Carolina Journal Weekly Report

February 11, 2002

In this issue

Feature 1 - Local Government's Burden

Ahead of the Curve

Feature 2 - Busting the Budget

Capital Quotes

Feature 3 - Shanahan Sticks With Principle

Coming Up

On the Cutting Edge

Local Government's Burden
Charlotte, Wilmington, Hickory tops in Taxes

Charlotte, Wilmington, and Hickory were the top tax-happy large cities in North Carolina in 2000, according to a new report published by the Center for Local Innovation.

The findings were part of the center's fourth annual By the Numbers report, which analyzes property, sales, and other local tax and fee burdens on residents of each of North Carolina's counties and municipalities. The Center for Local Innovation is a division of the John Locke Foundation, which also publishes Carolina Journal.

Charlotte once again, by far, had the highest tax burden per resident in the state. The Queen City and Mecklenburg County brought in a combined $1,826.14 per capita in the fiscal year 1999-2000, and also had the highest property tax and sales tax burden per capita.

The compilation of 2000 data culled from the State Treasurer's Annual Financial Information Report showed Wilmington and Hickory made the largest leaps in the rankings. The Port City moved from ninth to second among cities with populations greater than 25,000, while Hickory jumped from 12th to third. The rankings were for combined taxes, and the movements for the two cities can be attributed to large increases in property tax burdens per capita.

Such changes can be attributed to a number of factors. Property tax increases, revaluations, annexations, fee increases, and economic conditions can affect the numbers. "The reason we've had a tax increase is because previous councils annexed about 20,000 new residents," said Jason Thompson, a recently elected Republican city council member in Wilmington. "But we've only provided a portion of the infrastructure."

Of the large, urban counties in the state, Mecklenburg stood out with the highest combined tax burden, at $1,873 per capita. Forsyth and Buncombe counties boasted the lowest burden among areas surrounding large cities.

Bladen, Catawba, Lee, Wilson, and Edgecombe were high tax-burden counties that did not fall under the high-tax coastal or urban categories.

The rural counties of Madison, Caswell, Hoke, and Gates carried the least tax burden per capita in the state, with Alexander County the lowest.

Perhaps more significant are the numbers that illustrate how large a percentage of North Carolinians‚ income goes toward funding local governments. The counties of Bladen and Edgecombe were found to have the highest combined tax burden as a percentage of income per capita. Among urban centers, New Hanover County residents averaged 5.56 percent of their income going to city and county taxes. Residents of Durham County contributed 5.5 percent of their income to local taxes and fees.

Ahead of the Curve

On Feb. 5, Gov. Mike Easley announced he would implement several cutbacks to cover a projected budget shortfall this year (see story, Page 2). At his press conference, he argued perhaps more strenuously than ever for the state legislature to approve a lottery to boost revenues, primarily for education. The following day State Treasurer Richard Moore spoke at the annual meeting of the Thomasville Area Chamber of Commerce and said, "I'm not a huge lottery fan." The High Point Enterprise quoted Moore as saying, "You don't do a lottery because times are bad." He said that a lottery is not a stable source of revenue and that there is no quick fix for North Carolina's financial woes. Moore also said, "We've had horrible revenue forecasting. The General Assembly has used far too rosy a forecast." The Enterprise also reported Moore's criticism of the state's spending habits: "North Carolina, three of the last four years has spent more than it's taken in. You can't run a business like that."

Left untouched by Easley was money obtained so far from North Carolina's $4.6 billion tobacco settlement. About $150 million remains unspent by the Golden LEAF Foundation, the nonprofit organization established by the state legislature, which is responsible for distributing half the funds for the purposes of economic development. An additional $194 million from the settlement is expected this year, part of which is targeted for a prescription drug benefit for senior citizens.

Busting the Budget
Easley says deficit at least $900 million

In a press conference Feb. 5, Gov. Mike Easley announced he was taking measures, by executive order, to overcome a projected state budget deficit of at least $900 million. The announced figure did not include a projected Medicaid shortfall of $108 million.

