News: CJ Exclusives

State Budget With No Tax Hike Points N.C. Toward More Sustainable Path

JLF budget expert says plan that surived veto puts $200 in average household's budget

The General Assembly’s no-tax-hike budget sets North Carolina state government on a more sustainable course than the one Gov. Beverly Perdue and her allies supported. The John Locke Foundation‘s top budget expert reaches that conclusion in a new Spotlight report.

“Given the governor’s veto, this is likely the best possible budget that could have made it through the legislature,” said Joseph Coletti, JLF Director of Health and Fiscal Policy Studies. “Lawmakers accomplished their most important task of the year by passing a budget with no tax increases and a significant rebalancing of state government spending.”

Families will feel positive impacts from the budget’s tax provisions, Coletti said.

“By sticking with their campaign promise to eliminate a temporary sales tax, Republican legislative leaders have helped taxpayers across the state,” he said. “Households will have about $200 more to spend, save, and invest. This budget avoids the governor’s plan to swipe another $800 million from the private-sector economy. Beacon Hill Institute researchers estimate that allowing the sales tax to expire will lead to a net gain of 11,000 jobs.”

Coletti calls the new budget a “good starting point.” “There’s still work to do,” he said. “Lawmakers should look for additional savings in corporate welfare. The legislature also should use this budget as the basis for reforming the tax system and state employee pay and benefits.”

The report punctures myths about state spending cuts and about major differences between Perdue’s plan and the final budget.

“When you adjust for accounting differences and the federal bailout of state government, the new budget will spend $1 billion less than the budget in place today,” Coletti explained. “But it’s important to note that the new budget is just $400 million less than Gov. Perdue’s proposal.”

“The differences are even smaller in areas that have generated the most public debate,” he added. “The final budget for public schools was just $108 million — or 1.4 percent — less than the governor’s proposal. If you adjust for the More At Four program’s move to a different department, the difference falls to $43 million, roughly one-half of 1 percent.”

Inflated estimates of the state’s budget shortfall also skewed the debate, Coletti said.

“Gov. Perdue claimed that spending cuts in her plan would fill 72 percent of the budget gap over two years, but that’s true only if you accept her estimate of a $2.4 billion budget shortfall,” Coletti explained. “The real shortfall was smaller — about $2 billion. Using that figure, the governor actually would have covered 55 percent of next year’s gap through the extension of a 1-cent sales tax and other one-time measures.”

Perdue’s plan would have led to even more reliance on the temporary sales tax in 2012-13, Coletti said. “The sales tax extension and other temporary measures would close 70 percent of the budget gap for that year,” he said. “The governor’s plan would have set the state up for a $700 million structural deficit in 2013.”

The General Assembly’s budget takes a more responsible approach, Coletti said. “Lawmakers do not rely at all on temporary taxes,” he said. “Their final product is weighted heavily on permanent net spending reductions.”

Though their budget is better than Perdue’s plan, legislative budget writers draw some fire in Coletti’s report. “This budget relies on about $700 million in temporary fixes to get through 2011-12,” he explained. “In addition, lawmakers left no margin for a slower economy in 2012-13, and they left a $100 million structural deficit to start the next budget cycle.”

The budget’s most vocal critics have “misdirected their fire at spending changes in schools and Medicaid,” Coletti said.

Critics are correct when they note that Medicaid recipients will have fewer services covered and that health care providers will get paid less, Coletti said. “This is a direct byproduct of Obama administration rules that forbid any reductions in Medicaid eligibility,” he said. “If the state cannot limit who receives Medicaid services, the only alternative is to limit what everyone on Medicaid receives.”

Other Medicaid claims are less realistic, Coletti said. “In one case, critics complain about a so-called Medicaid cut that actually represents an attempt to game Medicaid reimbursement rules,” he said. “That change actually would net nearly $2.5 billion in new federal Medicaid dollars over the next two years.”

Corporate welfare within the budget deserves more attention, Coletti said. “Most of these targeted tax breaks, subsidies, grants, and other goodies are untouched,” he said. “If budget critics had not been as fixated on reinstating the temporary sales tax, they might have focused their fire on cutting these programs.”

Regardless of its flaws, this budget sets North Carolina government on a better path, Coletti said. “Previous legislatures have spent a lot of time kicking tough budget decisions down the road,” he said. “This legislature switched gears and agreed to make some tough decisions this year. The new budget represents a step in the right direction.”