September 19, 2002

RALEIGH — Gov. Mike Easley and the state legislature have approved a revised budget for the current fiscal year that will likely result in hundreds of millions of dollars in new taxes on North Carolina businesses and families, further damaging an already weakened state economy, according to a preliminary analysis by the John Locke Foundation.

John Hood, chairman and president of the Raleigh-based think tank, observed that the new budget directly raises the state tax burden by approximately $157 million, largely through changes in business taxes and the elimination of previously scheduled tax cuts that had been designed to help families offset the impact of last year’s $700 million increase in sales and income taxes.

In addition, Hood said that the confiscation of $333.4 million in tax reimbursements to local governments will likely lead to tens of millions of dollars in property tax increases at the local level over the next year. A prior Locke Foundation report estimated that cities and counties had already raised their property taxes by a combined $75 million in 2002-03, citing the impact of withheld tax sharing and reimbursement dollars, with other localities still facing the need to adjust their budgets to meet the latest fiscal challenge from the state.

“These tax increases couldn’t have come at a worse time for our state’s businesses and families, many of whom are struggling with layoffs, declining wealth, and at best an uncertain future,” Hood said. “Our leaders should be debating which of North Carolina’s relatively high taxes to cut to get our economy moving again, not which ones to raise to preserve government programs.”

Hood further pointed out that the new budget contains some $800 million in ongoing spending items funded for FY 2002-03 with one-time money, such as fund transfers and temporary cuts. That means that the budget for the coming fiscal year, FY 2003-04, is likely to contain a budget deficit of similar size.

“Many legislative leaders have made no secret of their plans to cover this gap with another huge tax increase, which they call a ‘tax reform’ plan,” he said. “In effect, this new budget contains within it the seeds of more deficits and more taxes in the coming year.”

Several Locke Foundation studies over the years have quantified the relationship between marginal tax rates and such economic indicators as unemployment and income growth. Last year’s tax increases were likely a contributor to the loss of thousands of private-sector jobs in North Carolina, Hood said. The latest round of tax hikes, though not as sizable, can still be expected to result in lost employment and economic opportunities, hampering the state’s ability to recover from a painful recession.

A complete analysis of the final 2002-03 budget from the Locke Foundation will be available soon at For more information about the Foundation’s fiscal policy research, call John Hood or Dr. Roy Cordato at 919-828-3876.