Governor Mike Easley says his budget for the 2005-2007 biennium is the model of fiscal prudence, but the numbers belie this. Spending increases nearly $1 billion to $16.9 billion. The governor claims $200 million in spending cuts, but they are far outweighed by the $741 billion in higher taxes. Tobacco Trust Fund transfers and unreserved credit balance close the rest of the $1.1 billion structural deficit. The General Assembly will need to be more forthright if it is to put real restraints on government growth.
Despite a $1.3 billion deficit, Gov. Mike Easley will propose up to 6 percent higher spending in his 2005-06 budget, even with small proposed savings in most agencies. Medicaid and education spending have grown rapidly, and will continue apace. Instead, the governor plans to keep the temporary half-cent sales tax and add a large cigarette tax to pay for higher spending. This is no way to address what the Fiscal Research Division calls a structural budget deficit.
States have three direct policy levers to control Medicaid growth: eligibility, services, and payments. North Carolina’s mix of policies has led to some of the highest costs in the South, but the Blue Ribbon Commission on Medicaid Reform would make it even costlier. Tennessee and Mississippi, the two Southern states with higher per capita costs in 2000, have since made significant changes. Georgia and Virginia present different ways to reduce costs, while a 2001 report for the General Assembly presented largely unexploited savings.
During the 2005 session, state lawmakers are expected to take up the issue of how to comply with court rulings in the Leandro case. It is important to discard widespread misperceptions. First, Leandro does not require taxpayers to spend more money on public education. Second, public-school funding does not differ significantly across counties when all spending is included. Third, the small gap that remains is shrinking, not growing, and is unlikely to explain differences in student outcomes. Finally, local funds are a reasonable way to compensate for elevated labor costs in counties with high housing prices.
A recent report published by the NC Center for Public Policy Research concludes that North Carolina is facing a crisis in teacher recruitment and retention. But neither the data on projected student enrollment growth nor teacher retention rates justify such a harsh assessment. Clearly teacher recruitment and retention is a challenge that will always have to be met. The best approach is to reward those teachers who best foster achievement and to differentiate salaries among teachers according to supply and demand conditions in different disciplines.
State lawmakers are scheduled to meet in Raleigh today to consider a package of tax breaks and other incentives designed to lure a Dell Computers plant to North Carolina. While politicians often portray such deals as necessary to promote growth and job creation, they serve to transfer resources from existing firms, sometimes even competitors, while failing to address tax and other problems afflicting businesses of all sizes in the state. A good place to start in improving the state’s business climate would be to reduce marginal tax rates.
As the North Carolina Senate prepares to vote on its proposed 2004-05 budget
plan, it is important to keep in mind that an accounting change included in
the plan has the effect of masking the magnitude of the proposed increase.
State legislators are currently considering proposals to issue hundreds of millions of dollars in additional debt without seeking voter approval. The billions of dollars worth of bonds and other debt already approved since 1996 have more than quadrupled the state’s debt service and represent as much as a third of the fiscal impact of the tax hikes passed by the General Assembly since 2001. It’s no wonder politicians are wary of asking voters for more. But that’s why they should.
As the 2004-05 budget process continues, policymakers should use regional and historical benchmarks to identify where to look for savings. Among major budget items, North Carolina spending on K-12 education and law enforcement is at the regional average but its Medicaid and higher-education expenses are higher than in comparable states. Reasonable restraint would save enough money to repeal last year’s tax hikes and catch up on deferred repairs and renovations.
For the first time since 2001, Gov. Mike Easley is proposing a budget plan that does not include new tax increases. However, his 2004-05 plan does contain hundreds of millions of dollars in new spending financed by previous, costly tax hikes on North Carolina families and businesses. A better fiscal choice would be to eliminate low-priority items from the budget and repeal prior sales and income tax increases. The best choice would be to implement JLF’s Freedom Budget plan.
