As legislators struggle to balance the budget through major spending cuts and painful tax increases , they are avoiding some choices that could save hundreds of millions of dollars.
Legislative leaders have backed off a plan to prevent corporate tax avoidance. They are keeping business tax credits deemed ineffective by their own studies. They are shying away from forcing pharmaceutical companies to cut prices for Medicaid drugs.
And they have barely even discussed the habitual felon law, which has locked up petty repeat felons for long sentences at the extra cost of $195,000 for each offender.
Each of these money-saving moves was included in a News & Observer series, "The Generous Assembly: Why Legislators Can't Fix The Budget." Though House leaders attempted to push some through in negotiations with the Senate, none will be included in the final budget, legislators say.
"These issues benefit powerful special interests with deep pockets, who game the system and maintain the status quo," said Bob Phillips, director of Common Cause North Carolina, a nonpartisan advocacy group trying to make public officials more accountable to citizens.
In the case of the habitual felon law, Phillips said lawmakers are unduly influenced by pollsters: "Decisions are made on polling rather than the merits of the issue."
Locking up minor criminals never even got to the bargaining table.
"The habitual felon law is a sacred cow," said Lao Rubert of the N.C. Justice Policy Center.
Since it took its current form in 1994, the habitual felon law has cost the state an additional $1.5 billion in prison operating costs and $264 million in prison construction costs.
The reason, said Senate Majority Leader Tony Rand, is that electoral politics trumps sound policy.
Long prison terms costly
It doesn't make sense to lock up a petty drug user for 10 years at $28,000 a year, Rand said. But political opponents will label any attempt to change the law as soft on crime in campaign ads.
"Why should I give something to my opponent?" Rand said.
Since 1994, prosecutors have used the habitual felon law to ratchet up big sentences for more than 7,700 felons. Many of these offenders are petty criminals and drug addicts, yet they pull sentences as long as second-degree rapists, typically in the seven- to 12-year range.
A News & Observer analysis found that it adds $195,000 in prison costs to sentence an offender as a habitual felon.
Rep. Phil Haire introduced a bill to lessen the sentences for habitual felons. Fiscal analysts estimated the state could save $216 million in prison operating costs over the next five years, and avoid $171 million in prison construction.
The bill is stuck in a House committee and hasn't even come to a recorded vote yet.
Losing $45 million a year
There will be no major changes that would force all corporations to show any tax-avoidance strategies to the state Department of Revenue.
The General Assembly will not enact a corporate tax law known as "combined reporting" that legislative analysts say would collect an additional $45 million in unpaid corporate taxes each year.
Some large multistate corporations have avoided state taxes by transferring revenue and assets between subsidiaries in different states to exploit differences in tax laws.
Combined reporting would end the state-by-state loophole by forcing a company to file tax returns as a single business.
"Combined reporting is the best way to close abusive corporate tax avoidance strategies," said Elaine Mejia of the N.C. Budget and Tax Center, which advocates fair treatment for low- and moderate-income people. "We are missing an opportunity to level the playing field between large multistate businesses and smaller home grown businesses."
The secretary of revenue can order companies to combine their tax returns on a case-by-case basis. In one recent high profile case, Wal-Mart was ordered to pay $33.5 million in back taxes and penalties for a tax-avoidance scheme.
But the proposal to make it mandatory has some big opponents: the N.C. Chamber, the state's business lobby, and large companies such as AT&T, Bank of America, GlaxoSmithKline, Pfizer and Smithfield Foods.
Senate members were adamantly opposed to combined reporting in their negotiations with the House, said Rep. Paul Luebke, a Durham Democrat and co-chair of the House Finance Committee.
Sen. David Hoyle, a Finance Committee co-chairman, said he feared that combined reporting might hurt some North Carolina companies: "It's like fishing for tuna: You don't want dolphins to get tangled in the nets."
Legislators are going to keep giving companies tens of millions in tax breaks each year, even if the tax breaks don't create new jobs as intended.
Tax credits, but few jobs
The William S. Lee Quality Jobs and Business Expansion Act of 1996 handed out $630 million in its first 11 years. Studies have found the Bill Lee tax credits to be ineffective, particularly at creating jobs and businesses in the state's poorest counties. The General Assembly commissioned a study by the UNC-Chapel Hill Business School; the study found the credits had little or no effect on job growth, and in some cases resulted in job losses. Eliminating the credits would save $574 million over six years, almost $100 million a year, the study found.
State economic officials argued that they needed every tool in the toolbox to recruit businesses, and prevailed on the House and Senate to keep the credits, Luebke said.
"The Department of Commerce told me they preferred to keep this in the law, due to the difficult economic climate," Luebke said.
"They say they don't want to eliminate any tool in the toolbox, but this is a tool that doesn't work, according to the legislature's own studies," Mejia said.
'Preferred drug list' out
Drug companies will also avoid a change they fought against. North Carolina will likely remain one of six states that doesn't use what's known as a "preferred drug list" to save tens of millions of dollars in Medicaid spending, legislators say.
The preferred drug list pushes doctors to prescribe generic drugs or, if generics aren't available, a lower-cost brand-name drug. Pharmaceutical companies must also offer rebates to get their brand-name drugs on the preferred list.
For years, the pharmaceutical industry has easily turned back any effort to institute a preferred drug list.
This year's fiscal crisis raised the possibility the measure could be adopted; the House adopted such a plan in their budget.
But as of Friday, the measure had dropped from the budget being wrangled over by the House and Senate. Instead, the Department of Health and Human Services will use voluntary programs to try to save $30 million in Medicaid drug spending. If the savings aren't met, a preferred drug list will take effect in June 2010.
Adam Searing, director of the Health Access Coalition who has lobbied for years for a preferred drug list, said the plan would likely be a one-time savings.
"A voluntary plan does not guarantee long-term savings," Searing said.