The governor said the estimate was "a best projection or a little beyond," but according to a state budget official, it could be much worse.

"The most likely scenario would result in a shortfall of $950 million," said Mike Kiltie, chief economist for the Office of State Budget and Management. However, Kiltie said "on a pure pessimistic level" the deficit could reach $1.2 billion, taking the state's Medicaid shortfall into account.

Easley said he was hopeful that the federal government, through a long-discussed and debated economic stimulus package, would provide relief to state governments for Medicaid. But Congress this week refused to pass the package. North Carolina faces a potential $108 million Medicaid shortfall, but has $32 million in reserve for the health subsidy program.

"We think there's a chance that money will be approved," said Bonnie Cramer, the state's budget administrator for human services and public safety. She said the issue was the top lobbying priority of the National Governors' Association.

Easley announced a range of measures to offset the shortfall, including 7 percent in cuts for state agencies, but said classrooms would not be affected. He also put into escrow $209 million in local government reimbursements, including expected inventory, franchise, natural gas, alcohol, and homestead tax revenues.

"It will drive the local governments crazy," said House Minority Leader Leo Daughtry. "They depend on that. They don't have the leisure of deep pockets."

News accounts from daily newspapers around the state reported reactions by county and municipal officials. Hiring freezes, reduced services, and cuts in nonessential functions suddenly became topics of discussion, with several localities calling emergency meetings.

"We didn't create this, and it shouldn't be handed down to us," Tony Jarrett, chief financial officer of the City of Thomasville, told the High Point Enterprise.

On the other hand, some local governments, such as the City of Wilmington, anticipated that the state might withhold the reimbursements after last year's difficulties, and prepared accordingly.

Easley's executive order set aside a total of $1.17 billion, including $313 million from the state's savings reserve. He also increased the amount transferred from the Highway Trust Fund by $80 million, and placed $37.5 million in the Mental Health Trust Fund on hold. He also plans to hold back $112 million in capital building projects, which Daughtry called "bad economics."

"When you don't keep your property up, you just lose more money down the road," he said.

Perhaps even more emphatic than in the past, Easley also stressed the need for the state to adopt an "education lottery" in order to fund his goals of smaller class sizes and educational programs for 4-year-olds. He urged the General Assembly to pass legislation establishing a game, even without a statewide referendum.

"There's no reason not to do this," said the governor.

Capital Quotes

“The state is balancing the budget on the backs of the cities and the counties. We're proud in the city of Charlotte of our reserves in case of emergencies, and now that they've eliminated their reserves, they're going after ours. And by the way, they did this with no warning and no discussion.”

— Charlotte Mayor Pat McCrory, discussing the state's latest budget maneuver with the Charlotte Observer. With the state facing a budget shortfall nearing $1 billion for the fiscal year ending June 30, Gov. Mike Easley declared a budget emergency Tuesday. The governor ordered that $209 million in funds scheduled to be distributed to municipalities be retained by the state. Easley also took money from the rainy day fund and several trust funds and ordered additional small cuts in state spending in an attempt to close the shortfall.

“This will not end soon. There is a fairly significant lag time from when the recession ends until revenues pick up again.”

— Scott Pattison, executive director of the National Association of State Budget Officers, commenting to the Winston-Salem Journal on the general budget outlook that states face. He noted that state revenues usually don't full recover until a year to 18 months after unemployment peaks.

“Stay tuned. We haven't precluded any legal option... . We have not committed any naming rights to anybody at this point.”

— Scott Falmlen, N.C. Democratic Party executive director, describing to the Charlotte Observer negotiations about selling naming rights to the party's headquarters building, which is being remodeled. Democrats are not the only ones looking to sell naming rights; Republicans are moving into a larger building in Raleigh and are looking for sponsors as well. They already have one donor lined up, whose $100,000 contribution will be recognized by naming a terrace in his honor.

