Taking the easy way out
on taxes and spending cuts
Gov. Mike Easley’s recommended state budget for the upcoming fiscal year is balanced — meaning that ongoing spending is paid for with ongoing revenues. That was no small task given the limited availability of “recurring” dollars and for it he deserves praise. Furthermore, rather than simply tweaking the budget he also makes bold spending proposals for items such as teacher pay raises and shoring up his signature education initiatives the More-at-Four preschool program for at-risk children and the Learn and Earn high school initiative.
But there are other aspects of his budget that warrant criticism.
The first (and there seems to be no shortage of criticism for this one) is his proposal to raise cigarette and alcohol taxes. His justification for raising these two taxes is pretty simple — the state needs the money in order to make some important investments. If that’s the goal then how did he arrive upon these two options? They are both highly regressive meaning they will disproportionately impact the poor. Moreover, in the long term they will not be good revenue performers. Excise taxes never are.
In the case of beer and cigarette taxes, the tax is set at a fixed amount per can or per pack rather than as a percentage of the price. As a result, the revenues from these taxes grow very slowly. In the case of the cigarette tax the revenue actually declines over time. If the goal is to raise revenue there are better ways. Two quickly come to mind. First, restore the top income tax rate that was foolishly eliminated last year. Second, enact “combined reporting” — a proven strategy to close corporate loopholes used by multi-state corporations.
In addition to faulty tax proposals, his plans for spending cuts are questionable. It’s admirable that in a tight but still positive fiscal situation that the governor would pay for his bold spending proposals by attempting to find savings in the budget. But a closer look at these spending proposals leads one to question if these cuts are wise.
The governor accomplishes most of his spending cuts by ignoring inflation and the impact it has on state agency budgets. For example, the largest proposed spending cut was achieved by disallowing the scheduled increase in the reimbursement rates to Medicaid health-care providers. These health care providers are struggling with rising health care costs and under the governor’s plan the state would not increase the amount of money they receive for treating a Medicaid client. The budget proposal also contains countless other examples of savings found by removing inflationary increases for various items. One such reduction is to reduce the amount that the state will give school districts to buy books and supplies. It’s difficult to know the exact impact of not providing such inflationary increases. But some disclosure or estimate of the impacts should be disclosed.
No where in the $400 million of proposed spending cuts does the governor recommend eliminating a single program or activity within state government. Are there really no such cuts to be had or even suggested? Furthermore, many cuts will have to be restored at a later date lest the state funding for certain things be frozen at 2007 levels. For example, the inflationary increase for school books and supplies next year may need to be higher than the inflation rate in order to recover from the loss of funding this year.
During the first few years of Easley’s term he saved some key programs that serve working families and the most vulnerable state residents. At that time other governors were slashing programs like Medicaid and unemployment benefits and dramatically raising university tuition. But under Easley’s leadership, North Carolina adhered to the notion that a strong public sector is good for the economy. He had the courage to propose a major tax increase at a time when other states were laying off tens of thousands of workers. As a result, North Carolina is much better off now than most others.
His leadership of the budget process so far this year, however, has not been so courageous. It’s admirable that the governor is looking for ways to make some important investments, but not at the expense of tax fairness and adequate funding for other important programs.