Press Release

Report Examines State Debt Trends

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RALEIGH — State lawmakers in Raleigh are currently debating bills that would authorize at least $760 million in new state debts — for land acquisition and for proposed University of North Carolina buildings — without a public vote.

A new report from the John Locke Foundation examines trends in North Carolina state debt since 1996 and concludes that the principle of voter-approved borrowing should be respected, not evaded.

John Hood, president of the Raleigh-based think tank, writes that both voter-approved bonds and other state debts incurred since 1996 have more than quadrupled the state’s General Fund budget for debt service, which will rise to nearly $600 million in 2005-06, and have played a significant role in generating the state budget deficits of the past three years that have led to costly tax increases on North Carolina households and businesses.

Statewide bonds for school construction in 1996, water and natural gas infrastructure in 1998, and college and university buildings in 2000 were successfully sold to voters as not requiring higher state taxes, Hood noted. Yet only months after the latter, a $3.1 billion bond package, received voter approval, Gov. Mike Easley and the General Assembly enacted tax increases on personal and business income, retail sales, communications services, and other consumer goods.

The passage of three separate tax packages in three years raised the tax burden by about half-a-billion dollars in 2001-02 and then by more than $1 billion in 2002-03, 2003-04, and 2004-05. The cost of servicing state debts incurred since 1996 represented as much as one-third of fiscal impact of these tax increases, depending on the fiscal year.

“Lawmakers clearly paid no attention to prior promises not to raise taxes to pay off state debt,” Hood said. “So it is not surprising that lawmakers are trying to authorize at least $760 million in new debt in 2004 without a public vote. They know that, given this past record, the voters wouldn’t be likely to approve new debt.”

But, Hood concluded, “This is precisely why the constitutional safeguard against legislators enacting long-term debt needs to be respected, not evaded.”

The proposed state budget for FY 2004-05 already creates the risk of another round of tax increases in 2005, Hood argued, because of the reliance on one-time revenue sources such as temporary tax increases, trust-fund withdrawals, or one-time budget savings.

“Unless state revenues surge by well over $1 billion in 2005-06, recurring expenses built into the House budget will force lawmakers in 2005 either to enact larger-than-ever budget savings or, more likely, to impose another round of state tax increases such as the reimposition of half-a-billion dollars in sales and income tax hikes,” he said.

Authorizing new state debt would heighten the fiscal pressure on North Carolina’s state budget, particularly over the next few years as bonds already approved will drive the debt-service budget to unprecedented levels.

The new Spotlight briefing paper on North Carolina state debt, tax increases, and voter approval can be found online. For more information about the state’s fiscal trends and debt-service burden, call John Hood or Dr. Roy Cordato at 919-828-3876.


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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.