP, which existed long before the corporate tax rate went lower, our mountains, our beaches.

I mean, there's so many things about North Carolina that bring them here, and it's not just the corporate income tax.

- There are beautiful mountains and beaches in New York.

That's where I'm from.

(laughing) But you know what's-- - I don't know about that.

- What's different is the tax rates and the government regulation in New York.

- I don't think anyone's ever moved to a state because they had really nice high tax rates and they preferred to go there.

I think that's fair also.

- Well, I think there's a difference between being competitive and being extreme.

And I think that I feel like that, one place instead of increasing sales tax, we do need to actually increase our corporate tax in North Carolina.

We have one of the lowest in the country.

And I think that if corporations are gonna come to our state, then they need to pay their fair share and be a part of the fabric of our state.

- But no one has said sales taxes are going up.

The governor says it's going to happen.

I mean, that's a very big bully pulpit.

That hasn't happened yet, Jim.

- That's fair.

I think when we start talking about revenue and spending, someone mentioned earlier that we think the people want their money spent wisely.

I think what I've heard more of recently is they don't want their money spent.

They wanna see some restraint at the local level.

So there's a lot of different ways to make the soup, a lot of different ingredients, a lot of ways to get revenue or reduce expenses.

And I think everyone takes a different approach.

- Yeah, I mean, the governor's argument is premised on this notion that government needs constantly more revenue than it had the year prior, even accounting for inflation and population growth.

I just reject the notion that government will somehow collapse or things will not work at all in this state in the near future, but for yet more revenue to state government.

And we will have a tax rate next year of 3.49%.

We talked about the litany of raises that state employees are getting at that tax rate.

I see no reason why in the year following, we must have a tax rate that brings in more revenue than we have this year.

If things are working this year, then they'll probably work next year.

- Well, I think there's a problem in that premise and that the cost of things are increasing.

And so you look at Medicaid and it's gonna be what, like a billion dollar shortfall starting July 1.

You don't rely on Medicaid, but many people across our state do.

And so that's why there's severe and significant concern when Medicaid could go unfunded because people can be without life-saving healthcare.

- Love to talk about healthcare costs, yeah.

- And Morgan, people wonder how a governor makes an impact in a super majority state, the opposition party.

Just one comment, get everyone talking.

(laughing) - The power of the word.

- I do wanna come, I'm gonna go to Jim on this one.

WRAL's political reporter, tip of the hat to you.

Will Duran, he recently wrote an article about North Carolina enjoying a $2.6 billion revenue beat for the next two years, if you look at how the budget is constructed right now.

So Senate President Phil Berger can get his bragging rights that tax cuts, again, have fueled a state economy that increases state revenues.

Back to Governor Stein, he has said, "Republicans, you'll eventually cut taxes so deeply, "you'll create a structural state deficit."

All right, Jim, what are realistic options?

We have 600 million here, 700 million next year.

If you believe the fiscal analysts, not the politicians who wrote the budget, we can spend it, we can save it as a state, we can refund it, we can cut taxes again.

- Yeah, so I think when we think about and consider revenue, I'd like to remind everyone something I learned in business school, and that's about a forecast.

And all forecasts have one thing in common, they're all wrong, right?

So forecast to me, I'm not really concerned about it, don't put as much faith in it as I do actual cash.

And we have collected more cash than anticipated as compared to the forecast.

I think several things contribute to that.

We have a strong stock market, been helping returns, those one-time earnings.

As people continue to move here, we have more people contributing to the soup that I mentioned earlier.

So as population grows, wages grow, we have continued to see these wins that Senator Berger has always forecasted.

And frankly, he's been right every time.

And people say, "Well, we haven't had a serious recession."

And I'll stipulate that and say, "Yeah, I agree, "but he has been right."

Part of the problem with forecast, and they have gotten better, you can be off by a point, point and a half, and it's several hundred million dollars.

But they started using regression analysis, and I think that that has helped us to be more accurate, but we still don't know what's going to happen in the future.

