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Budget and Taxation
The State Budget

The state budget is out of control. Gov. Mike Easley and the General Assembly call it “fiscal restraint” to spend the tax surplus when the economy is good and raise taxes when the economy is bad. Until state leaders learn to exercise real fiscal discipline or to impose discipline on themselves through an expenditure limit, the “spend and tax” pattern of budgeting from the past decade will continue.

Spending Growth

During the last ten years, General Fund spending on operations has grown 64 percent, to $17.1 billion in fiscal year (FY) 2005-06 from $10.5 billion in FY 1996-97 (see chart, "Growth in the General Fund Budget").

By way of comparison, General Fund spending grew 24 percent faster than the combined rate of inflation and population growth, which translates to $1,116 more spending in real terms for a family of four, for a total of $8,140. Spending in FY2006-07 will be at least $18.5 billion.

The state has in place a spending cap tied to average personal income growth for the previous ten years, which would limit General Fund spending growth in FY2006-07 to 5.6 percent. But with budget proposals to increase spending by more than 9 percent in FY2006-07, Gov. Easley and the General Assembly have made that spending cap meaningless. Even if the legislature continues to extend the temporary tax increases first passed in 2001 indefinitely into the future, spending at this level means continuing deficits that will lead to even higher taxes.

It must be remembered that this budget is part of the long term pattern in which higher tax revenues lead to higher spending, which eventually lead to deficits that require higher tax rates.

Principled, Practical Priorities

The John Locke Foundation’s Freedom Budget 2005, an alternative budget for the FY2005-07 biennium, would save more than $1 billion in FY2006-07 compared to the certified state budget.

Here are some of the steps recommended in the Locke Foundation’s Freedom Budget 2005:

• Redirect $60 million from non-teaching positions to fund teacher pay raises and class size reductions.
• Raise tuition so students pay 35 percent of costs of their UNC education as part of $179 million in savings in the university system.
• Save $151 million by bringing the state Medicaid program in line with the average of six southeastern states.
• Eliminate $170 million in business subsidies often referred to as corporate welfare.
• Reduce debt service by $182 million by delaying bonds and selling state-owned assets such as state-owned ports and railroads.
• Restructure and merge state departments to save $55 million.
• End the yearly transfer of $250 million from the Highway Trust Fund to the General Fund, rededicating the money to major road construction.

Test Existing and Proposed Programs

All lawmakers should test existing programs and any proposed programs by asking these questions:

• Should the state government be doing this program, or is it best left to private firms, charities, or families?
• Is another agency or level of government already doing this?
• Has this program received significantly more money with little or no better results?
• Does this program create or expand an entitlement that cannot reasonably be taken back in the future?
• Does this program use public money for political advocacy or to discriminate against racial or ethnic groups?

Protecting Taxpayers

One way to force lawmakers to set priorities and answer (or at least ask) these difficult questions would be with a limit on taxes and expenditures that would peg allowable spending growth to changes in population and inflation. In North Carolina, a proposed Taxpayer Protection Act (TPA) would allow per-capita spending after inflation to remain constant. Versions of a TPA bill have passed the House but they have never passed the Senate. If a TPA had been in place during the past ten fiscal years, the state&srquo;s General Fund Budget would have been more than $2.4 billion lower in FY 2005-06.

Recommendations

1. Enact — or submit as a constitutional amendment to voters — a tax and expenditure limit such as the Taxpayer Protection Act.
2. Set fiscal priorities each year. 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, pork-barrel earmarks and discretionary accounts, excessive costs for entitlement programs such as Medicaid, non-teaching expenditures in public schools, and programs best left to local governments or private institutions.

To view higher quality graphs, download Agenda 2006 [2.7MB Acrobat].