September 13, 2006

RALEIGH – North Carolina legislators employ a “spend and tax” budget policy that paves the way for regular tax hikes, according to a new John Locke Foundation Policy Report.

Click here to view and here to listen to Joseph Coletti discussing this Policy Report.

“Contrary to the popular rhetoric about ‘tax and spend’ policies, lawmakers actually spend first and tax later,” said JLF fiscal policy analyst Joseph Coletti. “During economic booms, legislators use rising tax revenues to create new programs that cannot be sustained during an economic bust.”

Lawmakers refuse to tighten their belts when the economy sours, Coletti said. “When the economic bust arrives, legislators raise taxes to pay for the new government programs they created in good times.”

That’s why lawmakers need new spending limits, Coletti said. “Tax and expenditure limits such as North Carolina’s oft-proposed Taxpayer Protection Act provide one method to accomplish this,” he said. “A good piece of legislation would cap spending growth at the combined rate of population growth and inflation.

“Any revenue collected above that growth rate would fill an adequate ‘Rainy Day Fund’ and an emergency reserve,” he added. “Once those are filled, any other revenue would return to taxpayers. That would smooth the ups and downs and keep future revenue shortfalls from creating fiscal crises.”

New limits would reverse a “spend and tax” pattern that extends back more than two decades, Coletti said. His analysis covers every budget year since 1984. In the past 22 years, each economic downturn has led to a tax increase. That includes the latest economic slump.

“The 2001 recession coincided with the first year of Gov. Mike Easley’s first term,” Coletti said. “His first three years in office were frugal, with total spending increases of just 5.1 percent. But Easley and the General Assembly needed tax and fee increases each year to support even this level of growth.”

That recession must not have taught budget planners any lessons about overspending, Coletti said. “Once revenues started to climb again in 2004, spending ratcheted right back up – increasing at a compound annual rate of 8.5 percent over the past three legislative sessions. This is very close to the annual increase from 1996 to 1999 – the years that led up to the recession.”

Part of the problem is that increases in education and health care spending generally lead to political pressure for even more spending in those areas, Coletti said. “The political pressure comes in the creation of constituencies for the new spending,” he said. “Given the choice between cutting benefits substantially for a few recipients or raising taxes a little for the whole state, it is no surprise that lawmakers are more comfortable spreading the pain as broadly as possible.”

Coletti rejects the argument from left-leaning policy analysts that state government suffers because tax revenues grow more slowly than personal income.

“This is true only in some years,” he said. “It is more accurate and widely acknowledged that state tax revenues are more volatile than personal income. Tax revenues will grow more slowly than income – or even shrink – in some years and will rocket upward in other years.”

Under current legislative policies, taxpayers will eventually feel more consequences from the “spend and tax” pattern, Coletti said. “Fiscal restraint beginning in 2007 is needed to avoid tax increases when revenue growth inevitably slows.”

Restraint should take the form of new spending limits, Coletti said. “The best way to ensure the necessary fiscal restraint in future years and to end the destructive cycle of spending and taxing is to enact spending limits that prevent state government spending from growing faster than population and inflation.”

Joseph Coletti’s Policy Report, “Spend and Tax: A History of General Fund Crises in N.C. and How to Prevent Them,” 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].