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Elaine Mejia is the director
of the N.C. Budget and Tax
Setting the bar
high (and low)
Recently, Gov. Mike Easley released his recommended budget for the fiscal year that begins July 1st. He has played his cards and his hand will be difficult to match - he wants the budget to balance, a large pay increase for teachers and, not surprisingly, more funding for his signature initiatives such as “Learn and Earn” and “More at Four.”
The governor’s plan includes $1.2 billion in new spending — unfortunately for him he doesn’t have $1.2 billion in new funds because of the toll that the economy is taking on state revenues. So here’s how he pays for his spending priorities.
First, he had about $200 million from anticipated revenue growth next year. That leaves about $1 billion to find. He had about $500 million in one-time left over funds from this year which he plans to spend on one-time needs such as new buildings. That still leaves him half-billion dollars short of his spending target.
He managed to find nearly $400 million in spending reductions that free up funds for his priorities. The largest of these reductions comes from not increasing what health care providers can bill to Medicaid when they see Medicaid clients. Most of the other reductions are simply revisions to estimates of what really is needed in certain areas of the budget or where the receipts for certain programs look like they will be higher than originally projected.
Alas, even after all of these measures were taken, the governor still needed more than $100 million to make the budget balance. To fill this remaining gap, the governor’s plan relies on two tax increases, one on cigarettes and another on beer and alcohol. While the goals of his spending plan are admirable, his tax plan is highly regressive — meaning that as a share of income, it disproportionately affects low-income taxpayers. The governor claims that these two taxes are being used to pay for new funding for mental health and for the proposed teacher pay raises although those two spending items will cost several times more than will be generated by these two taxes.
It’s clear that in attempting to deflect criticism for proposing two regressive tax increases the governor rhetorically linked them to two popular spending priorities. In actuality, these two tax increases are not earmarked for mental health and teacher pay. The governor could just have easily said they were to pay for other spending priorities from his budget like new exhibits at the N.C. Zoo or the cut in transfer from the Highway Trust Fund to the General Fund. It’s clear that the governor believes that his spending priorities are worthy of a tax increase, but only if he thinks that tax increase will be popular with voters. It was only last year that this governor and the Legislature eliminated an income tax bracket that affected only the wealthiest taxpayers in the state. That tax, if reinstated, would raise about the same amount of revenue as proposed tax increases on cigarettes and booze.
In many ways, the governor’s plan has made the job of the General Assembly more difficult. Legislators will be hard pressed to spend less than the governor because teachers, state employees, mental health advocates and others now see the governor’s recommended spending for their areas as a starting point and not as a ceiling. But in order to match the governor spending targets (plus address some others such as dropout prevention and affordable housing) legislators will either have to find more spending cuts than the governor or raise even more (and preferably different) taxes. Neither of these options is likely.
As such, the governor has left it to the Legislature to disappoint the legion of advocates hoping that the needs that they champion will be met this year. Now that the governor has played his cards, the game turns to the House of Representatives. Will they fold, call or raise Easley’s bet? We’ll find out soon enough.