Gov. Mike Easley’s proposed state budget takes advantage of a $2 billion surplus to increase spending by $1.6 billion, according to a preliminary analysis by the John Locke Foundation.
In addition, the proposal includes more than $700 million in contributions and reimbursements to reserves and the Highway Trust Fund.
The total general fund appropriation would be $18.85 billion in 2006-07, up from $17.2 billion in 2005-06. That is a 9.6 percent increase. But the governor told reporters Tuesday that this significant increase still fits under his spending cap of 5.6 percent.
In unveiling the budget plan, Easley explained that much of the new spending is exempt from the cap. “The governor and the General Assembly agreed to remove hundreds of millions of dollars from the spending cap, including reimbursements to the Highway Trust Fund and new money for low-wealth schools,” said Joseph Coletti, JLF fiscal policy analyst. “If I could redefine spending the way the governor does, I would own a much nicer car.”
Even with a nearly 10 percent spending increase, the governor’s budget does not include Medicaid relief for counties. Counties now pay 15 percent of the state’s share of Medicaid costs. An N.C. House study committee recommends spending $68 million in the next year to start relieving the counties of this burden.
Coletti noted that the proposed 8 percent pay increase for teachers could push North Carolina’s average salary to nearly $57,000, including pension contributions. That number, from JLF education policy analyst Terry Stoops, takes into account experience and cost of living. This would make the state’s teachers potentially the fourth highest-paid in the nation – earning $5,000 more than the adjusted national average.
Easley also recommends an 8 percent pay increase for community college faculty and an average 4 percent pay increase for most other state workers.
Despite having a reported $1.4 billion in unanticipated income tax revenue to work with, Coletti said, the governor only managed to repeal a quarter cent of last year’s extended sales tax increase. That change would take effect October 1. The state’s highest income tax rate of 8.25 percent also remains in place for another year. Both of these taxes were originally scheduled to expire in 2003.
“Two-thirds of the new spending obligates future higher spending with no corollary cut in taxes,” Coletti said. “This continues the state’s pattern of spending more in fat years and taxing more in lean years.”
The governor’s budget uses $195 million of the surplus appropriately, Coletti said. It would reduce the transfer of money from the Highway Trust Fund to $57 million from $252 million. “It would be better to eliminate the transfer entirely, but this is a good start,” Coletti said.
The budget also includes a cap on the gas tax that reduces the amount of revenue from this source by $23.6 million. The governor still expects the state to collect more than $1.4 billion in gas tax revenue. He did not recommend rolling back the state’s January 1 gas tax increase.
“Although Gov. Easley complained that a cut in the gas tax would be a subsidy to gas companies, his budget already includes additional business subsidies of more than $15 million through his discretionary One North Carolina Fund and other sources,” Coletti said. “The state’s high corporate and personal income tax rates, which discourage business relocation and creation, do not change.”
The Education Lottery is already replacing money in the General Fund for More at Four, reduced class sizes, and other education programs by more than $190 million, Coletti said. Easley had promised that lottery revenues would not supplant General Fund money for education programs. He justifies the funding shift by pointing to the $864 million total increase in education spending.
Easley also uses the budget to support a 16.5 percent increase in the state’s minimum wage, from $5.15 to $6 per hour as of January 1, 2007. “The minimum wage is not a budget item, but the governor implied that higher government salaries justify making private employers pay a higher minimum wage, too,” Coletti said.
Coletti said that Gov. Easley should have shown more fiscal restraint. “The governor has proposed permanent spending increases that will likely lead to higher taxes down the road,” he said.
Joseph Coletti’s Spotlight report, $1 Billion More — For Taxpayers: Better Priorities for the Budget Surplus, is now available on the Locke Foundation’s web site. For more information, please contact Joseph Coletti at (919) 828-3876 or jcoletti@johnlocke.org. To arrange an interview, contact JLF communications director Mitch Kokai at (919) 306-8736 or mkokai@johnlocke.org.