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Budget and Taxation
The State Budget

North Carolina’s state budget reflects its governmental priorities. Unfortunately, over the past two de-cades governors and lawmakers have usually chosen to add new programs to the state budget with-out considering the merits of existing programs and finding ways to fund higher-priority items by eliminating lower priorities. As a result, the budget has grown by leaps and bounds, interrupted only briefly by retrenchment during recessionary periods, including the past three fiscal years. Until state leaders learn to exercise fiscal discipline or to write fiscal discipline into law via a strong expenditure limit the budget will continue to expand out of control during years of normal or superlative revenue growth, creating strong pressure on state lawmakers to raise taxes in the middle of economic downturns, as they did in 2001 and 2002.

The Recent Past

Over the past 20 years, the state budget has grown by 362 percent. Even after adjusting for inflation and population growth, General Fund operating spending has grown 75 percent since 1981-82, with per-capita taxes rising accordingly on North Carolina families and businesses.

During the 1990s, the state budget trended upward, despite brief slowdowns during the 1991-92 recession and after the 1994 elections. Since 2000, spending growth has been essentially flat, after adjusting for increases in population and prices. However, it is important to remember that this period of tight budgets in the early 2000s followed a longer period in the 1980s and 1990s when lawmakers approved massive spending increases, creating new programs and expectations that could not be met with the current tax code and normal revenue growth.

Setting Budget Priorities

North Carolina’s state budget is full of items, programs, or whole agencies that fall outside the proper scope of government and the highest-priority needs of the state. For example, the John Locke Foundation’s alternative budget in 2002 identified $255 million in wasteful subsidies to corporations, $221 million in state services that should be the responsibility of users instead of taxpayers, $100 million in bureaucratic duplication, $218 million in non-teaching personnel and expenses in public schools, and $87 million in inappropriate subsidies for research and arts organizations that should be funded privately or locally, among other savings.

In evaluating state budget items, lawmakers should be asking these key questions:

• Does the item duplicate what other state agencies or the federal government are doing in that area?
• Does the item benefit primarily a definable local area rather than the state as a whole?
• Does the item attempt to accomplish a task that is best left to private firms, charities, or families?
• Are direct users or beneficiaries of the service paying a reasonable amount of the cost?
• Does the item create or expand an entitlement that cannot reasonably be taken back in the future?
• Has the item received significantly more money in recent years but not used it in the most effective way?
• Has the item been funded in the past by deceptive or inappropriate legislative or executive actions?
• Does the item use taxpayer funds for political advocacy or to discriminate against racial or ethnic groups?

Protecting the Taxpayers

Faced with an inability on the part of lawmakers to set priorities, some states have had success with tax or expenditure limits that peg allowable government growth to changes in population, inflation, or other factors. In North Carolina, a proposed Taxpayer Protection Act to allow General Fund budgets to grow in tandem with inflation and population has previously passed the N.C. House but never the N.C. Senate. If a strict Taxpayer Protection Act had been in place during just the past five fiscal years, the state’s General Fund budget would have been about $1.5 billion lower in FY 2001-02 — eliminating the budget deficit for that year.

Goal

To carry out the core responsibilities of state government at the lowest possible cost to taxpayers.

Recommendations

1. State leaders should set firm fiscal priorities every year and search the base budget for items or programs to cut if new spending is needed in other areas. In particular, lawmakers should reduce or eliminate corporate subsidies, pork barrel spending, and programs best left to local governments or private institutions.
2. State leaders should enact in statute, or better yet submit as a constitutional amendment to voters, a Taxpayer Protection Act to limit annual spending increases to a combination of population growth and inflation.

To view higher quality graphs, download Agenda 2002 [560KB Acrobat].