June 13, 2003

SENATE PROPOSAL RAISES REVENUE, SAVES SERVICES

SENATE PROPOSES RAISING MORE REVENUE TO AVOID CUTS

There was extensive activity at the General Assembly this week, but nothing seems clarified or closer to agreement. After learning that the state’s budget deficit is bigger than anticipated, the Senate held two public hearings to allow the public to tell what they are willing to cut or not cut, and what taxes they are willing to raise to avoid further cuts. The Senate then made the next volley in the budget debate by releasing its latest budget proposal. The new Senate plan would raise another $330.8m in State Fiscal Year (SFY) 2003-04, by raising the taxes on beer, wine, alcohol, and tobacco products. This allowed the Senate to avoid cutting Medicaid and avoid many of the worst cuts in education. It also allows the Senate to continue to place more money in the clean water trust fund.

In addition, the Senate plans for the future. This year the legislature must create a budget for the next two state fiscal years. The problem is the budget hole becomes enormous in SFY 2004-05 because 1) the feds gave us about $500 million for the first year to help with our budget deficit but they give us NO MONEY for any subsequent year; and 2) the feds cut some of our state revenues when they cut federal taxes, and as a result North Carolina anticipates losing over $120m more in revenue in SFY 2004-05. The result is revenues are naturally dropping, congress cut state revenue further, Congress refused to provide more than one year of fiscal relief for ongoing state needs, and at the same time state needs are growing rapidly – primarily in school enrollment growth, prison growth and Medicaid/health cost growth. Fiscal analysts anticipate a budget deficit of at least $1.5 billion in the second year. The Senate Tax increases are really intended to help with this growing problem in the second budget year. Senate leaders reason that if they are going to have enough money to meet all of the states needs in SFY 2004-05, they must start raising money in 2003. By doing this they were able to fund enrollment growth in the universities and community colleges in SFY 2004-05 and state employee pay raises, and continue to avoid major cuts to Medicaid and public education.

TIME IS OF THE ESSENCE

House and Senate budget negotiators seemed to have agreed upon freezing the state sales tax and the top income tax bracket, which are both set to sunset on June 30. These raise over $300m per year in revenue. They have also agreed to increase the soft-drink tax and some other fees. Retailers need some time to implement sales tax changes in their cash register systems. Legislators must pass legislation to implement these proposals by the end of next week, in order for merchants to get their systems up to collect the taxes starting July 1. If legislators do not increase the soft-drink tax increase in 10 days retailers cannot get it implemented by July 1, and will not begin collecting that revenue until a later date. The money is lost to the state because of the delay. The sales tax and top bracket end automatically unless law is changed also. This means that legislators are under enormous pressure to pass these revenue options into law within ten days or so.

Legislative leaders, especially in the House, say they cannot pass a stand alone bill to do these taxes. They say the taxes will only pass if they are part of the larger budget bill. It makes it clear they are passing the tax freeze and tax increases to avoid cuts, they argue. Unfortunately, there are many issues beyond just these taxes that must be agreed upon to pass the full budget. Therefore, this additional pressure may lead legislators to agree to cuts they otherwise do not want in order to save these revenues.

HOUSE SAYS THEY DON’T HAVE THE VOTES FOR MORE REVENUE

House leaders continue to say they don’t have the votes to raise the cigarette or alcohol tax. About 50 democrats may be willing to raise cigarette taxes and other tax options seem to have less support. Only a few Republicans will even consider raising taxes on either cigarette or alcohol. Republican leaders simply state that government must tighten its belt, but they have yet to say where they would cut hundreds of million more in programs.

There has been almost no discussion of a long list of other tax options. They include: closing business tax loopholes, eliminating or reducing business tax incentives in the Bill Lee act, increasing corporate taxes to mid-1990’s levels, expanding sales tax to services, or even implementing a surcharge on income taxes. Again, House members say they do not have the votes for these, but as yet the waters have been untested.

GOVERNOR WANTS THE LOTTERY

The Governor criticized both Senate and House proposals for not considering the lottery. The lottery has failed in a past House vote and now, some think it could fail in a Senate vote also. Budget negotiators are reluctant to add it to the already turbulent debate. The Governor says the Senate plan is unacceptable and that both Senate and House plans rely on unrealistic projections of revenue growth (in other words they count on money coming into state coffers that the Governor thinks is unlikely to arrive). Since there is no evidence the lottery could pass now, it would be more helpful for the Governor to promote a tax that may pass, such as the cigarette tax, or to show how he would get the budget done.

TAX PROPOSALS CONTINUE REGRESSIVE TREND AND DON’T ADDRESS ROOT PROBLEMS

The bottom line regarding the taxes is that all those under consideration continue the nearly decade long trend of reducing taxes on the wealthy and increasing them on the middle-income and poor. Sales taxes, whether on soft-drinks, cigarettes, clothes, or beer, hurt lower-income households more than upper-income. Its not rocket science to understand $200 in tax means more to someone earning $36,000 than to someone earning $500,000. Nonetheless, lawmakers are only considering such regressive tax items.

At the same time, legislators are not heeding the call – made for over a decade – that the state’s revenue system must be modernized and overhauled. While this is not the sole solution to the state’s budget woes, it could be enormously helpful. The Governor’s commission on the tax system made several proposals that have never been seriously discussed. Increasing tax system fairness – we have been going the other direction in recent years – and ensuring the tax system reflects the modern economy are essential to future budget health.

WHAT NEXT?

At a minimum, law-makers must pass legislation next week that prevents tax cuts and that implements the new taxes on which they agree. They must freeze the sales tax and the top income-tax bracket, and they must implement soft-drink tax and other taxes in agreement. These are regressive, but appear to be a necessary emergency step to avoid even more drastic cuts that hurt the vulnerable.

They then must have the courage to raise the revenue needed to avoid devastating cuts to Medicaid and Education, which make up over 70% of the state budget. These new revenue sources MUST BE PROGRESSIVE and should not continue the state’s trend of relying more and more on the bottom 60% of earners to pay for the state’s needs.

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