June 6, 2002

IN THIS ISSUE:
• SENATE REVENUE PLAN PUTS BURDEN ON LOW AND MIDDLE INCOME WORKERS
• SENATE BUDGET STILL PERCOLATING BUT HITS PROGRAMS FOR MIDDLE AND
   LOW-INCOME THE HARDEST
• THERE IS AN ALTERNATIVE TO TAXING AND CUTTING PROGRAMS THAT SERVE
   THE MIDDLE AND LOW INCOME

There has been a great deal of behind the scenes activity at the General Assembly in the last two weeks. Legislators had to get bills drafted and filed by the end of Thursday, June 13. In addition, the Senate passed one revenue bill and is trying, but not yet able, to complete its budget.

SENATE REVENUE PLAN PUTS BURDEN ON LOW AND MIDDLE INCOME WORKERS

On Thursday, the Senate passed SB 1292, the Budget Revenue Act of 2002. This bill would raise an additional $372 million for the state for the 2003 fiscal year. The funds would primarily come from regressive measures that burden low and middle income people. In addition, many of the funds are only available in 2003 and so would not resolve the budget/revenue problems projected for years after that. Major provisions are:

The local governments get a swap of funding. The state withholds $333 million they would normally send to local governments, but allows locals to raise the sales tax to make up for it. The State also makes up the difference if the county doesn't raise as much in sales tax as they had gotten from the state previously. In the end, local governments will get $45.1 million more from this system, than they did in the past.

The sales tax increase is very problematic. First it is very regressive. The burden of a sales tax falls most heavily on the lowest-income households. This also raises the sales tax higher than ever before contrary to previous agreements. Last year, legislators passed a revenue package that would allow local governments to raise the sales tax one half cent in 2003, but would phase out one-half cent currently going to the state. That package meant that sales tax wouldn't go over 6.5%, but this new package raises it to 7% in all counties except Mecklenburg where it will be 7.5%. (Mecklenburg already charges an additional half cent sales tax which goes to the county.)

The increases in the child tax credit and standard deduction for married couples primarily benefits middle income households. These were two items passed in last year's revenue package and were intended to go into effect for the 2002 tax year. These items helped balance last year's revenue package so that it didn't hit the middle income families as hard.

This revenue package is very regressive and basically forces low and middle income households to pay for the entire burden of the economic downturn and resulting budget short-fall. No corporate tax loopholes are closed or corporate taxes raised. As a result the inequity between taxes paid by the wealthy and those paid by middle and low income households is further widened. In addition, the share of the tax burden covered by individuals becomes even greater, while the share paid by corporations continues to shrink. Once again, the state is expanding its reliance on the sales tax to meet state and local needs, but the sales tax is not and has not been keeping up with population growth.

OTHER REVENUE OPTIONS COMING

The Senate is expected to come up with other revenues by taking some money from the Highway Trust Fund or taking some of the money slated to go to the various tobacco law suit trust funds. We will see what these are when the Senate releases its whole budget. While these can help with the immediate budget crisis, they are one-time moneys that do not help in later years.

The Senate also is not considering passing a lottery, at least not yet. It could still show up in the budget, and presumably the Senate is being pressured to consider it by the Governor. So far the Senate says the House must pass a lottery bill before they will take it up again.

In addition, the Senate is rumored to have been looking at raising some bonds to pay for some budget items. These are now in question and may be another cause for a delay in the budget.
On Thursday, May 16 the House of Representatives passed, by a vote of 229-197, H.R. 4737 to renew the Temporary Assistance for Needy Families (TANF) program and the Child Care and Development Block Grant (CCDBG) for five years. The bill is closely modeled on the Presidents TANF/CCDBG proposals and does not implement the changes recommended by the Justice Center and many others in North Carolina and the Nation who have been following welfare reform.