Is that growth going to continue in population?

Is that gonna bring us more dollars?

- What is regression analysis?

- Claude knows how to do it.

(laughing) - The AI knows how to do it.

What is regression analysis?

Very quickly, can you explain that?

It's a way of looking at spending.

- Regression looks at the past, and it makes observations, and then it explains the differences in the observations.

So it explains the eras when you compare what happened, and you can explain why things happen by comparing two things.

- Morgan, the governor has said the stock market returns, and he just said at one time, it was a good stock market year, that kind of goosed the revenue surplus or over-collection.

So, how does this play out?

Tax rates will be 3.49%.

They are still expecting revenue surplus.

- That's right.

But so, here's the thing you have to understand, is we've talked about it a little bit, we're a growing state.

People wanna move here.

The reason people wanna move here, and you ask any economic developer who is talking to companies that wanna come to North Carolina, they wanna come here because of our workforce.

They never ask about what your corporate tax rate is.

They never ask about what your personal income tax rate.

The first question out of every company's mouth is, tell me, do you have the workers that my corporation or my factory needs today?

And are you gonna continue to have them 10 and 20 years from now?

And so, when we have these kind of years, where we are able to bring in more money than expected, we need to be thinking about what are the investments we make in our people that make us a stronger state moving forward?

And the answer can't always be, let's just cut more taxes, cut more taxes, cut more taxes.

It has to be, how do you pay people to keep good teachers in school, good law enforcement on the job?

How do you keep people in healthcare?

We were just talking about that earlier.

700,000 people in North Carolina lost their healthcare in the last year because of the lack of the federal subsidies, the federal subsidies going away.

Those people now don't have healthcare and aren't getting treated.

That is not good for our economy nor anybody's healthcare.

And so, I think ultimately, you have to do some of both.

You can save more money, and it's a smart fiscal thing to do, but you also need to invest in your people if we wanna continue to be a destination state.

The only way that we're gonna continue to bring in more revenue is by bringing more people here.

And ultimately, you still have to fund, which means infrastructure's struggling, right?

Look at a lot of the discussions around transportation right now.

That takes more and more and more money to fund and build roads so that we don't end up, Charlotte doesn't end up like Atlanta and places like that that start to stymie economic growth.

And so, you have to understand that taxes are part of the equation.

But what people who are coming here looking for are quality of life, workforce, can their kids go to good schools, and living in a place like North Carolina, that's one of the reasons we're the number one state for business the last several years in a row is because of our workforce and our quality of life.

- Pat, the tax rate is drawing people in.

The economy's growing.

Voters have elected GOP majorities in the legislature.

They like Democratic governors, apparently, for the last 10 years.

So, this is a difficult topic to sort through because we are still growing.

The tax rate's getting lower.

But next legislative session, the one leader will not be there that has pushed the idea that if we continue lowering taxes, we continue bettering the economic and business climate.

What happens in 2027?

The House was much more cautious about future tax cuts.

- Yeah, I think there have always been differences of degree, if not opinion, between the two chambers.

But go back to 2011.

There have been three House speakers now.

Each one of them has been an equal partner in advancing the governing philosophy that North Carolina has had for those 15 years.

And so, look, leadership turns over, things change.

But I think what's been constant since 2011 in this state is a philosophy of keeping taxes low and cutting them as often as possible.

And the result has been, Brian Balfour of the Locke Foundation added it up, in the last 10 years alone, surpluses have totaled $12.6 billion.

That's a lot of money for investments in people and infrastructure and higher education.

- Mary Wills, if you lower taxes and lower spending, you can always budget yourself a budget.

Is the state spending enough money in infrastructure schools?

And then how do you make an argument to increase government spending in infrastructure schools, workforce, community colleges, and so forth?

Because you're right, people are squeezed.

They don't wanna pay more taxes.

- Right, people don't wanna pay more taxes, but they also rely on those services.

And so I think it's up to elected officials to really take the time to explain to people and be responsible for where those dollars are going and how they're being fiscally responsible.

