Press Release

Easley Budget By the Numbers

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RALEIGH — Gov. Mike Easley’s proposed state budget uses higher taxes to close the vast majority of an $1.1 billion budget deficit, itself created primarily by the governor’s proposed new spending of nearly $1 billion next year, according to a preliminary analysis by the John Locke Foundation.

Joe Coletti, fiscal policy analyst at the Raleigh-based think tank, observed that Easley’s budget recommends $1.125 billion more in General Fund spending next year than the state is currently projected to collect in revenues. The governor is touting “fiscal discipline” as his chosen tool for closing this gap, but Coletti noted that the higher sales, excise, and income taxes proposed by the governor account for two-thirds of the deficit, or $741 million, while his proposed “cuts” in the base budget constitute only 18 percent of the gap, or about $203 million.

Withdrawals from state trust funds and reserves would cover the remainder.

Contrary to administration claims that the budget “reduces the top income tax rate,” Coletti found that the Easley budget would actually raise income taxes. The “temporary” rate of 8.25 percent for high-income earners is currently scheduled to expire at the end of the year. The governor proposes to renew a fourth tax bracket in January 2006, though at 8 percent rather than 8.25 percent, and then phase it out in 2007.

As a result, higher personal income taxes ($20.1 million in FY 2005-06) would join other tax measures — reimposing a half-cent sales tax ($413.4 million), expanding and increasing the sales tax in various areas ($105.7 million), hiking the excise tax on tobacco products ($171.4 million), and levying a higher-than-scheduled estate tax ($30.6 million) — to generate $741 million in higher taxes in the coming fiscal year.

The cost to taxpayers would rise still further in the following fiscal year, 2006-07, largely because of a phase-in of the higher sales and estate taxes. Under the Easley plan, North Carolinians would pay about $1 billion more in taxes in 2006-07 than current law requires.

“If you purchase phone service, subscribe to cable or satellite TV, go to the movies, read a newspaper, or buy cigarettes, alcohol, or candy, the governor’s budget makes you pay more,” Coletti said. “It not only makes everyday life more expensive, but even increases the tax on death.”

Coletti also made these observations about the budget plan:

• The proposed $16.9 billion General Fund budget for FY 2005-06 would be nearly $1 billion larger than the budget authorized for FY 2004-05, representing an annual increase of 6.1 percent. The administration apparently uses a different baseline in computing an annual growth rate of just 5.5 percent, but has not yet explained the discrepancy.

• Easley proposes $57 million in new spending in FY 2005-06 targeted to poor school districts and at-risk children, apparently in response to the Leandro school-funding lawsuit. Yet the governor also identifies $50 million in structural savings in the public-school budget, plus another $24 million in lower-than-anticipated cost for school salaries. “In effect, the governor proposes that the state’s constitutional obligations to at-risk students be satisfied by redirecting existing school funding to that higher priority,” Coletti said. “That is a welcome approach to this controversial and often-misunderstood issue.”

• Coletti pointed out that while the governor’s budget includes $14 million in new corporate subsidies, it does nothing to reduce the state’s relatively high tax rates on corporate and personal income, which impede state economic competitiveness — as the governor’s staff admitted at a Wednesday press conference. The troubled Global TransPark project near Kinston continues to receive state funds.

• Despite the fact that North Carolina already spends far more on health-assistance programs than comparable states do, the governor is asking for $17.4 million in FY 2005-06 and $31.3 million in FY 2006-07 to bring additional children into a government health-care program. “This will take us in precisely the wrong direction,” Coletti argued.

A recent Spotlight briefing paper by Coletti on the governor’s budget assumptions can be read online Contact him or John Hood for more information at 919-828-3876 or [email protected]

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About John Locke Foundation

We are North Carolina’s Most Trusted and Influential Source of Common Sense. The John Locke Foundation was created in 1990 as an independent, nonprofit think tank that would work “for truth, for freedom, and for the future of North Carolina.” The Foundation is named for John Locke (1632-1704), an English philosopher whose writings inspired Thomas Jefferson and the other Founders.

The John Locke Foundation is a 501(c)(3) research institute and is funded solely from voluntary contributions from individuals, corporations, and charitable foundations.