Right now our state is in a crunch. We will hit the end of this fiscal year with no budget deficit, mostly because of some severe steps that Governors Easley and Perdue took and will take. I don’t fault them, they are required to not run a deficit. However, next year will require a significant legislative fix if we are going to avoid a government shutdown to ensure the constitutionally mandated balance budget.
Now is the time for Bold Action to fix this. Yesterday I attended a luncheon hosted by the NC Policy Watch. The two speakers were Speaker Hackney and Elaine Mejia from the NC Budget and Tax Center (a project of the Justice Center). The state of our budget is grim, with a potential budget shortfall of at least 2 billion dollars. The economic stimulus before congress could help us out, but it is not clear when that will pass, how much it will end up bringing to the state and when that of money will show up. Further, the stimulus package will do a lot good things, but a lot of the money will be mandated spending that can’t be used to plug gaps.
There are a number of people who are proposing that we cut our way out of this, because if there is anything that the past has taught us it is that cutting government spending during a recession is a great idea….oh wait… But, even if you believe that cutting the size of the government is the best idea the questions becomes, what do you want to cut? Given the size of our current budget, each and every department would have to cut around 10% of their budgets to have any shot of closing the gap. That is a huge cut in spending, especially when you think about where that money is going.
As this economy goes down we are going to have to spend more on certain services. Can anyone imagine that there will be a lower demand on unemployment services, community colleges, jails or Medicare in the next few months? To say that there will be is absurd. We already don’t have enough schools and don’t have enough teachers, so how can we not help counties afford the growing demand for education from our expanding population? At the luncheon, Elaine Mejia said that to solve this crisis through pure spending cuts we would have to cut out the entire budgets for the Department of Corrections and for Community Colleges. I can’t imagine there is a single person in this state that would support that “solution”.
So obviously we can’t solve this through budget cuts. Therefore we need to find some compromise that includes cutting spending and increasing revenues. That is not exactly a popular position at a time like this, but it is necessary. However, there seems to be zero support for a reality based approach to revenue increases within the legislature. In interviews with Under the Dome various legislators have proposed an increase in existing taxes, or an expansion of sin taxes, but that is about it.
I have a much simpler solution. We must spread out the base. Currently in North Carolina only about 1/3 of all transactions are covered by the state sales tax. A lot of the covered purchases are for things like bread and milk, not exactly high revenue generators. In the same vein, a study commissioned by the NC Budget and Tax Center looked at tax rates in the state. They found a number of glaring problems. Their full report can be found here (caution PDF). You can also view a number of enlightening graphs here. I can’t paste these graphs so please click on that second link.
First of all, North Carolina’s income tax is incredibly progressive in its construction. However, when you add on other taxes that are paid by every citizen of our state, the tax picture becomes much more regressive. More specifically, the lowest 20% of our state’s citizens pay 10.7% of their annual income to local and state government. This is a combination of sales taxes, income tax, property tax, etc. However, the top 1% pay only 7.1% of their annual income in taxes. Now, at a minimum, shouldn’t all North Carolinians pay similar amounts? Why should the least able to pay have to pay so much more? I don’t have a silver bullet fix here, but what if North Carolina instituted some form of the Alternative Minimum tax aimed at the top percentage earners in our state that was tied to inflation so as to avoid the constant fixes required by the federal version? Maybe that isn’t the right solution, but I think it deserves some debate.
The report goes on to list some specific changes and the benefits. Closing corporate tax loopholes was studied by a nonpartisan commission in 2001 and would have yielded $300 million in revenue for that fiscal year. 8 years later I imagine that number will have gone up. If not it is still 1/6 of next year’s deficit. They also proposed the lifting of the sales tax cap as floated by Sen Berger, a fix that would certainly help. To offset some of these, and avoid problems with a potential decrease in demand during this time of crisis we could institute some sort of drop in the sales tax on essentials such as bread and clothes. The simple solution in my mind to the political equation is to make more people pay less, rather than keeping such a narrow focus in who pays.
The depressing thing in all of this is that we are in trouble. And according to insiders such as Gary Pearce the legislature is going to be fearful of big action in anticipation of the 2010 elections.
So don’t expect anything too bold or radical from this session.
But, this state cannot afford inaction. We absolutely must move quickly to protect state government. The price of inaction is too high. How many unemployed are we willing to see go without benefits? How many children don’t deserve health care? How many workers are we willing to further punish for something they didn’t cause with layoffs in state government? I hope that our answers are zero, but I fear our legislators just don’t have the chutzpah to make it happen.