North Carolina lawmakers could have avoided repeated massive budget shortfalls in recent years associated with economic downturns, if only it had a Taxpayer’s Bill of Rights in effect, according to a study released Thursday.
The report, “A Taxpayer’s Bill of Rights (TABOR) for North Carolina,” was written by University of Colorado economics professor Barry Poulson, and was sponsored by the Americans for Prosperity Foundation, a taxpayer advocacy group. He said that the state, if it had an effective TABOR law in the 1990s, could have established a rainy-day fund of $1.9 billion by 2000-01 that would have helped carry it through its tough economic times since the beginning of this decade.
Gov. Mike Easley’s proposed tax and spending limits, tied to the average growth in personal income during the previous 10 years, are ineffective, Poulson said. Poulson has written extensively on the effects of Colorado’s TABOR, which is recognized as the most taxpayer-friendly and restrictive on government spending. Unlike Colorado, Easley calls for a statutory rather than constitutional limit and tax increases would not require the consent of voters.
“The legislature could drive a Mack truck full of tax and spending increases through the huge loopholes in Gov. Easley’s proposal,” Poulson said. “The citizens of North Carolina would be much better served by a true Taxpayer’s Bill of Rights that includes a constitutional amendment and the right to vote on any proposed tax hikes.”
Poulson’s policy paper reviewed North Carolina’s budget and spending history dating to the early 1990s, and explains how the state fell into annual budget crises since the year 2000. He attributes the problems to “unconstrained growth in state spending,” which includes an unprecedented increase in the amount of debt service.
“State spending increased in the 1990s more rapidly than the growth in state revenues, in some years increasing at double-digit rates,” Poulson said. “When the recession hit, the state attempted to sustain this higher level of spending despite the fall in revenues.
“Over the last three years, state spending has been virtually unchanged. Next year state spending is projected to grow 7 percent, again outpacing the growth in revenue.”
Poulson said the spending growth rate can be attributed mostly to three items: education, Medicaid, and debt service. He said that North Carolina’s taxpayers subsidize “one of the most expensive systems of higher education in the country,” and that tuition rates are among the lowest.
Spending increased by 224 percent for Medicaid over the last decade, “more than any other component of state spending,” Poulson said. North Carolina offers benefits under Medicaid that exceed the average private health plan.
According to the state treasurer and state budget office, total state debt will double this fiscal year from $4 billion to $8 billion. Debt service will increase in the coming years, from $296 million in 2003 to $587 million in 2006.
“Since the mid-1990s,” Poulson wrote, “North Carolina voters have approved billions of dollars in new debt because legislators promised that the new obligations would not result in any increase in taxes.
“The promise that this debt could be financed without raising taxes was not met. The cost of this debt accounts for a significant share of the tax increases discussed earlier in this report. Recent estimates are that about one-third of the tax increases are required just to service this debt.”
According to Poulson, a TABOR with “teeth” could have harnessed the excessive spending increases and onerous debt burdens that taxpayers now must bear. Under the ideal TABOR, he said, “state expenditures and debt could not grow faster than the annual rate of population growth plus inflation. Surplus revenue received above this amount would accrue in a Rainy Day fund and a portion would be returned to taxpayers. Tax increases or spending above the amount of the [TABOR] limit would require voter approval.”
But as in most states, Poulson is not optimistic that North Carolinians will see an effective TABOR anytime soon.
“Unfortunately, special interests (like health care and education lobbyists) in North Carolina have pursued tactics designed to block an effective tax and spending limit or to introduce a watered-down limit that would do little to manage the growth of government or stabilize the budget over the business cycle,” Poulson said.
“The major hurdle is educating North Carolina citizens about the need for fiscal discipline, which has been sorely lacking in the state. Only when [they] recognize the need to constrain state spending will the stage be set for fundamental changes in fiscal policy, such as a Taxpayer’s Bill of Rights amendment,” he said.
Paul Chesser is associate editor of Carolina Journal. Contact him at [email protected].