Earlier this week, the General Assembly received news of another “April surprise.” That is, revenues are greater than anticipated. Estimates were revised upward by $260.1 million over the February forecast, meaning actual revenue collections will be $1.14 billion above original budget estimates through the first 10 months of the fiscal year. State lawmakers already have plans for most of this revenue surplus. When revenues are projected to be higher than anticipated, the governor and General Assembly waste little time in creating dueling lists of “Adjustments to Expenditures” in which they stake a claim to the anticipated extra revenues. Instead of viewing the extra revenues as a means to provide tax relief for its citizens, many state representatives plan to use the additional revenue to expand government programs and pet projects.
Time for Temporary Taxes to Go
In an attempt to boost tax revenues and close the budget gap during the recession of 2001, lawmakers “temporarily” raised the top income tax rate and the statewide sales tax rate. The income tax on top North Carolina wage earners was raised from 7.75 percent to 8.25 percent, and the sales tax from 6 to 6.5 percent — both were sold as “temporary.” The counties then tacked on an additional permanent half-cent sales tax — raising the overall rate to 7 percent in 2002. Taxpayers were promised that the top income rate and the half-cent state sales taxes would last only two years, but they have been extended twice and still persist in part today (the sales tax was reduced to 6.75 percent last year). Both temporary taxes are scheduled to expire on July 1. If legislators decide to extend these taxes in spite of the scheduled expiration date, it can be viewed as nothing other than a tax increase. The General Assembly’s Fiscal Research Division estimates that maintaining the top income tax rate at 8.25 percent and the state sales tax rate at its current level will generate roughly $300 million in extra revenues next year. With revenues exceeding expectations in four consecutive years, it is time to examine whether or not these “temporary” taxes are still needed. The latest revenue revision brings the expected surplus revenues up to $1.14 billion for FY 2007-08; this number is $310 million more than the estimate used for the governor’s recommended expenditure adjustments. This means that the legislature could fund all of the governor’s spending increases and still have enough revenues — based on the new projections — to do away with the temporary taxes. Additionally, the revenue from the temporary taxes accounts for less than one percent of total state government spending. Put simply, 99.2 percent of the state’s spending comes from other revenue sources — including other taxes and fees, trust funds and federal funds.
Spending Priorities Needed
The failure to end the “temporary taxes” illustrates our government’s addiction to spending. Even in light of a 32 percent increase in General Fund revenues from FY 2002-03 to FY 2006-07, North Carolina politicians claim they simply don’t have enough money. Elected officials have numerous proposals to raise taxes they claim are needed to sufficiently finance “essential services.” In addition to arguing to keep the temporary taxes in place, lawmakers have proposed:
- increases in the local option sales tax
- a real estate transfer tax
- doubling the sales tax on automobiles
- extending the sales tax to services
The reasons given for these proposed tax increases vary from new school construction to infrastructure needs to Medicaid. We are told that if taxes are not raised, state and local governments simply will not have enough money to fund these vital programs. What is not discussed is the millions of taxpayer dollars being requested for various pet projects. Apparently, North Carolina taxpayers are supposed to believe we have no money for education, infrastructure or health care, but we somehow have plenty of money for:
Business Subsidies for Politicians’ Home Districts
- $20 million to directly subsidize businesses in rural areas — sponsored by representatives from rural areas. (H1225: Representatives James Crawford (D-Granville, Vance), Douglas Yongue (D-Hoke, Robeson, Scotland) and Lucy Allen (DFranklin, Halifax, Nash)
- $2.6 million to market the home furnishings industry of North Carolina (H1064: Representatives Maggie Jeffus (DGuilford), Harold Brubaker (R-Randolph), Earl Jones (D-Guilford) and Laura Wiley (R-Guilford)
Pet Projects and Non-Profits
- $17 million to upgrade the Western North Carolina Fairground located in Buncombe County. (H504: sponsored by Representatives Bruce Goforth (D- Buncombe), Susan Fisher (D- Buncombe) and Charles Thomas (R- Buncombe)
- $3 million to a non-profit organization to build an “East Coast Drag Racing Hall of Fame” (H297: Representative James Crawford (D-Granville, Vance)
- $2 million to a nonprofit organization in Greensboro to develop a “Natural Science Center.” Sponsored by three representatives from Greensboro. (H396: Representatives Maggie Jeffus (D-Guilford), Alma Adams (D-Guilford), and Earl Jones (D-Guilford)
- $3 million to establish a “Mountain Island Educational State Forest” (H856: Representative Martha Alexander (DMecklenburg)
- More than $10 million earmarked by Representative Mickey Michaux (D-Durham) to Durham-based non-profit groups such as the North Carolina Institute, N.C. Community Development Institute, and N.C. Minority Support Center.
- The latest revenue update tells us there will be a revenue surplus this year of more than $1.1 billion. This will be the fourth consecutive year the state has experienced a sizeable surplus, but lawmakers still insist on keeping the “temporary taxes” in place.
- Revenues continue to flow into state government coffers, yet elected officials claim they need to raise taxes to fund “essential services.”
- A closer look shows that many lawmakers simply cannot prioritize their spending. Most of the revenue surplus is earmarked for spending before it is even realized, and tens of millions of tax dollars are being requested to fund pet projects.