RALEIGH – We’ve all heard about the financial crisis facing this country. You’d have to be living in a cave to have missed it. But what about another type of financial crisis emerging in the Old North State?
Due to overzealous spending commitments and less-than-expected revenue, North Carolina’s state budget is facing a major revenue shortfall — what many would label a “budget crisis.”
It is crucial we not forget about North Carolina’s last budget crisis, in 2001, because the mere fact that the state finds itself in yet another hole indicates that lawmakers learned very little from that experience.
For starters, as was the case in 2001, the current situation results from a rapid, shortsighted build-up of spending commitments during healthy economic times that simply cannot be met when the economy — and thus state revenue — dries up. The similarities between then and now are quite striking.
The state budgets of the late 1990s show an average annual spending increase of 9.2 percent during the four years leading up to FY 2000-01. Likewise, the four years prior to our current budget saw annual average spending hikes of 8.64 percent.
Credit should be given, however, to outgoing Gov. Mike Easley for his proactive approach to the situation thus far. No doubt Easley remembers the difficult decisions he faced upon inheriting an $800 million shortfall when assuming office in January 2001.
This time around, some are projecting the current-year gap to grow to $1 billion or beyond, and Easley has had the foresight to take action now rather than let the next governor inherit a potentially unmanageable budget gap.
“What I want to do, given this economic uncertainty, is make sure we hold back money just in case there’s a shortfall,” Easley said. “I’d rather have [the money] and not need it than need it and not have it.”
In 2001, the new Democratic governor was forced to plug the budget hole he inherited, and the results were not pretty. Among other things, Easley redirected money from the state employee pension fund (prompting a lawsuit that the state employees union eventually won in 2006), held back funds from local governments (also prompting a lawsuit) and raided the unemployment insurance fund.
Making matters worse was how state leaders attempted to balance the budget for FY 2001-02.
Desperate for more revenue to cover escalating spending obligations, they implemented several tax increases. Thus, North Carolina became the only state to raise income taxes (and one of only a handful to raise taxes at all) during the recession. As UNC-Chapel Hill economist James Smith noted in September 2001, “It’s one of the all-time stupidest things done by a legislature anywhere. You don’t raise taxes during a recession, or even in a dismal economic environment.” Smith was right.
The now infamous “temporary” taxes on sales and income (along with an authorized local sales tax hike) created by the FY 2001-02 budget have imposed more than $5 billion in new taxes on North Carolinians. That year’s budget also included tax increases on HMOs, medical insurance companies, liquor, telecommunications and satellite TV.
Because higher taxes discourage investment and job growth by sapping resources from the private sector, North Carolina recovered from the last recession slower than most of the nation. Annual unemployment has remained above the national average for seven straight years, and is on pace to do so again in 2008. Per capita income fell further behind the national average, and the child poverty rate climbed from 17th highest to seventh highest.
A statewide poll in 2001 showed that 63 percent of voters preferred the budget shortfall be resolved by cutting spending, compared to only 17 percent who favored raising taxes. The people were right.
Back to the present: Easley has called for a 2 percent spending cut for select state agencies, a hiring freeze, limits on travel and a delay of major purchases by the state. He made similar moves in early 2001 (in fact, he imposed a 4 percent cut on select agencies). These fiscally responsible actions, however, may prove to be insufficient, given the rapidly declining state of the economy.
Here’s hoping that history doesn’t repeat itself in 2009. Easley and the next governor will have some tough choices to make, but raising taxes (again) should in no way be considered. Listen to the economists. Listen to the people. No new taxes.