June 12, 2006

RALEIGH – N.C. legislators should close the books on two “temporary” taxes, now that those taxes have helped generate a $2.4 billion state budget surplus. That’s a key finding in a new John Locke Foundation Spotlight report.

The report also recommends that lawmakers limit spending increases and eliminate local Medicaid bills for the state’s 100 counties.

“North Carolina’s $2.4 billion surplus means taxpayers have paid too much money for government services,” said Joseph Coletti, JLF fiscal policy analyst and the report’s author. “The fiscal emergency is behind us. It is time for the General Assembly to repeal the sales tax and income tax increases first imposed as temporary measures in 2001.”

A budget crisis in 2001 prompted the General Assembly to raise taxes on sales and income. Lawmakers billed both the half-cent sales tax hike and the half-percentage point income tax surcharge as temporary measures. Both were designed to disappear in 2003.

But the General Assembly extended the taxes in 2003 and 2005. Current budget proposals on Jones Street would maintain portions of both taxes into 2007.

Meanwhile, lawmakers would devote more than $1 billion to new spending, Coletti said. “Gov. Mike Easley’s budget proposal included more than $1.45 billion in new spending and $230 million in tax relief,” he said. “The Senate budget plan contains more than $1.42 billion in new spending and just $169.9 million in tax relief.”

Legislators could kill the “temporary” taxes and still have surplus money left for other priorities, Coletti said. “Ending the half-cent sales tax on July 1 would remove $524 million of non-recurring revenue in the next budget year,” he said. “Rolling the 8.25 percent top income tax rate back to 7.75 percent as of January 1, 2007, would remove another $57.2 million of non-recurring revenue.”

The General Assembly could adopt a proposal with just $75 million in new spending and $800 million in direct tax relief, Coletti said. That proposal would also call on the state to take over $459 million that counties are expected to pay for Medicaid in the next budget year. “The Medicaid spending, although new spending by the state, will remove the fastest growing item from county budgets and ease the pressure for new local taxes.”

Even with the Medicaid changes, Coletti’s report outlines a plan to limit the state’s spending growth to just 4.3 percent. That growth rate is less than half of the total recommended by the governor and the Senate. “This proposal would save $890 million from the Senate’s $18.82 billion budget,” he said. “It would spend $17.9 billion, set aside $548 million in the Saving Reserve and Repair and Renovation Reserve, end the $250 million annual transfer from the Highway Trust Fund and retain a $380 million unreserved balance.”

Taxpayers deserve a break from the 2001 “temporary” taxes, Coletti said. “Lawmakers asked people to dig deeper into their wallets to deal with a budget crunch five years ago,” he said. “Certainly now is the time to pay those taxpayers back.”

Joseph Coletti’s Spotlight report, “Freedom Budget 2006: Providing Relief to North Carolina’s Counties and Taxpayers,” is at the Locke Foundation’s web site. For more information, please contact Joseph Coletti at (919) 828-3876 or [email protected]. To arrange an interview, contact JLF communications director Mitch Kokai at (919) 306-8736 or [email protected].