Carolina Journal Weekly Report

September 27, 2002

In This Issue:
Feature 1 - Localities Win Tax Increase

Feature 2 – Taxes for Judicial Campaigns

Feature 3 -  Legislature OKs Toll Roads  

Feature 1
Localities Win Tax Increase
Legislators approve boost of one-half cent

After losing $209 million last year and $334 million this year in tax reimbursements from the state, local governments were tossed a $188 million bone last week from the General Assembly.

Legislators approved a bill that permits counties to raise their portion of sales taxes by one-half cent Dec. 1, seven months before they were scheduled to receive it.

An earlier version of the budget gave the state the extra one-half cent, which became effective last year, and then would transfer to the local governments in July 2003.

Last week’s action allows the state to continue to keep its one-half cent, while allowing counties to start their extra tax seven months sooner. The measure would produce $188 million for local governments if fully implemented as expected.

If counties implement the extra tax, it will represent an overall one-cent increase in the sales tax for consumers in the last year. Since the legislature has faced budget deficits of $850 million and $1.5 billion in each of the last two years, it has raised overall taxes by more than $1 billion.

Most Republican legislators, and a few liberal House lawmakers, found the latest sales tax measure too much to stomach, and doubted that the state’s portion of the tax would sunset as scheduled in July.
“This is what it’s about,” said Rep. Fern Shubert, R-Union, “is permanently raising taxes.”
Rep. Art Pope, R-Wake, said state government was not cut sufficiently and that instead “it’s the North Carolina families’ budget that is being cut.”

Rep. Paul Luebke, D-Durham, introduced the bill as the only option available to help local governments replace the reimbursements formerly paid to them by the state, which had resulted from repealed taxes. He said the Senate, which passed the measure Wednesday, would not support any other method of increasing revenues for localities.

The House approved the bill on a 58-54 vote Tuesday. In July, it had turned back a similar proposal 60-57, because members then preferred an even transfer of the half-cent tax from the state to local governments, which would have prevented an overall half-cent increase. This time around, local government officials came to Raleigh and applied enough pressure to swing a majority of votes their way.

Changing their votes from “no” in July to “yes” last week were Reps. Jim Gulley, R-Mecklenburg; Howard Hunter, D-Hertford; and Tracy Walker, R-Wilkes. Four other Republicans who voted against the measure in July were either absent or did not vote last week.

Ahead of the Curve

• Rachel Mills, Libertarian candidate for North Carolina’s House District 31, has won nationwide attention as the brains behind the “Ladies of Liberty” pinup calendar, which features 11 other female candidates in an effort to raise money for their campaigns. Tucker Carlson and James Carville of CNN’s “Crossfire” interviewed Mills on Sept. 18. Conservative Carlson told Mills, “I went to your website hoping for nudity, and instead found this,” and then he listed a number of “turn-ons” of the North Carolina lady Libertarians, which included “free market economies.” He then asked her which ones she favored. “Right now I like Russia,” Mills said, “because they just passed a 13 percent flat tax and their economy is soaring.”

• After lawmakers passed legislation permitting local governments to raise the sales tax (see article this page), many across the state were poised to do so. However, that hasn’t seemed to change the opinion of those city and county leaders who are suing the state for seizing their tax reimbursements. “We don’t think we ought to punish the people of Cabarrus County for the actions of Mike Easley and the legislature,” said Commissioner Coy Privette, who said Cabarrus is continuing with the lawsuit. “We want all that [Easley]’s illegally withheld from the people of Cabarrus.” Dan Boyce, a lawyer for the local governments, said, “None of our clients have asked us to back down.”

Feature 2
Taxes for Judicial Campaigns
House approves bill to fund races with public money

The North Carolina House last week passed a bill that would fund elections for appellate judges with taxpayer dollars.