Shanahan Sticks with Principle
Councilman says city politics don't follow party lines

Having served on the Raleigh City Council since 1996, Kieran Shanahan sees significant differences between local and national politics.

"At the local level, people are very passionate about what they feel," he said. Shanahan spoke at a John Locke Foundation Shaftesbury luncheon Feb. 4.

The 45-year-old lawyer, who hails from McLean, Va. near Washington, D.C. grew up watching others under the political microscope of the nation's capital. The children of Watergate figures John Erlichman and H.R. Haldeman were his classmates, and his father worked in the CIA.

"I was literally surrounded by political people growing up," Shanahan said.

Now he looks around and sees politicians concerned with growth issues, a public rail transit system, and Raleigh's version of a capital belt highway around the city. The tug-of-war over the 1970's Watergate break-in is a distant memory.

Shanahan has discovered the nature of city politics cuts across Democrat-Republican lines, and when a local problem affects voters directly, he said it often causes them to abandon principles they hold otherwise. Sometimes a conservative may decide individual property rights aren't as important as the needs of the city, or a liberal might actually think his taxes are too high.

Shanahan said what residents believe usually depends on how it affects their own neighborhoods. Successful politics requires personalizing the process.

"At the local level -- it really requires meeting the people," he said.

In Raleigh, after having former Mayors Paul Coble and Tom Fetzer as his allies for the last six years, he now finds himself in a constant high- profile conflict with new Mayor Charles Meeker. Since November's election he has spent a lot of time trying to build alliances, he said, but "I'm really in a defensive mode down there."

At the Locke luncheon he spoke briefly about his disagreement with Meeker over the completion of the I-540 Outer Loop highway. Meeker said he wanted to delay building the western portion of the loop and perhaps skip the southern portion altogether, but during last fall's campaign he said he favored completing the entire project. That flip-flop has led to a petition to recall Meeker, and that would require a new election. Shanahan has repeatedly criticized Meeker about the outer-loop issue.

Shanahan also spoke to the larger issue of regionalization, which he believes is a potential danger to the interests of Raleigh.

"When people are talking about regionalization," Shanahan said, "they are talking about wanting what Raleigh has."

Shanahan is concerned also that Meeker seeks relationships with neighboring city leaders, namely Cary Mayor Glen Lang, that appear to be at the expense of the quality of Raleigh's assets. He said the capital city has a top-notch water and sewer system, which it shares with other communities, but he said "Cary has problems."

Shanahan said Raleigh "holds all the cards," and is willing to deliver services to others, but doesn't want to "do violence to our assets."

Coming Up

Syndicated columnist and CNN personality Robert Novak will speak at a John Locke Foundation Headliner luncheon at noon Feb. 11 at the Brownstone Hotel in Raleigh.

Novak writes the political column “Inside Report” three times a week and appears in more than 300 newspapers nationwide. He is perhaps most well-known for cohosting the programs “Crossfire,” “Capital Gang,” and “Novak, Hunt & Shields,” on CNN.

“Inside Report” is noted for its rapidly moving dateline and its hard-hitting analysis of national and international developments.

Novak has also coauthored the following books: Lyndon B. Johnson: The Exercise of Power; Nixon in the White House: The Frustration of Power, a comprehensive study of the first 2 1/2 years of the Nixon administration; and The Reagan Revolution, an analysis of Ronald Reagan’s blueprint to transform the U.S. government.

Contact Kory Swanson at (919) 828-3876 or [email protected] for more information, or to register for either event.

On the Cutting Edge

"Smart Growth"

Traffic congestion, air pollution, and loss of open spaces have led some municipal governments to embrace "smart growth" urban planning to slow suburban "sprawl." The strategies are designed to increase urban population density, boost mass-transit ridership and cut auto driving.

But experts point to Portland, Ore.'s experience, where smart- growth policies led to increased traffic congestion, air pollution, consumer cost, and taxes.

