Another bad sign of times ahead

State revenues down 5 percent

RALEIGH -- State revenues are down 5 percent through October, the latest sign that the state will either have to spend less, raise taxes, or both next year.

According to a report released Friday by the legislature's Fiscal Research Division, state revenues are $320 million below the $6.3 billion target set through October. It's still too early to say what next year's budget deficit will look like, but most signs nationally and within the state point to a big hole in the budget.

"We've really got some weaknesses in our economy-based taxes, and, when you look forward, that weakness is not going to turn around soon," said Barry Boardman, an economist with the division.

The current state budget is $21.5 billion, and the revenue shortfall for next year's budget could reach $1.6 billion, said Rep. Mickey Michaux, a Durham Democrat and a key budget writer in the House. Lawmakers are going to have to make serious and deep cuts, he said. But Michaux said the budget can be balanced without raising taxes.

"We're going to have to do a lot of things that are going to be sort of hurtful," Michaux said. "This is not a time to really be talking about taxes. We know there are places in that budget where we can cut, and we're just going to have to bite the bullet and cut."

Sales tax collections are down 3 percent from the same time last year, an indication that the economic downturn is hurting consumers as the holiday shopping season begins. Another shortfall in wage and salary withholdings suggests that smaller businesses are cutting back on payroll, according to Boardman's report.

Revenue is only half the problem. Every year certain expenses go up, such as the cost of more students in public schools. And Gov.-elect Beverly Perdue campaigned on expensive promises such as free community college and health insurance for more children.

Michaux said, that given the shortfalls in a recession, increased spending is likely off the table.

But if the legislature decides to pay for the kinds of things it does every year -- teacher bonuses, enrollment growth and increases in Medicaid obligations -- then the deficit could grow to as much as $3 billion, said Elaine Mejia, director of the N.C. Budget and Tax Center, part of the nonpartisan and nonprofit N.C. Justice Center, which is dedicated to ending poverty. It's not the time, Mejia said, to cut education or health insurance.

"These low-income working families, they did not cause this financial crisis, and they should not be the ones who have to suffer because of it," Mejia said.