The Judicial Campaign Reform Act nearly slipped through the General Assembly with a provision that only alert taxpayers would have noticed. The original bill called for a “reverse checkoff” on tax returns, which would have required filers to mark a box in order to avoid sending $3 of their taxes to the Public Campaign Financing Fund. Nearly all the House’s Republicans objected to the entire bill, but especially the checkoff provision.

“This is a negative checkoff,” said House Minority Leader Leo Daughtry of Smithfield. “People would be spending money without their knowledge.”

An amendment to send the bill back to committee and change the requirement passed by a two-vote margin Tuesday. The revised bill, calling for tax returns to have an option for taxpayers to check a box to send $3 of their taxes to the fund, passed the House on consecutive votes Wednesday and Thursday. This week the Senate plans to take up the bill. Senators are expected to pass it.

Several other changes to the judicial election process are also included. Supreme Court and Court of Appeals races would become nonpartisan, so that voters could not identify candidates by their political parties.

Most Republicans disliked that provision also, complaining that Democrats were trying to overcome past GOP victories in judicial elections. They also said voters already have minimal information about judicial candidates, and party identification helps them make their decisions.

“Parties filter out unqualified candidates,” Daughtry said. “This bill is a friendly incumbents’ protection bill.”

Under the new proposal, individuals could contribute only up to $1,000 per election to a judicial candidate, and members of the same family could give up to only $2,000. Opponents argued that the bill is unconstitutional because it limits free speech.

“I would be the first to join a lawsuit (against the bill),” said Rep. Larry Justus, R-Henderson.

While the new campaign financing limits citizen contributions, it offers thousands of dollars of public money to qualified candidates. Those who want to run their races through the publicly funded program must meet several criteria, including:

• Receiving from at least 350 North Carolina voters contributions of up to $500;
• Spending only those contributions in primary races;
• Spending only the publicly funded money in the general election.

Court of Appeals candidates accepting money from the fund could receive up to $137,500 and Supreme Court candidates could receive up to $201,300. The candidates fund would be financed through the taxpayer checkoff boxes on their returns and through voluntary contributions, including an optional $50 gift by lawyers when they pay their privilege license taxes. Opponents argued that the plan represented more irresponsible spending out of the state budget.

“I don’t see how we can go out and face our voters,” Justus said, “and not feel like the biggest hypocrites.”

Capital Quotes

“It’s not even trouble… It’s about extinction.”

— Rep. Prior Gibson, D-Montgomery, talking to The Charlotte Observer about the impact of the just- passed state budget on localities throughout North Carolina. The budget withheld $333 million in funds that would normally go to counties and municipalities. In addition, it does not allow the localities to impose an additional half-cent sales taxes to close the resulting funding shortfall. The budget also prompted a protest by local government officials in Raleigh on Monday.

“This is a project that has really been driven by the interest of the private sector.”

— J.B. Milliken, vice president of the UNC General Administration, discussing with Freedom Newspapers a proposal to spend $180 million to $200 million in an attempt to lure biotechnology and pharmaceutical companies to North Carolina. Included in the plan is a new $120 million to $130 million cancer center at UNC-Chapel Hill, a $30 million to $40 million headquarters and training center at N.C. State University and $2 million training centers at seven community colleges. Founding would come through the Golden LEAF foundation, the Tobacco Trust Fund, and the Health and Wellness Trust Fund.

“I’m a Republican and he’s a Democrat. We took the same oath of office. I take this oath seriously. I want him to take his seriously.”

—Sen. Hugh Webster, R-Cas-well, commenting to the Times-News of Alamance County on why he filed a complaint against Gov. Mike Easley with the North Carolina State Bar. John Merritt, one of Easley’s aides, recently threatened localities with retribution for suing the state over the governor’s decision to keep money that would ordinarily go to localities to help close the state’s budget deficit.

Feature 3
Legislature OKs Toll Roads
Bill creates turnpike authority, authorizes three highways

The N.C. House on Tuesday approved and sent to the governor a bill creating a turnpike authority that would oversee construction, operation, and maintenance of public toll roads. The long-negotiated bill signals a turnaround in state transportation policy, which hasn’t included toll roads since the horse-and-buggy days of the 1800s.