Beginning in 1991, Portland's Metropolitan Planning Organization (MPO) established minimum density codes that required the owner of a quarter-acre vacant lot to build at least a six-unit complex, or nothing at all. To meet their targets, planners rezoned farms and other open spaces to high density. Ten thousand acres of prime farmland inside the MPO's three-county area were targeted for high-density development.

The MPO diverts most of the region's transportation funds to mass transit, ignoring road improvements; refuses to add road capacity to most freeways and highways; and purposely increases congestion by removing street lanes.

The results have been predictable. Portland's smart-growth restrictions changed one of the nation's most affordable single-family housing markets in 1989 to one of the least affordable by 1996. Nor did residents embrace the planned move to apartments. In 1999 vacancy rates were a decade-high 7 percent, and 11 percent for apartments built in the 1990s.

Planned congestion was supposed to cut per-capita driving by 10 percent, yet the MPO's planners now hope for 4 percent -- and that may be unrealistically optimistic. Given the area's projected 80 percent population increase, even a 5 to 10 percent reduction in per-capita driving will still increase smog by 10 percent because of the MPO- mandated stop-and-go driving.

As one smart-growth advocate admitted, there is "a gap between the daily mode of living desired by most Americans and the one that most city planners believe is appropriate."

Reported in Regulation, Fall 2001.

Hawaiian Health Care

Health care in Hawaii is a mess, says Greg Scandlen of the National Center for Policy Analysis. Hawaii has a waiver from ERISA, the federal law governing most employer-sponsored health plans, that allows the state to mandate employer-provided health insurance coverage.

The state's "Prepaid Health Care Act" requires that workers pay no more than 1.5 percent of their wages for their share of the cost of coverage. As premiums have increased much faster than wages, the employee contribution now amounts to only 7 percent of the cost, compared to 30 percent of the cost when the law was passed in 1974. Curiously, the state itself pays only 60 percent of the cost for state employees, with state workers paying the other 40 percent.

Since people who work only 20 hours a week are exempt from the law, many companies employ only part-time workers, and unemployment is high.

The act also requires a single benefit design, which has helped create a near monopoly among health insurance providers. The Hawaii Medical Service Association (the local Blue Shield plan) has the bulk of the market. A local Kaiser plan takes almost all the rest.

Now the state insurance commissioner is demanding new power to control premium rates. The chairman of the state legislature's Health and Human Services Committee has proposed a "universal reimbursement fee schedule" that would require all payers, including auto, workers‚ comp, and health plans, to pay health care providers at 120 percent of the Medicaid rates.

Reported in the NCPA Policy Digest, 1-21-2002.

Income Tax Data

Simply mention the words "tax policy" and liberal politicians fly into their "Rich People Should Pay Their Fair Share" lecture. But the latest data from the Internal Revenue Service demonstrate that the wealthy are bearing an increasingly disproportionate share of the tax burden.

Data from the IRS show that the top 1 percent of U.S. earners accounted for 19.5 percent of all adjusted gross income reported to the IRS but paid 36.2 percent of all federal income taxes. The top 50 percent of earners took in 86.8 percent of adjusted gross income, but accounted for 96 percent of personal income taxes paid.

The bottom 50 percent earners, on the other hand, accounted for 13.2 percent of personal income, while contributing only 4 percent of all personal income taxes.

It doesn't take a high income for Americans to land in high tax brackets. All one had to earn to qualify among the top 25 percent of filers in 1999 was a modest $52,965. People in that heady income class paid 83.5 percent of all taxes.

To be among the top 50 percent, a person had to earn only $26,415 a year. The 27 percent marginal tax rate kicks in for single taxpayers at only $27,050 of income.

Reported as an editorial in the Wall Street Journal, 1-22-2002.



Material published here may be reprinted provided the
Locke Foundation receives prior notice and appropriate credit is given.


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