Policy Report

Changing Course III: An Alternative Budget for North Carolina

posted on in Spending & Taxes

The 1995 session of the General Assembly was unique in the history of North Carolina. After years of rapidly increasing state spending, both Gov. Hunt and the legislature expressed an interest in controlling spending growth and cutting taxes. As a result, operating spending grew by only 1.4 percent in FY 1995-96, by far the slowest rate of spending growth in a non-recession year this century.

Unfortunately, the next three years featured a return to the state’s previously spendthrift ways. While the General Assembly did insist on additional tax relief — with total General Fund tax relief from 1995 to 1998 reaching $1.1 billion this year — the state’s continued spending spree created increasing pressure on the budget. That pressure is manifesting itself in 1999 because of a short-run money crunch caused by court-ordered tax refunds. If lawmakers and Gov. Hunt had simply restrained spending by one percentage point a year since 1993, there would be an additional $700 million on the table, nearly enough to handle the total cost of the tax refunds.

Of course, simply solving the state’s one-year money crunch wouldn’t be the stuff of legend. In fact, despite the past four years of tax cuts, North Carolina still imposes excessive taxes on its citizens. Only last year did the value of state tax cuts offset the impact of massive tax hikes imposed by the state legislature in 1991. Our state and local tax burden was 11.1 percent last year — still far higher than the 10.4 percent average for Southeastern states. Coupled with the federal tax burden, it still represents a tight restraint on potential economic growth and a reduction of freedom for North Carolina families who deserve more of their own money to spend or invest.

Changing Course III represents the authors’ best efforts to apply principles of limited government, free enterprise, and fiscal conservatism to the budget that Gov. Hunt has proposed for 1999-01.The report calls for $512 million in tax reductions in FY 1999-00, and $819.5 million by FY 2000-01. It contains 149 recommendations for budget savings in virtually every department of state government. In some cases, Changing Course III calls for real cuts in programs of questionable value. In other cases, including education, the report proposes increased state spending, though not as much as that proposed by the administration.

The authors endorse six proposals to cut state taxes, particularly in the areas of personal income tax rates, corporate income tax rates, and sales taxes. An econometric analysis of just the rate-cut proposals found that they would create nearly 160,000 new jobs in North Carolina and generate an additional $1,700 in income for the average North Carolinian. Changing Course III also proposes the elimination of fees and licenses that fund such unnecessary programs as the Bingo Licensure Office, the Grape Growers Council, the North Carolina Auctioneer Licensing Board, the North Carolina Board of Barber Examiners, and the Sleep Products regulatory office.

The Changing Course III budget would add $400 million this year to state reserves to handle tax refunds, while returning $170 million a year to the Highway Trust Fund for use in rebuilding and maintaining the state’s deteriorating roads and bridges. It also includes large pay raises for community college faculty and a new scholarship program for students trapped in low-performing public schools across the state.

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