Dollars and Sense: Spend Within Our Means

Due largely to increased spending, North Carolina has become a high tax state in a low tax region. Greater accountability to citizens is the key to reigning in out-of-control spending and taxation policies.

ACCOUNTABILITY to Taxpayers

 - Make tax increases subject to voter approval. As is done with general obligation bonds, tax and fee increases should be subject to a public referendum. Two states – Colorado (for all tax increases) and Missouri (for tax or fee increases that produce revenue above a preset amount) – already have versions of such a policy in place.
- Require a supermajority legislative vote to raise taxes and fees. Second to subjecting tax and fee increases to voter approval, another method of holding legislators more accountable is to require a supermajority (2/3 approval) legislative vote on all statewide tax and fee increases. Five states – Arkansas, California, Louisiana, Nevada and Oklahoma – have already passed such laws.
Index tax brackets for inflation to avoid the “inflation tax.” Many low- and middle-income taxpayers are bumped into higher tax brackets when their income rises along with inflation. Indexing tax brackets for inflation will protect taxpayers from paying more taxes on what is effectively the same level of income. Just as many public and private employees receive annual cost of living adjustments equal to the rate of inflation, taxpayers should receive cost of living adjustments to their tax brackets. The current 6 percent and 7 percent brackets and income thresholds were established in 1989, with the 7.75 percent bracket added in 1991. From 1991 to 2007, total inflation equaled 53 percent – meaning that every year thousands of North Carolinians have been pushed into a higher tax bracket merely by keeping pace with the cost of living.

COMMON SENSE Budgeting

Tax Burden on N.C. is at an All-time High

As state spending has increased, so has the need to generate more tax revenue. From 2000 to 2007 North Carolina’s ranking in relative tax burden increased from 36th to 19th highest in the nation, a larger jump than any other state. Likewise, North Carolina’s personal income tax collections as a share of personal income is highest among southeastern states and ranks 6th among the 43 states that tax income, coming in just behind California. Today, state and local taxes consume more of personal income – 11 percent – than any other state in the Southeast.

State Spending has Increased 42 percent since 2001

Likewise, the current FY2007-08 budget increased spending by 9.5 percent over the previous year and spent 20 percent more than just two years ago. All told, North Carolina’s annual General Fund spending now equals more than $9,100 – or $760 per month – for a family of four.

Reward state employees for saving taxpayer dollars. Implement financial incentives for government department leaders and staff to save money, create operating efficiencies, and eliminate waste.
Stop funding recurring spending items with nonrecurring revenues. This practice is irresponsible and sets the stage for budget shortfalls, leaving in place ongoing spending commitments with no reliable financing.
Increase funding for the Savings Reserve Account. According to state law (§ 143C-4-2), the General Assembly has a “goal” of accumulating a balance in the Savings Reserve Account “equal to or greater than eight percent (8%) of the prior year’s General Fund operating budget.” Yet, when crafting the FY2007-08 budget, the General Assembly opted to set aside only enough funds to increase the Savings Reserve Account to 4.2 percent of the previous year’s budget – roughly $711 million below target. This law should be changed to be a requirement, rather than merely a “goal.” Moreover, the law should be amended so as to require that the first money available through “overcollections” be dedicated to the Savings Reserve Account.
Implement more rigorous oversight over money allocated to nonprofits.
  • Prohibit elected officials from serving on the board of any nonprofit that receives state money.
  • Eliminate the practice of allocating money to nonprofits via earmarks in the budget. Instead, all funds directed to nonprofits should go through the proper agency’s competitive grant process.
  • Create a formal evaluation mechanism to determine, not only if grant money is being used as intended, but whether nonprofits are accomplishing their stated goals.
Exercise oversight over local government entities. Require greater oversight over the grant money distributed to local government entities to ensure the monies are being used as intended and  achieving the desired results. Local government entities received roughly $13 billion in such grants in FY2005-06: $8.8 billion in state money and $4.1 billion in federal assistance.

Government Restraint Through Responsibility

In 1992, Colorado implemented what came to be widely recognized as the most rigorous tax-and-spending limitation in the nation. Colorado’s taxpayer bill of rights (TABOR) set strict limits on state government spending and required voter approval for any local or state tax increases. In short, TABOR’s stated mission was to “reasonably restrain” the growth of Colorado’s government. It worked – well. In the 10 years leading up to TABOR, Colorado’s state spending grew at a pace more than twice the total of population plus inflation. In the decade following the passage of TABOR, state spending increased at a virtually identical rate of population plus inflation. Moreover, the state returned roughly $3.25 billion to taxpayers during the 1990s. At the same time, the state cut the income tax, the sales tax, the business personal property tax, and a number of other taxes and fees.

Giving citizens the right to vote on tax increases is not only an effective tool at reigning in excessive spending and taxation, it is politically popular. Acknowledged Colorado House Speaker (2005) Andrew Romanoff (D), “Voter approval of tax increases is extremely popular, and politically untouchable.” Such government restraint also inevitably leads to economic growth. As Dr. Barry Poulson, professor of economics at Colorado University and member of the Colorado Commission on Taxation, observed: “The contrast between Colorado and Kansas in that time is striking: while the two states experienced similar economic trends in the 1970s and 1980s, there was a major divergence in the 90s, when income per capita increased 70 percent in Colorado, while it only increased 53 percent in Kansas.”

Spending Restraint Makes Tax Cuts Possible

Estimates of the revenue effects of the proposed reforms discussed above are provided wherever possible. It is likely that the state would phase-in the tax cuts over time, rather than all at once. Nevertheless, legitimate questions may be raised as to how the state is going to “pay” for these cuts. For starters, implementation of the other recommendations presented here will result in significant reductions in spending. Moreover, we can look to recent history to see that state spending could have increased at a very healthy pace and still accommodated significant tax cuts. Consider the following:

• The FY2007-08 budget spent $20.7 billion – an increase of 20 percent over the $17.2 billion FY2005-2006 budget. Lawmakers could have increased annual spending by a healthy 7.5 percent over that time and still saved taxpayers more than $1.2 billion. By comparison, we have recommended roughly $1.36 billion in tax cuts that we have been able to quantify (not including cuts we have not been able to assign a dollar amount to).

Civitas’ 2007 pork barrel report identified more than $200 million in new “pork barrel” spending in the FY2007-09 expansion budget, along with $155 million in new debt authorized for pork projects.

It is clear that many agencies and departments are not operating as efficiently as they might. For example, the Department of Transportation was forced to cut $22.4 million from its administrative budget for FY2007-09 – a 6 percent reduction. According to the Raleigh News & Observer, DOT officials were unable to cite any specific project delays, job cancellations or service reductions that resulted from the budget cut. In other words, the department was able to absorb a $22 million spending reduction without any noticeable change in operations. As state Representative Danny McComas (R-New Hanover) noted, “If you can generate $22 million in savings from your administrative budget, (would) that indicate that your budget was inflated by that much?”

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