RALEIGH – As the Perdue administration, the General Assembly, and JLF research team all work furiously on their various state budget proposals for the 2009-11 biennium, I thought it might be worthwhile to give Carolina Journal a snapshot of North Carolina’s fiscal policy trends and rankings.

I’ll be drawing from three relatively new data sources: the 2009 edition of Facts and Figures, an annual compilation from the Tax Foundation; the latest edition of JLF’s own North Carolina Fast Facts cards (email us if you like copies of these handy little pocket card); and a new nationwide study, Freedom in the 50 States, by the Mercatus Center at George Mason University.

Let’s start with how North Carolina compares to other states in government spending and taxes. Those who believe North Carolina to be a low-tax state are living in the past. But those who believe North Carolina is one of the highest-taxed states in the country are also overselling the point. Here are the facts:

• State and local taxes took about 9.8 percent of personal income in North Carolina in FY 2008, ranking us 20th in the nation and 3rd in the South, behind Georgia and Virginia. The highest-taxed state was New Jersey, at 11.8 percent of income. Two notable low-tax states were Florida (7.4 percent) and Texas (8.4 percent).

• Contrary to the misapprehensions of some, North Carolina’s tax code is relatively punitive towards entrepreneurs, investors, and job creation. That’s primarily because of our high marginal tax rates on personal and corporate income, which tend to sting small- business entrepreneurs and investors more than big businesses (because the latter often qualify for various tax credits to offset their liability). On the Tax Foundation’s Business Tax Climate Index, North Carolina ranks 39th, by far the worst in our region. Notable states with attractive business-tax climates are Florida (5th best) and Texas (7th).

• On the broader measure of “Economic Freedom,” used in the Mercatus study to compare both fiscal and regulatory policies across the 50 states, North Carolina comes in right below the median at 26th. Most of our neighbors rank higher in economic freedom. The most-free state economy is New Hampshire’s. The least-free state economy is New York’s.

• North Carolina’s tax burden, measured as a percentage of personal income, used to be a bit higher than it is now – hitting a peak of 10.3 percent in 1994 and reaching 10.1 percent as recently as two years ago. Some of the tax hikes from the 2001-03 period were finally lifted, but others remain. What’s really depressing about the cost of government in North Carolina is that it delivers such a poor rate of return to taxpayers.

• Of the authorized General Fund budget for this fiscal year, about 37 percent was earmarked for K-12 education, 17 percent funded higher education, and 15 percent funded Medicaid. Add in public safety (corrections + law enforcement) at 10 percent and you account for all but about a fifth of the state’s General Fund budget. Nearly half of the remaining money went for debt service and employee-benefit obligations. So it is truly impossible to close a multi-billion-dollar budget deficit without identifying some significant savings in these big-ticket items of state spending.

• Most of the General Fund budget is financed with personal (55 percent) or corporate (6 percent) income taxes. The state sales tax pays for 26 percent, with the remaining 13 percent coming from excise taxes, fees, and miscellaneous revenues.

• Of the $2.9 billion originally authorized for transportation expenditures this year, 38 percent went for new highway and road construction. Another 32 percent went for maintenance, while 25 percent was devoted to motor-vehicle registration and regulation, public transit, passenger rail, and other transportation modes. The rest was transferred to the General Fund.

These statistics provide a valuable foundation for understanding the state’s precarious fiscal position as we await the first stages of what promises to be a momentous and contentious budget debate in the General Assembly this year.

Hood is president of the John Locke Foundation