This week’s “Daily Journal” guest columnist is Joseph Coletti, fiscal and health care policy analyst for the John Locke Foundation.
RALEIGH — While state government officials keep one eye on the health care debate in Washington, they are shifting their attention to other pressing matters that they can control, beyond simply opting out of Medicaid. These include tax reform and future retirement benefits for state employees.
In three meetings so far, the Joint Finance Committee on Tax Reform has heard exclusively about sales taxes. As was clear in the budget debate last spring, legislators would like to expand the sales tax to include more services. They would offset some of this expansion with a lower tax rate, ideally low enough to make the change revenue neutral. In order to make the change more palatable to service providers and their clients, the politically wise step would be to make the reform a net tax cut.
Tax cuts are not a popular idea in the General Assembly, however. Legislators and special-interest lobbyists passed a budget that commits $750 million more in state funds than was actually spent the previous year. So the Finance Committee members are trying to pursue two goals at once. If past policy is prologue, a more rational tax system will lose out to one that takes more money out of the private sector. Lawmakers will not reduce the sales tax rate enough to offset the new services they would tax.
It would be simpler and more efficient, with less opportunity to hide taxes, if the state adopted a consumed-income tax instead of keeping the current income tax and adjusting the sales tax on purchases. Maybe the committee will invite John Locke Foundation Vice President for Research Roy Cordato to testify.
The only guaranteed way to ensure there is enough tax revenue to cover the desires of state legislators, however, is to rein in those desires. It is the same lesson many households have learned in the last two years and a big reason why the national saving rate is increasing.
State lawmakers know vaguely that their spending plans are unsustainable. They need a clearer picture of the long-term costs their programs impose on taxpayers. Without it, too many of them will continue to say it is a revenue problem instead of a spending problem. While they admit there is waste and abuse in the budget, their first impulse is to accept the spending as necessary and raise taxes.
During the recent debate, Sen. David Hoyle stated, “Nobody wants any more taxes, but they also don’t want cuts on services.”
Past attempts to show where spending could be cut have largely been ignored. The governor’s current Budget Reform and Accountability Commission (BRAC) may be able to succeed where others have failed by bringing a comprehensive package of program changes to the General Assembly for a vote. Without legislative support of the BRAC process, its success is not assured, but it is our next best hope.
In addition to program funding, the state is on track to borrow another $2 billion from the federal government to pay unemployment claims; officials hope that debt will be deferred beyond 2011 since many other states are doing the same thing. Federal money to bail out states disappears completely in 2011, and the state already faces another $2 billion hole.
Pensions and health benefits for retirees are an even larger problem for the legislature. Girard Miller, writing for Governing Magazine, said state employees should split the cost of their own retirement. State employees in North Carolina currently contribute no money to their future benefits. Pension benefits are at least counted in the state’s financial statements, and there is an acknowledgment that they need to be paid.
Future health benefits get mentioned in a footnote and a separate actuarial document, but the legislature pays only current benefits with no provision for future costs. Legislators in other states even balk at starting to prefund the health system because that would recognize those future benefits as an actual debt for the state. Now, they argue, there is no contractual obligation, so future health benefits can be changed at any time. Without changes, North Carolina has a $30 billion unfunded liability.
Our state’s political leaders have a rare opportunity in the midst of these budget problems to set policies that will provide citizens with a better return on their tax dollars. If they can stop or reverse the growth in state government, these leaders may even find that North Carolina’s economy will return to the vigor that marked the 1980s and 1990s, when annual growth in per capita personal income was 10 percent faster than the national average instead of 14 percent slower, as it has been since 1998.