North Carolina entered the new year, sadly, under the dark cloud of another budget deficit. A shortfall of about $1.2 billion is forecast even though the state’s leadership enacted several tax increases over the last four years. More tax increases are on the way soon, if trial balloons floated by the political class in Raleigh indicate the direction in which the new session of the General Assembly will go.

Among the ideas proposed were higher sin taxes, such as those on tobacco products and alcohol. Other tax ideas that surfaced over the last few years include an extension of the sales tax on services sold at retail, such as lawn mowing and haircuts. North Carolina also has positioned itself as a leader on the Streamlined Sales Tax Agreement, which would allow the state to directly collect revenue on merchandise sold over the Internet.

Taxes. Taxes. Taxes. Something has got to give. North Carolina’s leaders can no longer expect taxpayers to continually pick up the tab for wanton state spending.
In his first term in office, Gov. Mike Easley proposed a tax and expenditure limit for the state. Unfortunately, the governor’s well-intentioned proposal will not effectively constrain the growth of state spending and stabilize the North Carolina budget over the long term.

There is, however, an alternative. It’s called a taxpayer’s bill of rights, or TABOR. A TABOR amendment, modeled after a similar amendment in Colorado, would help North Carolina manage the size of its government. Even better, the amendment would return money to the state’s taxpayers.

A study released in November by University of Colorado economics professor Barry Poulson shows how North Carolina could benefit from a TABOR. Poulson’s policy paper reviewed North Carolina’s budget and spending history dating to the early 1990s, and explained how the state fell into annual budget crises since 2000. He attributed the problems to “unconstrained growth in state spending,” which includes an unprecedented increase in the amount of debt service.

“State spending increased in the 1990s more rapidly than the growth in state revenues, in some years increasing at double-digit rates,” Poulson said. “When the recession hit, the state attempted to sustain this higher level of spending despite the fall in revenues.

“Over the last three years, state spending has been virtually unchanged. Next year (2005) state spending is projected to grow 7 percent, again outpacing the growth in revenue.”

Three expenditures in the budget — education, Medicaid, and debt service — will wreak most of the havoc. North Carolina’s taxpayers subsidize “one of the most expensive systems of higher education in the country” and tuition rates are among the lowest, Poulson said.

Spending increased by 224 percent for Medicaid over the last decade. North Carolina offers benefits under Medicaid that exceed the average private health plan.
Total state debt has been soaring due to voter-approved bond referenda as well as debts issued by legislators without a vote of the people. Overall state debt service will increase dramatically in the coming years, from $296 million in 2003 to $587 million in 2006.

Poulson’s version of a TABOR could have managed the excessive spending increases and heavy debt burdens that taxpayers now must bear. Under the TABOR, state expenditures and debt could not grow faster than the annual rate of population growth plus inflation.

Colorado’s voters passed a TABOR in 1992 that amended the state’s constitution to (1) limit the growth in state revenue and spending to the growth of population plus inflation; (2) ensure surplus revenue above this amount is returned to taxpayers; and (3) require voter approval for tax increases or any weakening of the amendment’s limits. As a result, Colorado taxpayers have received more than $3 billion in surplus revenue since 1992.

In drawing up North Carolina’s TABOR, Poulson created emergency and budget stabilization funds. Specifically, under TABOR since 1995, North Carolina would have amassed a budget stabilization fund of $1.9 billion by 2000-01 that would have been used to offset the state’s budget shortfall in 2001-02 caused by the national recession. According to conservative estimates, $1.4 billion would have been returned to taxpayers in the form of rebates or tax cuts. In addition, the state would currently have $400 million in an emergency fund and $1 billion in a budget stabilization fund for use during economic slowdowns or unforeseen disasters.

Now, that’s the kind of fiscal plan North Carolinians could learn to like.

Richard Wagner is the editor of Carolina Journal.