February 27, 2007
RALEIGH – North Carolina taxpayers would pay the price if state lawmakers endorse complex fund-raising schemes this year. That’s according to a new John Locke Foundation Policy Report.
Click here to view and here to listen to Joseph Coletti discussing this Policy Report.
“Legislators could face two proposals to hide tax hikes during their budget deliberations,” said Joseph Coletti, JLF fiscal policy analyst and the report’s author. “The first would raise taxes nearly $1 billion across the state, while the second would extend an existing temporary sales tax.”
Coletti highlights details of the two plans, then offers lawmakers a different approach. He suggests trimming optional Medicaid benefits. He recommends exploring new options to cut school construction costs and to build new roads more quickly. Coletti also outlines possible reforms of the General Assembly’s current spending and taxing patterns.
“Taxes exist to raise money, not reward or punish behavior,” he said. “Any reform, therefore, should make the system simpler, more efficient, and more equitable.”
A good budget process involves a focus on priorities, Coletti said. “If lawmakers set the right priorities, they would be able to meet the state’s challenges without smoke, mirrors, hoops, or other tricks.”
The General Assembly’s budget writers have yet to debate the spending plan that’s scheduled to take effect in July. But informal discussions have already pointed toward two troubling ideas, Coletti said.
The first would allow the state and county governments to trade some responsibilities, he said. The state would take over the counties’ bills for Medicaid, the state and federal health insurance program for the poor. In return, counties would surrender their control over revenue from one cent of the current sales tax. The state would then turn around to give county governments authority to raise the sales tax by a cent to make up for their lost revenue.
“In making this trade-off, the state would net an extra $500 million in revenue,” Coletti said. “That’s the difference between the incoming sales tax funds and the new outgoing Medicaid costs. Meanwhile, counties that agree to raise the sales tax rate will maintain their current revenue streams while losing a significant drain on their budgets from Medicaid.”
The idea has another wrinkle that will appeal to some politicians, Coletti said. “Both the General Assembly and county commissioners would be able to deny that they raised taxes,” he said. “State lawmakers could claim it was a simple swap, and county commissioners would state that they were just covering their lost revenue.”
Coletti has dubbed the second idea the “magnanimous mugger” plan. In this proposal, the state would maintain a current quarter-cent sales tax that’s scheduled to disappear in July. To soften the blow for people with less money to pay the tax, North Carolina would adopt an Earned Income Tax Credit. “This would be like a mugger leaving cab fare for his victim.”
A state-based EITC makes little sense for North Carolina, especially after lawmakers hurt low-income workers by raising the mandatory minimum wage, Coletti said. Now the funding source of the tax credit is questionable. “Regardless of the pros and cons of an EITC, hiking the regressive sales tax to pay for it adds insult to injury and reduces the tax credit’s net value.”
Lawmakers have ignored avenues for positive reform, Coletti said. These include: a consumed-income tax to replace the current standard income tax; an end to corporate income taxes; and mandated limits on spending growth.
“One way or another, legislators must find a way to rein in spending,” he said. “The buck stops somewhere, and usually that is a taxpayer’s wallet. They cannot raise taxes indefinitely, or they will cause people to vote with their feet and jeopardize the future prosperity of North Carolina.”
Joseph Coletti’s Policy Report, “A Better Bargain: Meeting North Carolina’s needs without a $1 billion tax hike,” is available at the JLF web site. For more information, please contact Coletti at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].