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Historic State Budget Battle Focuses on Taxes, Jobs

The 2011 North Carolina state budget is an historic one; it is the first state budget to be vetoed by the governor. Adding to its historic nature, the governor’s veto was overridden by the required three-fifths vote in both the state House and Senate, making it only the second veto to be overridden in state history.

At first glance, there appears to be little difference in the legislature’s budget plan that Gov. Bev Perdue vetoed and the budget she herself proposed a few months ago.

The General Assembly’s plan spends a total of $19.68 billion, compared to Perdue’s proposed total appropriations of $19.9 billion – for a difference of only one percent. According to Perdue’s statements upon vetoing the legislature’s proposal, however, she believed this minor difference would “cause generational damage to this state.”

And for a bit more perspective on the budget, it is important to note that a budget of $19.68 billion equates to half a billion more in spending than contained in the FY 2007 budget, and expands the state budget by more than one-third over the state budget of 10 years ago.

Despite the similar spending totals, the governor would have you believe there were some notable differences between what she desired and what was contained in the final budget plan that she so vehemenntly opposed.

The three most discussed issues were: taxes, public education funding and state employee layoffs.

Taxes: An $840 Million Difference

In 2009, North Carolina lawmakers implemented more than $1 billion in annual “temporary” taxes. These taxes included a one-cent increase in the statewide sales tax, along with increases in the corporate tax and personal income tax. Each of these taxes was legislated to be temporary and expire after two years, with the sales tax rate being the last to expire on June 30, 2011.

The new leadership in the General Assembly was swept into power last fall in no small part based on their promise to balance the state budget while allowing all of these taxes to fully expire.

Perdue, however, had a different idea in mind. Facing a $2 billion budget hole, the governor was unable to craft a balanced budget plan on spending reductions alone.

Specifically, Perdue’s plan called for an increase in the statewide sales tax by three-fourths of a penny. As of July 1, 2011, the state-level sales tax was scheduled to fall back to 4.75 percent (counties and some municipalities also levy a sales tax, typically 2 cents per dollar spent). In short, under Perdue’s plan, the statewide sales tax rate would have been 5.5 percent on July 1 as opposed to 4.75 percent as it will be under current legislation. Estimates projected the three-fourths penny extra sales tax rate would cost taxpayers $826 million annually.

Moreover, the governor’s proposal included a reduction in the state’s corporate tax rate from 6.9 percent to 4.9 percent.

But because the corporate tax rate applies to a relatively small number of businesses, total savings from Perdue’s tax reduction would have amounted to only a projected $115 million. Therefore, the combined impact of Perdue’s desired tax changes would have yielded a net tax increase of roughly $710 million.

Conversely, the final budget passed over Perdue’s objections does not include a sales tax increase or a corporate tax rate reduction. Instead, the plan includes a tax cut package focused primarily on small businesses. It features a tax exemption of the first $50,000 in business income for start-up and small businesses having gross receipts less than $825,000.

The tax exemption is projected to produce a tax savings of $131 million for the coming fiscal year, and savings of $336 million the following year. It is, however, targeted to sunset at the end of the 2013 calendar year.

The difference of $840 million in taxes clearly weighed heavily on Perdue’s mind as she applied the veto pen to the legislature’s budget bill.

“Tonight, the Republican-controlled legislature turned its back on North Carolina’s long-standing commitment to our people to provide quality schools, community colleges and universities – all to save a penny,” Perdue stated in a clear reference to the sales tax.

Conversely, House Speaker Thom Tillis (R-Mecklenburg) praised the new budget for offering relief to the state’s economy and taxpayers. “This budget is fiscally responsible and economically sustainable,” he said in a statement.  “It reverses a decades-long trend of state government spending beyond its means and puts over a billion dollars back into the hands of North Carolinians. This is a good day for our state.”

Public Education and State Employees

As noted above, Perdue focused much of her objections heavily on the legislature’s budgeted appropriations for public education. One should note that total spending on public education in the legislature’s budget was only a minor fraction lower than Perdue’s budget proposal: $7.46 billion to $7.6 billion. This tiny difference evidently amounted in Perdue’s opinion to the legislature “turning its back” on education.

Perdue’s wild-eyed rhetoric notwithstanding, the General Assembly’s final budget agreement compromised significantly in her favor compared to their original public education budget.

The final version included an additional $250 million for public education not included in the original bill, and it restored full funding for K-3 teaching assistants. The new budget also includes more than $60 million in new spending to finance reduction in K-3 class size – something not included in Perdue’s plan.

The number of state employee layoffs was also a contentious issue for debate during the budget process. The governor’s office publicized reckless claims regarding the number of state employee layoffs contained in the General Assembly’s budget. At one point, Perdue claimed their budget plan would result in as many as 30,000 state employee layoffs, in contrast to legislative staff estimates putting the number at less than 20,000.

With money restored for teacher assistants in the final budget, however, the number of state positions to be eliminated would be closer to 10,000. Total state employees number roughly 285,000, and the typical state worker attrition rate comes in at about 30,000 annually. Moreover, there are no estimates on how many of these positions currently sit vacant.

Incidentally, Perdue’s own estimate for state positions eliminated in her budget plan was 10,000.

Conclusion

With an override of Governor Perdue’s veto, the new leadership in North Carolina’s General Assembly managed to keep its primary promise: to balance the state budget without raising taxes.

The hotly-debated 2010-11 budget bill will likely continue to divide politicians and advocates on both sides of the political aisle for months, if not years, to come.


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Legislature Imposes New Hurdles for Involuntary Annexations

Lawmakers Perform Healthcare Reconstructive Surgery

2011 Redistricting is a Process

Session Filled With Steps – And Missteps – to Redirect and Reshape Public Education

Immigration Reform Long Time in Coming, Long Ways to Go

North Carolina’s Attempt at Election Reform

Second Amendment Gets a Fresh Look in 2011 Session

Session Gains Ground on Family Issues

Tort Reform Not Forgotten in Historic Legislative Session

This article was posted in Budget & Taxes, Legislative Activity by Brian Balfour on June 21, 2011 at 11:10 AM.

© 2011 The Civitas Institute. Visit us on the web at www.nccivitas.org.
This article can be found at http://www.nccivitas.org/2011/historic-state-budget-battle-focuses-on-taxes-jobs/

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