The bill, which was adopted by the House on a 74-33 vote, and the Senate, 32-8, Monday, now goes to Gov. Mike Easley for his signature.

The turnpike authority is to be governed by a nine-member board of directors, comprised of five members appointed by the governor and two each would be selected by the speaker of the House and the president pro tempore of the Senate. The authority would issue revenue bonds to pay for the construction of three toll roads. Tolls collected on the roads would be used to repay the bonds.

As specified in the bill, one road would be built in a county having a population of greater than 650,000, and the second road would be constructed in an area having a population of fewer than 650,000. The third road could be built anywhere in the state. Three additional toll roads could be built, depending upon further approval by the legislature. A road and bridge between Gaston and Mecklenburg counties might be the first toll project, transportation officials said.

Toll roads, according to the legislation, would contribute to addressing the critical transportation needs of the state. Creation of the turnpike authority would provide a feasible approach to alleviating congestion on the state’s highways and rescuing the underfunded highway system that cannot keep up with demand, the bill’s sponsors said. Sponsoring the bill were Reps. James Crawford, D-Henderson; Joanne Bowie, R-Greensboro; and Nelson Cole, D-Reidsville.

The Authority would have the power to buy or condemn public or private land for construction and improvement of highways and to enter into partnership agreements. The Authority’s revenue bonds would be subject to the approval of the Local Government Commission, and for the purposes of issuing the bonds the authority would be considered a municipality.

A fiscal note accompanying the bill says the development of road and bridge projects will require funding for design, preliminary engineering, environmental impact statements and right-of-way acquisition. Development costs for the initial two projects are estimated to be $1.5 million in fiscal 2004-05, $11.5 million in fiscal 2005-06, and $10.5 million in fiscal 2006-07.

Construction costs associated with turnpike projects would be incurred by the Department of Transportation regardless of whether the turnpike authority was reported, the fiscal note said. “Turnpike projects will cost the state less to build than if these projects were built solely with state funds,” the report said. “Ultimately, by leveraging state construction funds with toll revenues, the Turnpike Authority will allow the state to stretch those funds further.”

The turnpike authority bill was filed on March 14, 2001. Attesting to the legislature’s difficulty accepting the concept of the introduction of toll roads, the bill was referred and re-referred to various committees in the House and Senate before it was finally passed. Some legislators have argued for years that the state needs toll roads to relieve traffic congestion, but others were reluctant to abandon the state’s tradition of free-access highways.

On The Cutting Edge

Reversion Tax

• Historically, pension plans’ excess assets “reverted” to the firm if the fund was terminated, and were subject to normal corporate tax treatment. In the 1980s, advocacy groups prompted government action to prevent firms from terminating their pension funds, paying termination benefits to workers and retirees, and using the excess assets for corporate purposes.

Lawmakers in 1986 levied a 10 percent (nondeductible) excise tax on reversions from defined benefit plans — the “reversion tax.” In 1988, they made it 15 percent, in 1990 boosted it to 50 percent, and tacked a corporate tax onto the reversion amount. If that tax rate is 35 percent, the firm is left with only 15 cents of each reversion dollar.

Analysts who examined the reversion taxes’ impact between 1986 and 1990 concluded they were the root cause of the decline in corporate pension funding. Firms drastically reduced their pension funding ratios despite the fact that investments were yielding record returns.

 Reversion taxes reduced plan assets in 1995 by about 20 percent. Even in the face of historically high investment returns, plan sponsors reduced their excess pension assets by 60 percent — a dollar value ranging between $218 billion and $262 billion.

Without the reversion tax, after 1986 excess assets would have been at least 2.6 times higher, or about $350 billion.

