Don't slash services; keep '09 tax package

Director of N.C. Policy WatchJanuary 23, 2011 

North Carolina is not in this current budget crisis because of overspending. The $3.7 billion shortfall is the result of the worst economic downturn since the Great Depression, which brings with it both lower state revenues and a higher demand for state services like health care, unemployment insurance and retraining at community colleges.

The N.C. Budget & Tax Center reports that state spending per capita is lower in the current year's budget than it has been in 15 years.

Rep. Paul Stam, the presumptive House majority leader, has unwittingly made the case for more revenue, saying that lawmakers can balance the budget without raising any new money simply by returning to 2003 levels of state spending, adjusted for inflation.

But according to current revenue estimates, lawmakers would actually have to raise $1.4 billion in new revenue next year to bring state spending up to 2003 levels. That is roughly how much was raised by the 2009 temporary tax package, which expires June30.

Cuts won't do it

There is no way to balance the budget with cuts alone without inflicting catastrophic damage on education and human services, which account for 77 percent of the spending in the current General Fund budget.

That would result in thousands of teacher layoffs and an end to vital services for thousands of seniors, children and people with disabilities.

Claims that education cuts don't have to affect the classroom are disingenuous. Ending all state funding to the Department of Public Instruction would save only $42 million and end important services to local schools such as curriculum and IT support.

North Carolina has already made significant cuts to education administration. The state now ranks 49th in the country in state and local spending on central office personnel in public schools according to the U.S. Census Bureau.

Balancing next year's budget by slashing services alone would result in the loss of at least 21,000 jobs, according to the Budget & Tax Center - and that's a conservative estimate. When a plant closes and 200 workers lose their jobs, it's a major crisis that makes headlines across the state. More than 100 times as many workers (and taxpayers) could lose their jobs if lawmakers refuse to address the budget shortfall with a balanced approach.

Closing the 1991 gap

State lawmakers should take a lesson from their predecessors 20 years ago. The 1991 General Assembly faced a crisis too, with a shortfall of $1.2 billion, 15 percent of that year's budget.

After long and often heated debate, lawmakers balanced the budget with roughly $600 million in cuts and $600 million in tax increases. The compromise came after Republican Gov. Jim Martin proposed his own tax increase to protect vital state services.

The final plan in 1991 protected education and human services from irreparable harm, and the taxes hardly held North Carolina back. Business boomed and the state began a period of unprecedented growth.

The 2011 General Assembly should follow that example, first by keeping the 2009 tax increases on the books. That doesn't mean raising new taxes. It means keeping current tax rates the same. That would provide $1.4 billion to address the $3.7 billion shortfall.

Most of that revenue comes from the 1 percent hike in the state sales tax, which admittedly is not ideal because it falls disproportionately on the poor. If lawmakers aren't willing to reform the antiquated tax code this year, an increase in the state Earned Income Tax Credit could help until they do.

Another part of the shortfall could be addressed with the roughly $350 million that state agencies are saving this year through the reductions mandated by Gov. Bev Perdue.

And finally, lawmakers should take a long look at the $5.8 billion in "tax expenditures" identified by the Department of Revenue in its 2009 report. That list includes dozens of tax loopholes and exemptions for specific industries.

A good place to start would be to end the practice of allowing multistate corporations to shift profits to subsidiaries in other states to avoid paying the corporate income taxes they owe in North Carolina. That would bring in more than $30 million and could raise as much as $100 million in future years.

All these proposals combined would fill only half of the hole. Lawmakers would still have to make painful budget cuts as they have for the last two years. But they must refrain from making the worst cuts and setting North Carolina back a generation.

It's not that difficult. Don't cut taxes this year and don't cut teachers or the most vital services, either. Keep the current rates in place, close corporate tax loopholes and use the money from the governor's mandated reductions.

It's a reasonable, balanced approach that makes sense and doesn't turn back the clock on decades of progress in North Carolina or punish its most vulnerable people.

All it takes is an honest look at the evidence and the courage to find a common-sense solution.

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