RALEIGH — As the North Carolina Senate prepared to release elements of a spending plan for 2005-07, the John Locke Foundation offered its own alternative Monday that avoids any new or extended tax increases – and, indeed, uses more than $1 billion in budget savings to reduce income taxes for state households and businesses.
JLF’s Freedom Budget 2005 proposes to double the average pay raise for state employees and retirees to 4 percent in FY 2005-06, up from Gov. Mike Easley’s proposed 2 percent, and begins a five-year process of transferring to the state the share of Medicaid costs currently imposed on counties. The plan also lowers the top marginal tax rate on all personal and corporate income to 6 percent.
“This budget plan shows that there is no need for higher taxes, draconian cuts, or a government lottery to fund the legitimate needs of state government, just an emphasis on the right priorities,” said Joseph Coletti, fiscal policy analyst at JLF and author of Freedom Budget 2005. “North Carolina’s recent string of budget deficits is the result of poor spending policies, not inadequate revenues or forces beyond our control.”
In Coletti’s proposal, which uses Easley’s budget plan as a starting point, General Fund spending would grow by $254 million over the next two years, or 2 percent, to $16.1 billion in FY 2006-07. By contrast, Easley’s proposal is for $1.6 billion in new spending over the biennium, a 10 percent increase, to $17.5 billion in FY 2006-07.
One of the largest areas of Freedom Budget savings is Medicaid, where North Carolina’s per-capita costs are 12 percent higher than the regional average. Bringing the program in line with other states frees up more than $250 million a year in taxpayer dollars. The budget also eliminates targeted business incentives – such as cash grants, below-cost services, and tax credits – to redirect another $170 million to other uses.
By setting firm priorities, Coletti said, the Freedom Budget provides more resources to address critical state needs, such as improving employee compensation and ending the annual diversion of hundreds of millions of dollars from the Highway Fund and Highway Trust Fund, allowing all proceeds from gas and car taxes to be invested in highway construction and maintenance.
“North Carolina now has some of the most-congested urban interstates in the nation, and our highways and bridges remain in a deplorable condition,” Coletti said. “We owe it to motorists to spend their tax dollars addressing these problems, rather than transferring the money to lower priorities within the General Fund.”
Here are some other key elements of the new Freedom Budget:
• While identifying $1.5 billion in budget-savings recommendations in key areas such as Medicaid, corporate welfare, administrative reorganization, and educational expenditures other than classroom teachers, the budget still increases health and human services spending by 2.6 percent over two years and education spending by 4.1 percent.
• The budget lets the 8.25 percent income-tax rate and a half-penny on the sales tax rate expire as scheduled, rather than be reimposed as Easley proposes, thus saving taxpayers almost half-a-billion dollars next year. In addition, it phases in a reduction in the top tax rate on personal and corporate income to 6 percent, which along with other changes yields a net tax cut of about $700 million.
• In-state tuition at the University of North Carolina would rise over two years to cover 35 percent of the cost of undergraduate education, up from 21 percent.
• The plan reduces the state’s debt service by more than $100 million next year, in part by delaying the issuance of some bonds and in part by selling state-owned assets to the private sector and using the proceeds to buy down existing debt.
• It proposes to save $23 million by shifting the cost of some services outside of core state functions to users, and recommends $55 million in administrative savings by eliminating duplication, merging agencies, and creating combined Cabinet-level departments of Finance and Public Safety.
• The budget proposes higher spending in some areas than the governor did, including state-employee pay ($168 million), school construction ($15 million), and high-priority needs in road and bridge maintenance ($207 million), urban loops ($58 million), and other road construction ($182 million).
“Although combining these recommendations yields what appears to be a dramatic change in state spending,” Coletti said, “most proposals in Freedom Budget 2005 have been previously proposed in one form or another by legislators, former governors, state panels and commissions, and other independent reports. Some of them go back to the 1993 report of the Government Performance Audit Committee.”
For more information about Freedom Budget 2005, call Coletti at 919-828-3876 or read the report online.