Spending & Taxes

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.

With news of a worsening state budget and a weakened state economy, Locke Foundation analysts have updated last year's alternative budget with new projected savings and tax changes for FY 2002-03. The resulting Changing Course V budget would eliminate the deficit, repeal last year's hikes in sales and income taxes, stimulate the economy through additional tax relief and highway investment, and protect highpriority items such as public safety and classroom teachers.

In recent months, public officials have made a range of statements in an attempt to explain persistent state and local budget woes. Many of these assertions do not square with the facts. A collection of graphs and tables shows clearly that North Carolina government is out of line with neighboring states in spending, employment, and taxes. Moreover, revenue growth outpaced personal income growth during the 1990s, while debt service costs are projected to triple over 10 years.

A new study in the Journal of the American Medical Association alleges a significant increase in lung cancer risk for those exposed to high-levels of particulate matter, commonly called soot. In North Carolina, the news media and others have cited the study to boost support for the proposed Clean Smokestacks bill. But according to expert analysis, the study is so flawed that it should have been rejected by the journal. Moreover, it does not establish a case for new regulation.

By the Numbers 2002: What Government Costs in North Carolina Cities and Counties is a publication of the Center for Local Innovation, a division of the John Locke Foundation. Its purpose is to inform North Carolinians about their local governments and promote debate and discussion about the future of city and county fiscal policy in North Carolina. It is not intended to advance or impede legislation before local, state, or federal lawmaking bodies.

According to state economists, North Carolina will face another budget deficit in FY 2001-02 of between $450 million and $900 million. The state's economy, weighted down by high taxes and poor public services, continues to lag behind the rest of the country. Unlike last year, policymakers cannot exempt such big-ticket items as Floyd relief, tobacco-settlement funds, universities, Medicaid, and bonds from scrutiny - and they should consider repealing last year's tax hikes.

Responding to Gov. Jim Hunt's call for $830 million in emergency hurricane relief, state lawmakers have nearly drained the state's rainy day fund. Calls for state tax hikes or a new borrowing binge have only been put off until the 2000 legislative session. But state leaders have no one to blame for the coming budget crisis but themselves. As national data reveal, North Carolina has hiked spending far more rapidly than the average state with little regard for the long-term impact.

A report released last week by the North Carolina Progress Board contained hundreds of long-term goals for the state. But the text was overshadowed by the comments of board member and UNC-W Chancellor James Leutze, who said the report showed North Carolina would never make it to the top tier of states without tax increases. Leutze's remarks were ill-timed and ill-informed but reflect the conventional wisdom about taxes and social progress. It’s wrong.

North Carolina's 1998-99 state budget grew by between 10 percent and 11 percent (depending on the measurement used) compared with the national average for state budget growth of only 5.4 percent. This follows a similar pattern last year. Growth in spending on Medicaid and education fueled North Carolina's exceptional budget increase. Overall, North Carolina spends more of its budget on education and correction, and less on Medicaid, than the average state. This mostly reflects differences in responsibilities given to local government.