FAQs on State Budget Crisis
By John Hood

"Excessive taxation," Thomas Jefferson once wrote, "will carry reason and reflection to every man¹s door, and particularly in the hour of election."
Shorn of its 18th century quaintness, the statement simply takes note of the fact that there are few more potent political issues during campaign season than high taxes. If my recent experience is any guide, we may soon see another example of Jefferson¹s insight in North Carolina as politicians face the voters this November.

The John Locke Foundation just completed a "Tax Awareness Tour" of two dozen cities. Cosponsored by the state chapter of Citizens for a Sound Economy, the tour attracted more than 1,200 people to a variety of events. Much of my time was spent answering questions. In the spirit of those ubiquitous Frequently Asked Questions (FAQs) sections on Internet sites, here are some of the issues that came up:

Is North Carolina a low-tax state?

Not anymore. Since the mid-1980s, North Carolina state and local governments have repeatedly raised income taxes, sales taxes, property taxes, and others. There was a brief period in the mid-1990s when the legislature and some localities enacted tax cuts, but this welcome relief was more than offset by previous and subsequent hikes.

Currently, North Carolina ranks 29th in the nation in the percentage of income consumed by state and local taxes. Our tax burden (10.1 percent) is now just shy of the national average (10.2 percent) and exceeds both that of virtually every other state in our region and, if you can believe it, the tax burden in Massachusetts. Our marginal tax rates on income the rate on each additional dollar earned are among the highest in the nation. The rankings for next year (2003) are likely to be even worse, as they will include the full impact of recent state and local tax hikes.

Does that mean we also have big budgets?

Yes. North Carolina ranks particularly high in two areas of government spending: higher education and health care. If our spending in these areas were closer to that of our neighboring states, our current fiscal problems would have been much easier to address.

Haven't recent budget cuts hollowed out state government?

What budget cuts? Last year the state¹s General Fund spending was about $14 billion. This year, it will also be $14 billion. The distribution of state dollars has changed hundreds of millions have been redirected to cover surging health costs but the current budget still represents a massive increase from the $7.8 billion budget we had just 10 years ago.
And far from reducing the ranks of public employees, North Carolina governments have actually added thousands of employees just since September 2001, even as the private sector has been downsizing. We have the biggest government workforce in the Southeast and expanded it faster during the 1990s than almost every other state in the nation.

Are state and local taxes really high enough to worry about?

It depends on your threshold for pain. One indication of trouble, however, is that in a recent Locke Foundation survey the leaders of North Carolina¹s largest businesses said that the number one problem facing our economy right now is our tax burden.

Isn't our tax system too antiquated to bring in sufficient revenue?

No. It is antiquated, generating inequities and economic costs, but it brings in more than enough revenue. During the 1990s, for example, state revenues rose by an average of 7.4 percent a year. By comparison, personal income grew by 6.5 percent. If the tax system was truly so porous that it failed to keep up with growth, these rates would have been reversed.

Are additional tax increases necessary or likely?

No, they aren't necessary, but yes, they are increasingly likely. Politicians seem unable to set priorities or give up on failed programs. So many will decide to stick it to taxpayers, again, and hope Jefferson was wrong about electoral fallout. We¹ll see if their gamble pays off.

Resource: www.johnlocke.org