There’s a flip side to any discussion about budget cuts: A discussion about revenues, which is usually a nice way of saying taxes.
Now, North Carolina’s state budget has increased nearly 50 percent since the 2000-2001 fiscal year, which many Republicans will point to as evidence of a spending problem. Too much spending, they argue, is why we’re looking at a $3.7 billion budget deficit when the new fiscal year rolls around July 1.
But the consumer price index grew 26 percent over the last decade, and the CPI just for healthcare grew 48 percent, according to the state’s Fiscal Research Division, which gives legislators and the governor information they need to write the budget. The state’s population increased about 17 percent, community college enrollment went up 65 percent and the state’s Medicaid caseload went up 63 percent.
All those numbers are a fancy way of saying, there’s a reason we’re spending more money. So do we really have a spending problem, or do we have a revenue problem?
Plenty of people think it’s the latter, and N.C. Policy Watch is scheduled to put out a report tomorrow on this very subject. We’ll have to see what it says, but there are very few “revenue problems” that can be solved without a tax increase, because about 95 percent of the state budget is funded by taxes.
Now, look at this chart from the Fiscal Research Division:
The state doesn’t charge a sales tax on services, but it does charge one on goods. So as our economy has moved from one in which people are typically buying goods to one where they’re more often buying services, the state is taxing a smaller percentage of the total transactions made. Taking the state sales tax (but not the locals sales tax) off groceries (but not food made in restaurants), also contributed to what you see in the chart.
Thus, sales tax percentage charged on those goods has increased so the tax could hold up it’s responsibility, which is currently about 27 percent of the state budget. Right now state sales tax is 5.75 percent, which includes the temporary 1 percent increase legislators put in place two years ago, is scheduled to expire June 30 and isn’t shown on the chart above.
Republicans are going to be pointing to this chart when they get serious about tax reform, which they’re likely to do this session.
“This tells you that tax reform has to happen. …” state Sen. Pete Brunstetter, a Winston-Salem Republican and co-chair of the Senate Appropriations Committee, said this morning. “I think that a tax on services is a part of any tax restructuring.”
The idea is that, if you tax services, you can lower the sales tax percentage and still bring in more money. And since you’re bringing in more money by taxing folks when they get a haircut or hire a plumber or visit a lawyer, you can cut taxes elsewhere.
Where, you ask? Business taxes. Despite the fact that North Carolina consistently ranks as an excellent state for business in outside reviews (Forbes has us at No. 3 and Site Selection magazine at No. 1), the new majority feels business taxes are too high.
So look for that. Now, a note about the economy and the coming budget.
While $3.7 billion might seem like a lot of money to cut (it’s about 19 percent of the total state general fund), it might not be quite that bad. The governor has already ordered some cuts this year that should lower that deficit, and the legislature is looking to grant her new budget cutting powers to chop another $400 million in spending before the new fiscal year starts July 1.
So you could be talking a deficit that doesn’t reach that dire $3.7 billion figure. And, if the economy continues to improve, taking state revenues up with it, there will be more tax revenue to spend without a tax increase, which Republicans have repeatedly vowed not to make. So, while things aren’t good, they may not be as bad as they seem.
Only time will tell, but the state economist, Barry Boardman, struck a guarded, but positive, tone on the economy this morning in a presentation to legislators. Unemployment remains steady above 9 percent, but wages and hours worked are up, which is a “pretty strong precursor” that an increase in full-time hiring will follow, Boardman said.
Boardman’s report, where most of the numbers above came from, concludes that “the economic recovery is finally starting to gain solid footing” though growth this year will be “modest.”