News: CJ Exclusives

“Freedom Budget” Offers Savings, Tax Cuts

JLF plan applies constitutional principles to fiscal policy

North Carolina leaders should find significant and permanent savings in the state budget to restore fiscal responsibility, uphold constitutional principles, and allow for dramatic tax cuts to offer relief to North Carolina families and pro-growth incentives for North Carolina’s struggling economy.

That’s the conclusion of The Freedom Budget, a new report outlining an alternative state budget for the next two fiscal years. It was released Tuesday by the John Locke Foundation, a Raleigh-based think tank.

Coauthors John Hood, Don Carrington, and Roy Cordato scoured state budget documents, Gov. Mike Easley’s recommendations for the 2003-05 biennium, and other government and private research to construct a revised General Fund budget of $14 billion in FY 2003-04 and $14.2 billion for FY 2004-05 — compared with Easley’s proposed $15 billion and $15.6 billion, respectively.

The Freedom Budget proposes a net tax reduction of $581 million by the second year, including the adoption of a flat tax rate of 6 percent on individual and corporate income, family tax credits for preschool and health care expenses, and the repeal of 2001 tax increases on liquor and employers. The alternative budget also allows “temporary” increases in sales and income taxes to expire as previously legislated, saving households and businesses another $600 million by the second year of the coming biennium compared to the governor’s plan.

“After two years of damaging tax increases and stagnation in North Carolina’s economy, it’s time for our state leaders to start actually leading on fiscal policy,” said Hood, JLF’s chairman and president. “Academic research and surveys of business leaders show clearly that reducing our marginal tax rates will boost our competitiveness and make North Carolina an attractive place to invest and create new businesses.”

JLF published its first alternative state budget, Changing Course, in 1995. Since then, JLF analysts have developed and refined a set of strategies, based on provisions of the state’s constitution, for identifying budgetary goals and priorities. These “nine Rs” are: Reform Entitlement Programs, Require More User Responsibility, Redirect Spending to Higher Priorities, Reorganize State Government, Revive Free Enterprise, Restore Civil Society, Remove Advocacy and Race-Based Programs, Reshape the State-Local Government Relationship, and Reduce Biases in the Tax Code.

Applying these principles to the governor’s budget proposal, the Freedom Budget identifies $1.3 billion in General Fund savings in FY 2003-04 and nearly $1.7 billion in FY 2004-05. After adjusting revenue availability to sunset the temporary tax hikes and funding some new spending, including larger pay raises for state employees and community college personnel than Easley proposed, the Freedom Budget eliminates $369 million in special tax biases and loopholes while phasing in $950 million in tax reductions. The net tax cut is $581 million by the second year of the biennium.

“Lawmakers can and should eliminate wasteful and unfair biases in the tax code, but they shouldn’t use the proceeds to expand government further,” Hood said. “The net result should be to lower North Carolina’s tax burden, which is the highest in the Southeast and has nearly doubled in real terms in the past two decades.”

Outlining the Budget Savings

Here are some of the major savings recommendations contained in the Freedom Budget:

• Redirecting $171 million in projected spending on non-teaching positions in public schools to fund teacher pay raises and class size reductions.

• Increasing tuition at UNC campuses to cover about 30 percent of the cost, up from the current share of less than 20 percent. Combined with reductions in taxpayer funding for the UNC Hospitals and the redirection to the General Fund of overhead receipts from research grants received by campuses, the plan calls for immediate savings of $237 million.

• Reforming the state Medicaid program to bring its costs in line with the Southeastern average within four years, saving $89 million in FY 2003-04. Changes would include eliminating optional services, renegotiating reimbursements, and introducing incentives for patients to consume care efficiently.

• Converting the Smart Start program into a more targeted preschool program for at-risk children and a package of state income tax credits for preschool expenses, education, and child health insurance. General Fund savings would be nearly $193 million.

• Eliminating $120 million in subsidies for corporations in dozens of separate programs and credits, including an 80 percent reduction in General Fund support for the Commerce Department.

• Selling the North Carolina Railroad and state-owned ports at Wilmington and Morehead City, using the proceeds to reduce debt. Together with a recommended two-year delay in issuing higher education and other bonds — which were originally sold to voters as not requiring higher taxes — these ideas would reduce debt service costs by $137 million in FY 2001-02.

• Offsetting about $23 million in expenses for state-run enterprises and attractions such as museums by charging higher users fees and soliciting more private donations.

• Administrative savings of $54 million from such ideas as downsizing administrative expenses throughout state government, merging three related departments into a single Department of Public Safety, and creating a unified Division of Disability Services within HHS.

In addition to these and other savings, the plan does propose increasing spending in some areas, such as doubling the supplemental pay raise for community college personnel ($30 million), creating a private-school scholarship program for low-income children ($57 million), restoring school construction funds the governor’s budget cuts ($64 million) and boosting the cost-of-living increase for state employees to 2 percent ($32 million).

Outside the General Fund, the Freedom Budget recommends $153 million in savings in the governor’s transportation budget, including the elimination of subsidies for rail, reductions in paving of rural secondary roads, and an immediate end to funding for the Global TransPark. These savings were combined with $252 million saved by ending the diversion of funds from Highway Trust Fund to finance higher annual spending on road and bridge maintenance ($179 million), urban loop construction ($51 million), and other highway construction ($164 million).

In additional to the 227 specific recommendations for budget or tax changes in the 2003-05 biennium, the Freedom Budget also outlines a strategy for long-term budget savings through structural Medicaid reforms, changes in state employee benefits, and privatization.

“According to surveys of North Carolina voters and business leaders, there is a strong constituency for solving the state’s budget problems without recourse to additional taxes — and, indeed, while cutting tax rates to make North Carolina more competitive in a vibrant, global marketplace,” the report concluded. “By returning to the fundamental, constitutional principles of our state, we can maximize freedom and opportunity in North Carolina while getting our fiscal house in order.”