Spending & Taxes

Policymakers should think carefully about the administrative costs of raising revenue through a state lottery. In effect, the state would be legalizing gambling, establishing a state monopoly on it, and then taxing gross sales at a 33 percent rate. The cost per dollar collected of this lottery tax would be 20 to 50 times greater than the cost of raising rates for other state taxes that already exist. The best course for the state is not to raise taxes at all but to reduce the size of government.

In his State of the State address, Gov. Mike Easley stated his case for a state lottery for North Carolina by suggesting that it would raise up to $500 million annually and that North Carolina's neighbors were collecting "hundreds of millions of dollars" from N.C. lottery players. Neither assertion is correct. The net proceeds from a lottery will likely be no more than $285 million. And a lottery's administrative costs would far exceed the current "loss" of revenue to other state lotteries.

Gov. Jim Hunt's long-awaited budget recommendations for FY 1999-2001 do not actually present a full balanced budget to state lawmakers. Instead, the plan offers sizable increases in operating spending, particularly for education and corrections, while listing only "options" for dealing with the more problematic capital and nonrecurring sides of the General Fund budget. Of the $400 million in proposed "savings," the vast majority come from correcting the administration's earlier errors in projecting debt service and Medicaid costs.

One of the most common arguments in favor of a state lottery for North Carolina is that the Virginia Lottery attracts as much as $100 million in lottery ticket purchases from North Carolinians. But this revenue loss is exaggerated and dwarfed by the loss of revenue to out-of-state corporations that North Carolina would experience with a lottery. In reality, Virginia receives at most $34 million in state revenues from N.C. residents, while management fees paid out-of-state for operating a N.C. lottery would be at least $36 million.

As one way of closing the state's ever-widening budget gap, Senate leader Marc Basnight has suggested that the state consider requiring retailers to pay sales taxes by electronic fund transfer rather than by check, thus allowing the state to collect additional interest on the money. This would constitute a hidden but costly tax increase on North Carolina businesses hobbling the state's economy as it slips towards a possible recession. Far better ways to close the gap exist.

Gov. Mike Easley and the General Assembly face half-billion-dollar budget deficits (at least) for FY 2000-01 and FY 2001-02. But the problem need not become a crisis. State leaders now have an opportunity to restructure government programs and rethink state responsibilities. Budget savings previously recommended by Locke analysts would yield nearly $600 million this year and $743 million next year enough to close the gap without raising taxes or increasing state debt.

North Carolina's 1999-2001 budget cycle presents state lawmakers and the Hunt administration with a fiscal challenge — planned spending increases exceed predicted revenues by hundreds of millions of dollars. Some lawmakers and the news media have blamed four years of tax cuts and recent court decisions. This is misleading. By far the biggest cause of the problem was excessive spending growth during much of the 1990s. If state leaders had exercised even modest spending restraint, there would be no fiscal challenge awaiting the state this year.

Health and human services has become an important government responsibility, second only to education in terms of budget authorization. The disability services system, which serves North Carolina's mentally and physically disabled, receives approximately 17 percent of the funds of the Department of Health and Human Services (DHHS), for a total of $1.25 billion in fiscal 1996. By N.N. Fullwood, Ph.D.