While defined contribution plans are desirable in their own right, part of their popularity is attributable to tax policies that disfavor defined benefit plans. A more neutral policy would be a more sensible approach, observers say. Eliminating the reversion tax and other regulations that discourage funding would give firms more latitude in designing their pensions in ways that maximize their value.
Researched by Richard A. Ippolito, “The Reversion Tax’s Perverse Result,” Regulation, Spring 2002, Vol. 25, No. 1, Cato Institute.

Foundation Giving

• Charitable foundations have traditionally aimed at self-perpetuation, allowing their core capital to grow year-by-year so they can continue to fulfill their mission ad infinitum.

But some foundations are adopting precisely the opposite strategy: self-liquidation through immediate grants and endowments over a planned, finite period. Their founders want to see results within their own lifetimes, figuring future generations of benefactors will rise to address future goals.

A federal tax code change in 1981 relieved foundations of the obligation to distribute at least as much as they earned on their assets each year and, since then, payout rates have drifted down to near the legal minimum of 5 percent of assets.

 Consequently, during the same period, foundation assets have increased from $47.6 billion to $486.1 billion in 2000. Last year, foundations paid out about $29 billion.

Traditionally, instructions from donors — who have often seen their institutions as memorials to themselves — obligate foundations to maintain their endowments in perpetuity, but aging foundations can become sclerotic.

Foundation sponsors who want their institutions to distribute all funds over a predetermined period of, say, 10 or 15 years, argue that a large grant made today may be several times more socially valuable than smaller grants stretched out over years.

The recent stock market decline, in which some foundations saw 15 percent to 30 percent of their capital disappear, also argues for immediate giveaways, some benefactors reason.

Reported in the Wall Street Journal, Sept. 10, 2002.

Arizona Public Takings

• The state of Arizona was once known for its strong protection of private property rights. Prior to 1997, takings of private property for public use were strictly limited and each case was subject to extensive judiciary review. But a 1997 redevelopment statute greatly broadened the power of municipalities so that specific areas could be targeted for redevelopment.

The 1997 redevelopment statute made it easier for municipalities to take private property that has a “defective or inadequate street layout” or if it lacks in “diversity of ownership.”

Targeted areas known as redevelopment zones are being taken by municipalities and handed over to other private entities. Under the 1997 statute the number of clearly abusive eminent domain cases has risen.

Several small businesses, including a grocery store condemned by the city of Phoenix in 1998, are vacant and the city has yet to accept a proposal for redevelopment.

Several businesses and dozens of homes in a 30-acre area targeted by the city of Mesa in 1998 for redevelopment sit empty because the developer is still seeking funding.
The city of Phoenix condemned Hi Dreams head shop in 2001 to redevelop the property for a less controversial business.

Researched as “Eminent Domain Abuse in Arizona: The Growing Threat to Private Property,” Arizona Issue Analysis 174, Aug. 16, 2002, Goldwater Institute.

Coming Up

• R. James Woolsey, former director of the Central Intelligence Agency, will speak at a special John Locke Foundation dinner at 7 p.m. Oct. 30 at the Brownestone Hotel in Raleigh.

Woolsey is a partner in the law firm of Shea & Gardner in Washington, D.C. He returned to the firm in January 1995 after being director of the CIA for two year. He has been a member of the boards of directors of several corporations.

Woolsey has also served in the U.S. government as: ambassador to the Negotiation on Conventional Armed Forces in Europe, Vienna, 1989-1991; under secretary of the Navy, 1977-1979; general counsel to the U.S. Senate Committee on Armed Services, 1970-73; and adviser (during military service) on the U.S. Delegation to the Strategic Arms Limitation Talks (SALT I), Helsinki and Vienna, 1969-1970.
He earned a bachelor of arts degree in 1963 from Stanford University (with great distinction, Phi Beta Kappa), a master of arts degree from Oxford University, and an LL.B from Yale Law School in 1968, where he was managing editor of the Yale Law Journal.

For more information or to preregister, contact Kory Swanson or Thomas Croom at (919) 828-3876 or [email protected].



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


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