Time to Ditch the Vicious “Spend and Tax” Roller Coaster

Roller coasters at amusement parks are fun. Taking North Carolina’s state budget on a roller coaster ride, however, is highly damaging and disruptive to the state’s economy and core government services. It’s time North Carolina budget writers choose a smoother path.

Examining the last three decades of state budgets in North Carolina reveals an indisputable and dangerous pattern: rapid rises during flush economic times followed by sharp declines when recession hits. Indeed, the state’s current budget woes are just the latest predictable dip following the most recent ascent to ever-greater heights in the budgetary roller coaster.

A few data points can help to clarify this trend. In the four years leading up to the current budgetary crisis, state spending grew by a total of 30 percent – at an average annual spike of 8.6 percent. Similarly, in the four years prior to the state’s previous budgetary cutback in 2000-01, state spending grew by a total of 34 percent – for an average annual growth rate of 9.2 percent.

Spending trends: 1997-2000, 2005-2008

Going back a little further, the state budget experienced another drop off in 1995-96. But this was preceded by a four-year spending hike totaling 31 percent, an annual average increase of 9.7 percent.

I could go on and on, but you get the idea.

Accompanying each of these roller-coaster type drops is predictable panic among state legislators. Budget writers frantically scramble to adjust to the reality that their spending binges proved to be unsustainable yet again as the economy falls into recession. Typically, legislators reach deeper into the pockets of taxpayers to cover their self-inflicted shortfall.

Interestingly, North Carolina has been virtually alone among state governments in their desperate tax grabs in the 21st century. According to Governing magazine, North Carolina was one of only four states to raise total taxes by more than 1 percent in 2001. Furthermore, North Carolina raised all three of the major state taxes (income, sales, corporate) in 2009 – while no other southeastern state raised any of those three.

In other words, North Carolina stands out in the region and nation as embarking upon reckless budgetary expansions during times of robust economic growth. Such patterns then prompt state lawmakers to be uniquely desperate to hike tax rates as the economy turns sour.

As this process of spend and tax plays out with every economic cycle over time it afflicts North Carolina with a “ratchet up” effect. After each dip is over, taxes don’t fall back to the previous level and spending resumes at a dizzying pace once again.

Take the case of state tax rates. The “temporary” tax increases imposed in the 2001-02 budget to counteract the recession at that time proved to be not so temporary. Higher income and sales tax rates were extended multiple times, remaining in place four years longer than originally promised. In fact, part of the “temporary” sales tax increase was made permanent and still remains in effect today.

The major components of the 2009 tax increases did expire as scheduled, though not without a fight. However, several new taxes included in that package, such as higher rates on cigarettes, alcohol and digital products were permanent.

On the spending side, the ratchet effect is even more evident. A review of the 30-year period from 1979 to 2009, for instance, shows that North Carolina’s state budget – even after adjusting for inflation – more than tripled in the 30 years proceeding the current recession. Moreover, inflation-adjusted state spending grew at more than three times the pace of population growth during the same period.

North Carolina's Population vs. Real General Fund Budget Growth 1979-2009

The end result of this spend and tax roller coaster is that taxpayers, state budget writers and agency heads are suffering from whiplash. It is past due time to consider a smoother budgetary road.

A Taxpayer Bill of Rights (TABOR) would level out these dramatic rises and dips in the state budget. The basic premise behind a TABOR is to install sensible restrictions on the growth rate of state spending, in order to smooth over the wild spending and tax swings that North Carolina has experienced in the past. In short, a TABOR restricts the growth rate of the state budget each year to not exceed a combination of inflation and population growth.

Rather than extreme ratcheting up of spending by 8 or 9 percent annually during healthy economic times, a TABOR would limit these annual growth rates to a more sensible 4 or 5 percent per year in most years. The extra revenue collected would not be spent, but rather set aside in a rainy day fund, to be made available to fill the budget shortfall when the next recession hits. As an added bonus, once the rainy day fund is fully stocked, further excess revenue could be returned to taxpayers.

Under a TABOR, the next time a recession hits state lawmakers wouldn’t need to panic. There would be plenty of funds set aside to draw upon to balance the budget without punishing taxpayers with another massive tax hike.

A TABOR is an essential tool for smoothing out the vicious roller-coaster ride the state budget has experienced for decades. A smoother, more predictable budget cycle will also make it much easier for state agencies to plan their budgets ahead of time, rather than suffer through wild ups and downs.

Its time to end the unrestrained peaks and valleys of our state budget. No more vicious spend and tax cycles. No more panic. North Carolina needs a TABOR.

This article was posted in Budget & Taxes by Brian Balfour on December 5, 2011 at 2:58 PM.

© 2011 The Civitas Institute. Visit us on the web at www.nccivitas.org.
This article can be found at http://www.nccivitas.org/2011/time-to-ditch-the-vicious-spend-and-tax-roller-coaster/

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