I think, I always say, with our own House budget, I don't mind spending money, but I don't wanna waste money.

I'm okay with making an investment that's going to make a difference, but I don't want my money wasted.

- Without a council not having any taxes at all, Mary.

(laughing) Well, it would have been hard for you to get here today without all those roads, Pat.

- Well, let's finish up with our final topic.

North Carolina State Board of Elections will be accepting public comments on a proposal that could change some voter identification rules.

One proposal would allow local boards of election to disqualify ballots of voters who can't or did not present a photo ID.

That could be rejected by a simple majority vote.

The current standard is a unanimous vote of the local board of elections.

Now, as part of that, the board would then need to submit a fact-based, not a motion or any other kind of standard, fact-based written explanation for the ballot rejection.

And then another rule, Mary Wills, would ban audio speakers, bullhorns, and the like, sounding equipment from voting site entrance areas.

One, I wanna talk about, the other one, yeah, I don't care who you are, you don't wanna be yelled at.

- You wanna talk about the bullhorns?

- I don't want somebody with a microphone talking, even talking to me when I go into a ballot spot.

And if I'm biased for that, so be it.

- I agree.

- So, let's talk about the voter ID.

- Sure.

- There's a big difference in simple majority and a unanimous vote to disqualify a ballot.

- Sure, certainly, and when we talk about the right to vote, our most sacred right, our most fundamental right, we need to be very careful when we're proposing changes.

And so, in North Carolina, every county, all 100 counties have five people who sit on their board of elections, two Democrats, two Republicans, and then the auditor appoints one.

So, conceivably, we could have a partisan split on whether or not people want someone's vote to count.

And I think we need to do everything we can to really inoculate the right to vote from that partisan toxicity.

I mean, even Senator Berger's race, 23 votes, we've got some really tight elections in North Carolina, and it could come down to some partisan pressure at the board of elections.

- Jim, is this a problem at all at the local level?

Most boards of elections, even when Democrats, when it was tough, all this stuff, they all have gotten along, for the most part, over history of North Carolina voting.

So, what's the deal?

- You know, I think it does get charged politically based on national politics and efforts to inflame it, but I think locally, these people know each other.

They go to baseball games together, they go to the same grocery stores.

I think they get along better in the smaller towns and those smaller counties, and I don't see it being a huge problem.

- Morgan, the process would still allow voters to come back and, what they call, cure the ballot, make it good.

Is this just a procedural matter for if you're watching the state board of elections, or is there something more deep in the policy of this that could affect North Carolina elections in a tangible way?

- Oh, totally.

Listen, this is a solution in search of a problem, and the reality to it is, since there's been voter ID on the books in North Carolina, this system has worked very well.

Local boards of elections work very closely together, regardless of your partisan stripe, to make sure that legal votes are counted, and those that aren't, if you have an exemption that doesn't qualify under state law, your ballot doesn't count.

That's the law, straightforward.

The thing that is concerning about the timing of this is this has now come to head, now that there are three Republicans and two Democrats on every single county board.

This, for whatever reason, was not an issue, and it was not something the Republican majority in the legislature cared about when Democrats were leading the boards of election.

Now that they have a majority, it's very clear, and I think one of the big concerns for people is that you can make partisan decisions based on if three Republicans say, "Let's don't count the vote," it doesn't get counted now, and that should cause some concern to people.

- You got 20 seconds.

- Well, I'm old enough to remember when the Republicans tried for five years to get an equal number of Democrats from Republicans on boards of elections everywhere in this state, and it was soundly rejected.

Look, we're arguing here about rules for what happens if you don't bring your ID to the ballot booth.

You just gotta bring your ID.

- There you go.

Thank you, panelists, thank you.

What are your thoughts, by the way, if you've watched this show?

The email address is statelines@pbsnc.org.

I'll read the email, share it with the crowd.

I'm Kelly McCullen, and thanks for watching.

See you next time.

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