Research Reports: 2002

Summary: During debates about air pollution in North Carolina, supporters of more regulation have asserted that high rates of childhood asthma are related to increasing exposure to ground-level ozone. Not only has there been no such increase, but a new study shows there is, if anything, an inverse correlation — the higher the ozone level, the lower the asthma rate. Next time, lawmakers and the media should check the facts before repeating unfounded and politically motivated allegations.

After months of delay, the state legislature has enacted a revised FY 2002–03 budget that differs little from the plan originally proposed by Gov. Mike Easley in May. Lawmakers adopted nearly all the governor's $543 million raid on local government reimbursements and highway funds, changing only what percentage will be made up with a sales tax increase. Taxpayers are the big losers—entering the second of what promises to be three straight years of huge tax hikes.

North Carolina’s state budget reflects its governmental priorities. Unfortunately, over the past two decades governors and lawmakers have usually chosen to add new programs to the state budget without considering the merits of existing programs and finding ways to fund higher-priority items by eliminating lower priorities. As a result, the budget has grown by leaps and bounds, interrupted only briefly by retrenchment during recessionary periods, including the past three fiscal years. Until state leaders learn to exercise fiscal discipline or to write fiscal discipline into law via a strong expenditure limit the budget problem will worsen.

As House and Senate leaders negotiate a final budget package for FY 2002-03, they should resist the usual temptation to "logroll" — to add in spending items favored by the other side — and instead accept the lower of the two chambers' previously approved figures for every department as well as the higher of the two chambers' previously approved fund transfers. With such "reverse logrolling," lawmakers could balance the state budget without a tax increase.

At this writing, the N.C. House is considering a revised General Fund budget of $14.3 billion, balanced largely by raising state taxes by $166 million, raiding $255 million from highway funds and $156 million from local governments, and achieving net budget savings of $478 million. Unfortunately, the news for taxpayers is likely to be worse next year, given the use of some $666 million in one-time money for expenses likely to recur — setting the stage for another tax increase.

Gov. Easley's new incentives proposal would put political appointees into the position of doling out special tax breaks that amount to grants of taxpayer money to private businesses. Because of the unpredictable nature of a free-market economy, such a policy cannot claim to boost overall economic growth. A better policy would be to reduce North Carolina sky-high marginal tax rates on personal income, investment, and capital gains - which are among the highest in the country.

The N.C. Senate is debating its proposed budget, which would reduce authorized FY 2002-03 spending by $585 million. Most of the $1.4 billion budget gap, however, would be closed with one-time revenues, including tax hikes and fund diversions, that will reportedly create a recurring deficit in FY 2003-04 approaching $800 million. Some leaders propose closing that gap with tax hikes, too, meaning that the total annual tax burden will have grown $1.4 billion from 2001 to 2003.

The state legislature is currently considering the idea of "decoupling" North Carolina's income tax code from the federal tax code in order to avoid implementation of several tax reductions associated with a federal economic-stimulus package. But North Carolina's weakened economy desperately needs the $258 million boost that adjusting state taxes on business and personal investment would provide. Policymakers could offset any revenue loss by reducing spending.

Gov. Mike Easley's proposed budget for FY 2002-03 includes $250 million in revenue from a state-run lottery that has yet to be enacted. Among many legitimate objections to the administration's idea are that expected net revenue is inflated by between 37 percent and 62 percent - creating a hole in the budget of as much as $96 million — and that the administrative costs of the lottery tax exceed both the cost of alternative taxes and any revenue "loss" to out-of-state lotteries.

Gov. Mike Easley's proposed budget adjustments for FY 2002-03 help to frame the coming fiscal debate in North Carolina. The plan relies primarily on increasing revenues — including more than $400 million in tax hikes, $250 million from a theoretical state lottery, and $210 million from raiding the state‘s Highway Trust Fund — rather than on budget savings. And contrary to the governor's assertion, his plan would increase state spending in the midst of a fiscal emergency.