Gov. Mike Easley, in his proposed budget for the 2005-07 biennium, recommended yesterday that lawmakers retain a now four-year-old “temporary” sales tax increase and also tack an additional 45-cent per pack tax on cigarettes.
At the same time the governor called for the extension of another “temporary” income tax – a fourth tax bracket implemented four years ago on the state’s highest earners – which would ultimately be phased out in 2007.
“I had hoped to let the one-half cent sales tax sunset this year,” Easley said in a statement, “but we do not believe revenues will grow as fast as we hoped for the rest of the year.
“That, in addition to unmet needs in the west and substantial health care growth, makes the temporary continuation necessary.”
Easley proposes $1.125 billion more General Fund spending than the state is currently projected to receive in revenues next year. According to fiscal analysis by the John Locke Foundation, publisher of Carolina Journal, the governor uses higher taxes to account for two-thirds, or $741 million, of the deficit, while only 18 percent of the gap is closed by proposed “cuts” in the base budget. Withdrawals from state trust funds and reserves cover the remainder.
State Senate Minority Leader Phil Berger, a Republican from Eden, said the governor’s budget reflects what now has become an “annual funding crisis,” calling Easley’s budget “broken promises and poor choices.”
“The broken promise is higher taxes,” Berger said in a statement. “The poor choices are the promotion of ever-expanding government spending rather than a serious examination of priorities to finding savings and efficiencies.”
Easley, in a press conference announcing his budget proposal, said the plan reflects principles of fiscal discipline while funding necessary education and economic development priorities. He identified more than $200 million in reductions for next year’s budget, almost one-third of which is achieved through flexible agency cutbacks.
Easley also called for legislative restraint on borrowing, saying debt service for the state has doubled in the last five years from $242 million to $490 million. In the last four years lawmakers have increasingly used so-called certificates of participation for borrowing, in order to circumvent the constitutional requirement for voters to approve new public debt.
“It is growing too fast,” Easley said in yesterday’s press conference, “and we have to put a stop to it.”
While decreasing some capital expenditures and other funding for schools, Easley proposed $163 million in new spending — $57 million in FY 2005-06 and $106 million in 2006-07 — for poor districts and “at-risk” children, apparently in response to the Leandro school-funding lawsuit. He also sought $18 million for the next two years for education programs that he tied to economic development, including more than $14 million for “Learn and Earn,” which would allow students to earn certain types of two-year associates degrees at some high schools in the state.
“Never before have education and economic development been so intertwined,” Easley said.
The governor also requested a $5 million boost for the One North Carolina Fund, which enables him to give grants to relocating or expanding businesses in the state. Easley also sought $11.4 million for another economic incentives program, the Job Development Investment Grants; $8 million in new incentives to offer for movie production in the state; and $10.4 million for biotechnology development programs.
But for all the targeted financial incentives programmed into the budget, Easley and his fiscal advisor Dan Gerlach said that the state had missed out on many recent opportunities to lure businesses to the state, because of its current 8.25 percent income tax rate on earnings over $120,000 for individuals and $200,000 for married couples. According to Gerlach, business consultants would “look at that ‘eight’ number” and cross North Carolina off their list for potential relocation spots. Easley told reporters that “we have to lower it in order to be competitive,” because it had cost the state jobs.
In Easley’s budget proposal, however, “that ‘eight’ number” for the top income tax bracket remains until 2007. Instead of dropping to 7.75 percent as scheduled in 2006, the rate goes to 8 percent, then lowers by another quarter percent in 2007.
Both the governor and Gerlach said the state still can’t afford to let the half-cent sales tax increase, which was “temporarily” implemented in 2001 in response to a budget “crisis,” elapse. It was scheduled to expire in 2003, but was renewed through 2005.
“When we can bring it down, we will,” Gerlach said.
Other new taxes included an additional 35-cent levy on a pack of cigarettes next year, and 10 cents more the following year, leading to a 50 cent total tax on smokes. The governor’s budget writers also called for higher taxes on telecommunications, satellite and cable television service, liquor, candy, newspapers, and entertainment. Those specific adjustments, expected to bring in almost $250 million during the next two years, were made to comply with the national Streamlined Sales Tax Agreement, to make it easier for merchants to collect taxes on Internet purchases.
Easley also recommended taking $37 million from the Tobacco Trust Fund, which receives one-quarter of the state’s share of the 1998 national tobacco settlement. But unlike previous years, he left the Health and Wellness Trust Fund alone, because of a burgeoning prescription drug program for senior citizens that it administers.
Paul Chesser is associate editor of Carolina Journal. Contact him at [email protected].