February 5, 2006
RALEIGH – North Carolina leaders should avoid turning a one-year state revenue surplus into a long-term budget nightmare. That’s the new warning from a John Locke Foundation fiscal policy analyst.
North Carolina tax revenues are already $89 million ahead of projections. Analyst Joseph Coletti urges the governor and legislature to remember recent history before planning new tracks of spending.
In a new JLF Spotlight report, Coletti looks at how state leaders handled similar short-term revenue windfalls in the late 1990s. What he found is that the state is still saddled with the tax increases the legislature passed after those windfalls dried up.
“Spending was the problem in the late 1990s,” Coletti said. “When the boom went bust, state leaders decided to raise taxes instead of addressing the problem.”
Spending soared with the tax-revenue boom of the 1990s, Coletti showed, but spending continued to soar even after revenues began falling in Fiscal Year 2002 (July 2001 to June 2002). Rather than rein in the spending, legislators began draining money from the rainy-day fund, he said. Then they began passing “temporary” sales- and income-tax increases that are still with us today.
Spending on pork projects increased by 38 percent between FY 1995 and FY 2001, Coletti said. During that same time, new spending on education, Medicaid, and prisons grew by 42 percent. Both of those increases outpaced population and inflation growth.
Since FY 2001, Coletti said, the state has raised taxes by more than $1.4 billion.
“Ronald Reagan always talked about the tendency of government to grow, that no government ever voluntarily reduced itself in size, and he joked that government programs were the nearest thing to eternal life on this earth,” Coletti said. “It’s no laughing matter when our leaders use windfalls to justify starting new government programs, but don’t use shortfalls to justify cutting them. Instead, they just raise our taxes.”
North Carolina needs some way to limit what legislators spend, Coletti said. He recommended “taxpayer bill of rights” legislation that would hold inflation-adjusted government spending to a constant per-person level. Such legislation has been tried in North Carolina, he said, as the Taxpayer Protection Amendment.
In the meantime, state leaders should “exercise self-discipline during a short-term boom,” Coletti said. “Let’s not rush into new spending programs that we’ll all be made to pay higher taxes to keep later.”
Joseph Coletti’s Spotlight paper, “The Political Spending Cycle: Spending Binges Lead to High-Tax Hangovers,” is available on the Locke Foundation’s website. For more information, please contact Joseph Coletti at 919-828-3876 or [email protected]. To arrange an interview, you may also contact JLF communications director Mitch Kokai at (919) 306-8736 or [email protected].