RALEIGH — The North Carolina House is preparing for a final vote on its version of a 2004-05 budget for state government. The best that can be said for it is that it is not the state budget proposed by Gov. Mike Easley last month. But that is, frankly, faint praise.
The House budget is better only because it increases authorized General Fund spending slightly less — by $1.075 billion, or 7.3 percent, compared to the $1.08 billion, or 7.4 percent, increase in Easley’s budget. The House properly says no to some of the governor’s least-defensible ideas, such as $15 million for a NASCAR test track and a $9 million (in state funds) expansion of the state’s Health Choice program providing virtually all-expenses-paid-by-taxpayers health care to non-poor children. But the House fails to endorse some of Easley’s budget-savings ideas, particularly in the Medicaid program, and adds new spending of its own.
The fundamental problem with both budgets is that they represent an unwillingess to come clean with the voters of North Carolina. They fund ongoing expenses in 2004-05 and beyond, including new programs, with revenues that are only scheduled to be collected in 2004-05. By some estimates, this use of nonrecurring revenues to finance recurring expenses approaches $1 billion. The largest single elements are nearly $500 million in proceeds from “temporary” income and sales tax increases that are due to expire sometime in 2005-06; $75 million in raids on reserve and trust funds; and just over $250 million in surplus funds from the previous fiscal year.
It is possible, I suppose, that lawmakers might find themselves with another sizable surplus of unspent funds going into 2005-06. It is possible that revenue growth will surge to such a degree that the $1 billion hole will automatically fill up. It is possible that lawmakers will be willing to let millions in additional nonrecurring spending items drop out of the state budget after building political constituencies to have them become permanent.
Possible, but not likely.
The most likely scenario, if lawmakers approved the proposed rapid growth in spending this year, is that next year they will vote to retain the higher income and sales taxes they first enacted in 2001 as “temporary” relief measures. That really was a recession year, so perhaps some were persuaded the hikes were needed to address an emergency. But the recession is clearly over, North Carolina is beginning to experience the economic recovery that began elsewhere in the country last year, and still our politicians want to spend far more than the underlying tax structure of North Carolina is expected to generate.
They have their reasons. Many Democrats in Raleigh, and some who are registered Republicans, truly believe that North Carolina state government is too small, that it does not do enough to provide education, health care, and other services to its citizens. They’ve believed this for years. But until the 2001 recession, they were unable to gain enough votes to increase taxes for finance their grandiose, wasteful, and extra-constitutional schemes. Now that they’ve pushed the combined state/local sales tax from 6 percent to 7 percent, and the top income tax rate to 8.25 percent, they are loath to give up this “progress.”
Indeed, it’s not hard to imagine that, depending on how the 2004 elections come out, a new General Assembly in 2005 might well want to go beyond the reimposition of the higher sales and income taxes. Some legislative leaders are already talking about “reforming” the sales tax to cover services as well as goods (they don’t understand, or don’t much care, that most “untaxed” services are purchased by businesses and thus should never be subjected to a retail sales tax, which would constitute double-taxation). Others would like to “close loopholes” so that companies in the state pay a higher tax burden (they are under the mistaken impression that North Carolina’s business-tax burden is low and that taxes don’t matter anyway in economic development).
Make no mistake. A vote for a billion-dollar increase in spending in 2004 is probably a vote for a half-billion or larger increase in state taxes in 2005.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.