North Carolina’s FY 2009-10 Budget: $1.1 Billion in New Taxes, Increases Year-Over-Year Spending by $400 Million

The FY 2009-10 North Carolina $20.7¹ billion state budget (S.L. 2009-451) includes one of the largest tax increases in state history while increasing actual spending by half a billion dollars over last year. Rather than seize on a golden opportunity to implement meaningful spending reform, state lawmakers instead used a massive $1.1 billion in new taxes to preserve the status quo.

To finance the new spending plan, state budget writers will draw on several sources of revenue. In addition to the new taxes, $1.69 billion in federal funds will help fill the gap; along with nearly $55 million in new fees, almost $100 million from several trust funds and reserves, and $210 million from questionable revenue “enforcement” and “compliance” initiatives.

REVENUE SOURCES
The FY 2009-10 budget appropriates $20.7 billion. The actual budget bill, however, reflects the smaller total of $19.01 billion. The reason for this difference is because $1.69 in federal funds will be used to supplement state spending, especially in education and Medicaid.

Following is a list of major revenue sources used to finance the FY 2009-10 budget:

$1.1 Billion in New Taxes
The FY 2009-10 state budget includes a tax package raising the tax burden on struggling North Carolinians by nearly 6 percent above the existing tax structure.  New taxes include:

• 1-cent Statewide Sales Tax Increase; Cost to Taxpayers: $803.5 million
  • Rate increase will raise North Carolina’s total sales tax rate to 7.75% in most of the state. The new rate will be 8th highest in the nation (two of the seven higher-rate states have no income tax). The bill includes an expiration date of July 1, 2011 for this tax increase.
• Income Tax Surcharge; Cost to Taxpayers: $172.8 million
  • “Surcharge” would effectively force many taxpayers to pay 102 or 103 percent of their income tax liability. The income tax surcharge is slated to be temporary, scheduled to expire at the end of taxable year 2010.
  • Surcharge would be assessed beginning on single filers earning above $60,000 and couples earning above $100,000.
• 3 Percent Surcharge on Corporate Income; Cost to Taxpayers: $23.1 million
  • Tax would force companies to pay 103 percent of their tax liability. The corporate income tax surcharge is legislated to be temporary, scheduled to expire at the end of taxable year 2010.
  • North Carolina already imposes the highest corporate tax rate in the Southeast region.
•  “Sin” Taxes on Cigarettes, Alcohol and Tobacco; Cost to Taxpayers: $68.8 million
  •  A higher percentage of middle- and lower-income people smoke and drink alcohol compared to the wealthy. Such sin taxes therefore hit hardest North Carolina’s poor and middle class.
• New Tax on Digital Products and Click-Throughs; Cost to Taxpayers: $11.8 million
  • Includes the “Amazon” tax on internet retailers, as well as taxes on computer software downloads, downloaded publications, ringtones, etc.

$1.69 Billion in Federal Funds
Thanks largely to the federal stimulus package, North Carolina’s state budget writers were “bailed out” with nearly $2 billion in federal funds to help finance their spending plan. In many cases, state spending on a program is reduced, only to be replaced by federal funds. For instance, $857 million in state funding for North Carolina’s Medicaid system is “offset by federal recovery funds.” Curiously, this is recorded as a “cut” in the budget even though the $857 million in spending on the program remains intact.

Major recipients of federal assistance payments include:

• $380 million for public education, courtesy of the “Education Stabilization Fund”
• $1.1 billion for HHS, including the $857 million for Medicaid payments, $67 million for childcare subsidies, and $131 million for a “weatherization” program for lower-income homes
• $80 million for the “Workforce Investment Act”
• $90 million total for the Drinking and Clean Water State Revolving Loan Funds

$99 Million From Funds and Reserves
Some trust funds and reserves are raided, including:

• $38 million from “cash balances from special funds”
• $24 million total from the Capital and Repair & Renovations Accounts
• $5 million each from the Tobacco and Health & Wellness Trust Funds

$210 Million from Enforcement and Compliance
State budget writers also rely on a projected $210 million in increased revenue due to Department of Revenue actions. If these actions don’t yield the anticipated revenues, balancing the budget will be in jeopardy. These DOR measures are listed as “improved enforcement” and a “compliance initiative.”

$55 Million in New Fees

• $7.55 million in new “general government fees”
• $47 million in new Justice & Public Safety fees
• $1 million in increased “health services registration fees”

SPENDING
Spending Up Year-Over-Year, “Spend and Tax” Cycle Continues
The FY 2009-10 budget marks a continuation of North Carolina’s dysfuncional “spend and tax” cycle: when times are good the state spending commitments increase dramatically; when recession hits, state leaders resort to tax increases – such as the $1.1 billion tax hike approved this year –  to maintain those spending commitments.

• The FY 2009-10 budget will appropriate $20.7 billion (including  $1.69 billion federal money to replace state spending “cuts”) – up nearly half a billion from an estimated $20.3 billion actual expenditures for FY 2008-09². The new budget, in fact, will spend slightly more than the FY 2007-08 budget.
• Even amid the recession, a budget of $20.7 billion will mark a continued, rapid escalation of state spending:
  • Spending is up 30 percent in five years, and 45 percent in 10 years
• Digging yet another budget hole requires a long-term trend of out-of-control government growth. Even after adjusting for inflation, per person spending in the FY2009-10 budget will be³:
  • Up 12.5% over 15 years
  • Up 25% over 20 years
  • Up 82% over 30 years

Legislature Ignores Spending Reform
Reasonable observers would think that the second major “budget crisis” in the last nine years would serve as a warning for legislators to break the status quo mentality of “spend and tax” and instead enact some meaningful spending reform. Regrettably, no such action occurred this session.

• A clause calling for “zero-based budgeting” included in the Senate budget bill was cut from the final budget. A zero-based budgeting approach would simply call on state agencies to rank the importance of their activities in order to better prioritize state spending.
• Three different bills calling for a form of a “taxpayer bill of rights” never made it out of committee. Such bills would seek to smooth the growth of state spending, more aggressively setting aside surplus revenue during flush revenue times to save for the next revenue downturn (as well as returning a portion of surplus revenue to taxpayers.)

Brian Balfour is a Budget & Tax Policy Analyst with the Civitas Institute (www.nccivitas.org)

UPDATE: Some numbers have been updated from the original version of this article. The original version totalled FY 2009-10 total budget spending at $20.86 billion, including $1.86 billion. Those numbers should have been $20.7 billion and $1.69 billion, respectively. The rest of the numbers affected by this change have also been updated. Civitas regrets the error.