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Budget and Taxation
The State Budget

North Carolina’s state budget reflects its governmental priorities. Unfortunately, over the past two decades governors and lawmakers have usually chosen to add new programs to the state budget without 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 four of the past five 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 1991 and 2001–03.

The Recent Past

Over the past 20 years, the state budget has grown by about 250 percent. Even after adjusting for inflation and population growth, General Fund operating spending grew 67 percent from 1984–85 to 2004–05, with per-capita taxes rising accordingly on North Carolina families and businesses.

During the 1990s, the state budget grew significantly despite brief slowdowns during the 1991 recession and after the 1994 elections. From 2000 to 2003, spending grew modestly, as lawmakers grappled with recurrent budget deficits, and actually declined slightly in real, inflation-adjusted terms. In 2004, the legislative majority reverted to its old ways and passed a budget that hiked spending by more than $1 billion, or nearly 8 percent.

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. The John Locke Foundation’s latest Freedom Budget proposal identified $1.7 billion in potential savings in FY 2004–05, much of it in the following major areas:

• Bringing the state‘s Medicaid costs into line with the Southeastern average, saving $183 million.
• Eliminating $143 million in wasteful business subsidies and another $213 million embedded in the tax code.
• Saving $54 million through administrative reorganization, reducing the number of major departments.
• Redirecting $171 million from non-teaching education spending to cover teacher pay and enrollment growth.
• Converting $193 million in Smart Start dollars into a mor e targeted program and family tax relief.
• Increasing UNC tuition to cover 30% of educational costs, part of a proposed $237 million savings in this area.
• Reducing the state’s debt service by $241 million by delaying bonds and privatizing state-owned assets.
• Offsetting $23 million in expenses for state-run enterprises and attractions through user fees and donations.

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

• Does the item duplicate what other state agencies or the federal government ar e doing in that area?
• Does the item benefit primarily a definable local ar ea 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 cr eate or expand an entitlement that cannot reasonably be taken back in the future?
• Has the item r eceived 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 inappr opriate legislative or executive actions?
• Does the item use taxpayer funds for political advocacy or to discriminate against racial or ethnic gr oups?

Protecting the Taxpayers

Faced with the inability of lawmakers to set priorities, some states have had success with tax or expenditure limits that peg allowable 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 House but never the Senate. If a strict TPA had been in place during just the past 10 fiscal years, the state’s General Fund budget would have been about $2.3 billion lower in FY 2004–05.

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 target corporate subsidies, porkbarrel spending, excessive cost for entitlement programs such as Medicaid, non-teaching expenditures in the public schools, 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 2004 [560KB Acrobat].