May 14, 2007

RALEIGH – State senators could avoid $207 million in new taxes and fees tied to the N.C. House’s state budget plan, while cutting spending and addressing more budget priorities. That’s a key finding in a new John Locke Foundation Spotlight report.

Click here to view and here to listen to Joseph Coletti discussing this Spotlight report.

“One alternative for senators to consider is the John Locke Foundation’s Freedom Budget 2007, which would dedicate more money to mental health, treat all state employees equally, set aside more money for retiree health care liabilities, and begin taking over the county share of Medicaid – all while lowering tax rates for businesses and individuals and saving more than $1 billion compared to the House budget proposal,” said report author Joseph Coletti, JLF fiscal policy analyst.

The House’s $20.3 billion general fund budget for 2007-2008 would increase spending by 7.6 percent, Coletti said. “That’s half again as fast as the 5.1 percent rate justified by the combined rate of inflation and population growth last year,” he said. “All of this translates into roughly $158 more spending per person and $632 for a family of four.”

The House extends two “temporary” taxes on sales and income to generate $299 million, Coletti said. Those taxes took effect in 2001 and were originally scheduled to disappear four years ago. The House budget also includes some fee increases. The new taxes and fees are offset partially by compliance with federal tax cuts and some targeted cuts for businesses and individuals. Taken together, the tax hikes and cuts increase the overall tax burden by $207 million.

“A state Earned Income Tax Credit (EITC), intended to provide tax relief for low-income working families, will provide in the 2008-2009 budget year at most $17 for a family after they pay $23 per person in additional sales taxes,” Coletti said. “A better tax credit in the budget, for purchases of long-term care insurance, can help relieve the state of future Medicaid costs by encouraging individuals to prepare for their own needs.”

Overall operating expenses would grow by 7.9 percent, with education programs getting most of the new spending, Coletti said. “Other areas of growth include corporate welfare, including a new $1 million fund for green businesses, another $13 million for the One North Carolina Fund, and more than $10 million for community development corporations.”

The House wants the state to subsidize purchases of Medicaid coverage for children in middle class families of four earning up to $60,000, Coletti said. “This is a case of the public sector invading private sector territory,” he said. “Blue Cross Blue Shield offers similar coverage, with a wider network of providers for a similar monthly premium. Policies with higher deductibles are available for entire families for less than $300 a month.”

Capital spending would decrease by $35 million to $171 million, Coletti said. “But that’s not the whole story,” he added. “The House also wants to issue $450 million worth of certificates of participation (COPs) to fund capital projects. COPs are a form of debt that do not require a vote by the public and carry a higher interest rate than normal general obligation bonds. The House budget also sets aside $300,000 for a bond vote in November, which indicates more debt will be added to the total.”

Coletti cites good ideas in the budget: $100 million for one-time relief of counties’ share of Medicaid costs; redirection of salaries for vacant positions to give non-teaching state employees larger raises; higher community college tuition; and elimination of 188 middle management positions in the state university system. “Unfortunately, 95 percent of state spending covers items that do not receive a second glance,” Coletti said. “They are included in a so-called continuation budget that goes on and on without scrutiny.”

Joseph Coletti’s Spotlight report, “Spend Now, Tax Now & Later: House budget would spend 7.4 percent more in FY2007-08,” 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].