THERE IS AN ALTERNATIVE TO TAXING AND CUTTING PROGRAMS THAT SERVE THE MIDDLE AND LOW INCOME

Several more foresighted legislators entered bills that will raise revenue, rather than cutting programs, to solve the state's budget crisis this year and to ensure there is enough revenue to meet the state's needs in future years. The legislature must look beyond this budget cycle and begin resolving the long term state budget crisis. Legislative Fiscal Research released budget projections that show if no new ongoing revenue is raised, then the state can expect to have budget shortfalls in each of the next five years between $1.5 and 2 billion per year. This year alone is enough to send the state back a decade or more in health and human services programming. While the worst cuts in Medicaid were avoided by the Senate, Medicaid and health care costs generally are expected to continue to cut up. IN other words, this Senate budget delays but does not eliminate the pain. Things will only continue to get worse if legislators don't step up to the plate and deal with the real problem: THE STATE TAX SYSTEM IS OUT OF DATE AND DOES NOT KEEP UP WITH STATE NEEDS. NC HAS A REVENUE PROBLEM, NOT A SPENDING PROBLEM.

State Legislators Should Follow Some Basic, Common Sense Principles:

REVENUE PACKAGES ENTERED THAT HELP MEET THESE GOALS:

Representatives Mickey Michaux, Paul Luebke, Jennifer Weiss and Verla Insko entered revenue bills in the House. Senator Ellie Kinnaird entered revenue bills in the Senate. All have some of the revenue recommendations made by the Justice Center and/or the Covenant with North Carolina's Children. Below is a summary of the bills with bill numbers. You can get the bills themselves from the General Assembly web page at www.ncleg.net. More will be included in future BTC reports and LIU updates about these revenue packages and bills.


PACKAGE 1: Rep. Mickey Michaux of Durham County entered several revenue bills. When taken as a whole these bills will raise well over $1 billion and they fairly spread the revenue burden among wealthy, middle and low income households and between individuals and corporations. The regressive nature of the cigarette tax is reduced with the implementation of a State Earned Income Tax Credit.

PACKAGE 2: Representatives Jennifer Weiss of Wake, Paul Luebke of Durham and Verla Insko of Orange also entered a progressive package of revenue bills that would share the burden and raise a fair amount of money. They are particularly concerned that everyone step up to the plate and share in the effort to keep the state whole during this time of economic downturn.

PACKAGE 3: Senator Ellie Kinnaird of Orange, Chatham and part of Moore counties entered two bills that spread the burden among many and raise some revenue to address the deep shortfall.

SENATE BUDGET STILL PERCOLATING BUT HITS PROGRAMS FOR MIDDLE AND LOW-INCOME THE HARDEST - CUTS - CUTS - CUTS

The Senate had hoped to pass its budget this week and send it on to the House. On Wednesday, the Appropriations subcommittees met and saw their parts of the budget for the first time. After that, the Budget fell apart with the Governor allegedly upset that Kindergarten classroom size would not be reduced and that his new More-At-Four program funding was cut. While more changes to the details of the budget are expected, the amount of overall cuts per division is likely to stay about the same.

The cuts are devastating to many programs, though they are less than the cuts originally being considered by legislators. This led the Raleigh News & Observer to print the headline "Senate Budget Avoids Deep Cuts." That's about like saying Hurricane Fran was a drizzle just because it wasn't as bad as Hurricane Floyd. About $250 million is cut from Health and Human Services alone, including 381 positions. Approximately $150 million is cut from public education, though some of the cuts are put back in for ABC bonuses and to hire 462 teachers to cover the expected 8,695 additional students. Nonetheless, $150 million worth of programs and building will not happen and 309 positions are cut.

Some Senate Budget Cut Lowlights In Public Education:

Some Senate Budget Cut Lowlights in the Health and Human Services Budget:

Over 100 programs and services are cut in the Health and Human Services budget, before you even look at how the block grant funds were distributed. More cuts were made in the TANF block grant which LIU will cover next week. Medicaid costs are expected to increase next year and the state must pay them to continue to get federal Medicaid moneys; consequently, $109 million more was allocated to Medicaid to continue to provide the same services now in place. A full list of cuts will be available soon on the Justice Center Web page.

The bottom line for the Senate budget is that it cuts critical programs and services that primarily serve middle and low income individuals and families who are experiencing hard times due to health problems, aging or other circumstances. Children will do much worse under this budget, putting North Carolina at great risk of seeing yet another increase in the child poverty rate. (In 1990 17% of children lived in poverty, in 2000, 19% of children were poor.)

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