Policy Reports
Freedom Budget 2007

April 24, 2007

Freedom Budget 2007 continues the tradition of John Locke Foundation alternative budgets that revise the governor’s Continuation and Expansion budgets. If an item is not included here, the author accepts the governor’s proposal. That includes all pay raises for state employees and some tax changes. The specific recommendations detailed in this report are made as additions or subtractions from Gov. Mike Easley’s budget.

The net General Fund savings for fiscal year (FY) 2007-08 of $1.0 billion is not as large as in previous alternative budgets, but this includes some items of significantly higher spending than Gov. Easley has proposed:

• $172 million to transfer one-third of the county share of Medicaid to the state, with elimination in FY 2009-10.



• $50 million more than the governor’s $3.5 million expansion to assist in transforming the state mental health system.



• $147 million to provide all state employees with a five-percent raise instead of the governor’s proposed 2.5 percent increase for non-teachers.



• $150 million to cover a larger portion of the unfunded liability for retired state employees’ health benefits.

This $563 million in suggested new spending is more than offset by $1.57 billion in proposed savings throughout state government, such as:

• Redirecting $46 million in projected spending on non-teaching positions in public schools to fund teacher pay raises.



• Increasing in-state tuition at UNC campuses to cover 35 percent of costs, up from 21 percent. Combined with reductions in taxpayer funding for the UNC Hospitals and research overhead, the plan calls for immediate savings of $246 million in the university system.



• Reforming the state Medicaid program to bring its costs in line with the Southeastern U.S. average within two years, saving $166 million in FY 2007-08. Changes would be made in eligibility, coverage, and reimbursement policies.



• Converting the Smart Start program into a state income-tax relief package for preschool expenses and education.



• Offsetting the federal tax penalty for individuals who do not receive health insurance through their employer with a $250 per person tax credit, which would be worth $1,000 for a family of four.



• Eliminating roughly $270 million in subsidies for corporations in dozens of separate programs and tax credits, including an 83-percent reduction in General Fund support for the Commerce Department.



• Offsetting more than $23 million in expenses for state-run enterprises and attractions such as museums by charging higher user fees and soliciting more private donations.

Highway Funds
Outside the General Fund, Freedom Budget 2007 recommends $138 million in savings in the governor’s FY 2007-08 transportation budget, including elimination of subsidies for rail, reductions in paving of rural secondary roads, and a two-thirds reduction in contingency construction money controlled by the Speaker of the House and the President Pro Tempore of the Senate.

These savings are combined with $172 million saved by ending the diversion of funds from the Highway Trust Fund to finance higher spending on road and bridge maintenance ($281 million), urban loop construction ($66 million), and other road construction ($204 million).

Taxes
In addition to finally ending the temporary sales-tax and income-tax increases from 2001 and thereby saving taxpayers $300 million, Freedom Budget 2007 includes a comprehensive tax reform proposal for North Carolina. This proposal would end income tax preferences and biases worth $317 million in FY 2007-08, while providing $811 million in broad-based tax relief to individuals and businesses:

• Over two years, the plan would eliminate the top individual income tax brackets, creating a flat marginal rate of 6.0 percent. This would save taxpayers $817 million in FY 2008-09.



• The corporate income-tax rate would fall from 6.9 percent to 6 percent, saving $91 million in FY 2008-09.



• Families would get a refundable Smart Start tax credit of $200 per preschool child, saving them $70 million. They could also deduct the first $1,500 of education spending or saving, worth $159 million.



• The plan would reinstate refundable tax credits for long-term care insurance worth $6 million and would add a new, $250 refundable credit for individual purchases of health insurance worth $130 million.

Download PDF file: Freedom Budget 2007 (574 k)

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