RALEIGH — North Carolina legislators could save nearly $500 million in the next budget year, and more than $1 billion over two years, while ending corporate income and inheritance taxes and replacing the personal income tax with a consumed-income USA Tax. That’s if they follow the John Locke Foundation’s alternative to Gov. Pat McCrory’s first budget proposal.
The JLF plan also would lower the state sales tax rate from 4.75 percent to 4 percent and reduce the franchise tax by 60 percent in 2014-15.
Tax changes and other ideas, such as ending transfers away from highway spending, are designed to spur economic growth.
“Our approach to this year’s alternative budget is particularly mindful of the dismal economic climate in North Carolina,” said Sarah Curry, JLF Director of Fiscal Policy Studies. “This proposal offers our best efforts to apply simple yet firm principles of limited government, free enterprise, and fiscal conservatism.”
The bottom-line spending figure for JLF’s 2013-14 General Fund budget plan is $20.1 billion, $490 million less than the governor’s proposal. JLF would decrease General Fund spending by 0.2 percent, compared to McCrory’s 2.2 percent increase. Total state spending would decrease in both plans.
In the second year of the two-year budget plan, JLF’s proposal would spend $560 million less than McCrory’s plan. General Fund spending is $1.05 billion less in the Locke Foundation plan than in the McCrory plan over the course of the two-year budget cycle.
Though JLF’s proposed spending levels are lower than the McCrory budget, Curry finds encouraging signs in the governor’s plan.
“Normally one would question why the governor is increasing spending when there are debts to be paid and unfunded liabilities that need additional attention,” she said. “The additions in spending, however, are not seen in state departments or agencies, but rather in reserves, debt payment, and capital improvements of almost 70 percent compared to 2012-13 levels.”
The increase in reserves, along with other budget recommendations, “come with a sigh of relief,” Curry said. “In the last 30 years, from 1982 to 2012, government spending grew three times faster than the rate of population growth plus inflation in North Carolina.”
Nonetheless, Curry found some room for improvement. “The most significant of the differences between our budget and the McCrory proposal relates to the decision-making process,” she said. “Like his predecessors, Gov. McCrory often funds or increases funding for programs that cater to specific interests. Our plan takes a different approach.”
Budget items like the N.C. Museum of History and N.C. Maritime Museum would get less state funding, encouraging greater efficiency or increased user fees. Meanwhile, the JLF budget completely removes funding for the Partnership for the Sounds, Biofuels of NC, the Rural Economic Development Center, and the High Point Furniture Market.
“The hope is that state money can be spent on statewide operations instead of special interests in certain locations,” Curry said. “Removing state aid for special interests and nongovernment functions saves the state more than $80 million. That money is redirected to savings and reserves.”
The alternative budget proposes ending the transfer of money from the state Highway and Highway Trust funds into North Carolina’s General Fund. “North Carolina’s highways have gone too many years without the proper funding, particularly for maintenance,” Curry said. “This change would shift more than $200 million a year back to high-priority transportation needs.”
Curry’s plan also incorporates a “comprehensive overhaul of the state tax system,” based mainly on adoption of a new consumption-based Unlimited Savings Allowance tax, or USA Tax. With a rate of 6 percent, that tax would replace existing state personal income, corporate income, and inheritance taxes.
Adoption of the USA Tax and additional General Fund savings would help reduce the state sales tax from 4.75 percent to 4 percent. The state franchise tax would decrease by 60 percent in 2014-15.
Those tax changes could have significant benefits, Curry said. “The growth effect of this proposal for North Carolina’s real gross domestic product is estimated to be $4 billion in the first year, producing an estimated 10,000 jobs.”
Curry offers 19 specific policy recommendations in K-12 education, early childhood programs, public safety, Medicaid, transportation, and state employee benefits. Among them: eliminate class size mandates, revise NC Pre-K income eligibility criteria to target children with the greatest needs, re-establish drug courts, divert mentally ill individuals into community-based care rather than jails, cut Medicaid services not required by the federal government, and require state employees to pay a portion of their health care premiums.
“All of these ideas are tied to what we have labeled the six R’s of fiscal responsibility in North Carolina,” Curry said. “First, reform entitlement programs so they are carefully structured to minimize dependency and encourage personal responsibility. Second, require more user responsibility by asking those who benefit to shoulder more of the cost for services that are outside core programs like law enforcement and public education.”
“Third, redirect spending to higher-priority uses,” she added. “Fourth, revive free enterprise by moving the state away from a policy of picking winners and losers through tax credits, cash subsidies, and other targeted incentive programs.”
“Fifth, restore civil society by being careful not to supplant nonprofits and charities that deliver important services and benefits to North Carolinians,” Curry said. “Sixth, reduce biases in the tax code by adopting the USA Tax proposal.”
The JLF plan helps reorient state budget policy, Curry said. “State government is not empowered to do whatever it wants to do,” she said. “It is constrained to perform its constitutional functions — maintaining law and order and ensuring availability of true public goods — and otherwise to leave North Carolinians alone to pursue their own interests and solve their own problems without state encroachment.”
Sarah Curry’s Spotlight report, “Budget for Growth: JLF plan redirects funds, cuts taxes to create jobs,” is available at the JLF website. For more information, please contact Curry at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].