As usual, the market fundamentalists miss the mark in diagnosing state budget ills
Okay, here are some basic facts that everyone who's paying attention ought to agree on when it comes to the current state budget picture:
1. Times are very tough – Like most of the rest of the nation, North Carolina's economy is in recession. Business activity and personal incomes are down and unemployment, foreclosures, evictions and the need for services are up.
2. State tax revenues are taking it on the chin – As a result of the downturn, Governor Perdue and the new General Assembly face large shortfalls in projected tax revenues – both for the current fiscal year which runs through June 30 and the new fiscal year which begins July 1.
3. Something must be done – Sitting on our hands and hoping for things to turn around is not a viable option. It's important for state leaders to act with a purpose and to do so sooner rather than later.
But what should they do? In an environment such as the present in which so much of the current crisis is beyond the control of state government, what can Governor Perdue and the soon-to-convene General Assembly possibly do to help turn things around?
Three main actions that ought to be at the top of everyone's policy "to do" list: a) stop the immediate bleeding, b) seek emergency help, and c) implement reform measures that will reduce the chance of future fiscal emergencies while causing as little collateral harm to the state and its inhabitants as possible.
Thus far, just a week into her term, Governor Perdue has done an excellent job of moving forcefully on points (a) and (b).
First, faced with a huge drop-off in tax revenues for the current fiscal year, she has acted swiftly to stop the bleeding by cementing and expanding former Governor Easley's orders to dramatically reduce agency budgets by up to 7%. Check one.
Second, almost immediately after her inauguration, she traveled to Washington to plead her case to the state's congressional delegation and the incoming Obama administration for swift and sizable emergency assistance from federal lawmakers. Preliminary responses and indications are somewhat hopeful. Check two.
The biggest challenge for the state's incoming leadership team, however, lies in the decisions it makes under action step (c) – implementing reforms to forestall future emergencies without harming average North Carolinians. This is where the Governor and state lawmakers need to spend the lion's share of their energy in the coming months.
The far right urges retreat
According to the market fundamentalist right, the only reform action to be taken under (c) is "no action at all." According to this simplistic and defeatist point of view, the revenue shortfall shows only that North Carolina has been "spending beyond its means" and that the only possible cure – even in the long run – is for us simply to make do with less.
Recently, the right-wing policy twins, the Pope Civitas Institute and the John Locke Foundation issued brief policy reports in which they concluded, respectively, that a "rising tax burden" and "rampant spending" were at the heart of our problems.
According to Pope-Civitas:
"General Fund spending rose a dramatic 47 percent over the last eight years (FY 2001-02 to FY 2008-09). This represents an increase of nearly $7 billion, and a per capita spending increase of 30 percent (not adjusted for inflation)."
According to Locke:
"As with previous budget crises facing the state of North Carolina, the shortfall in FY 2009 and the projected shortfall for FY 2010 are as much the result of rampant spending as of lower than expected revenue. Revenue volatility is a long-standing problem in North Carolina given the state's tax structure."
The implication of their "findings," naturally, is for North Carolina to simply cut its way out of the problem by slashing services and other public investments.
Reality Check
As has been explained at some length on this site on numerous occasions, both Civitas and Locke are flat out wrong. First of all, for any supposedly serious policy organization to hold up the absolute growth in state appropriations (without adjusting for inflation and population increases) as "evidence" of "whopping" growth is an absurdity of the highest order.
Memo to Right-wing Avenue: Uh, guys, in case you hadn't noticed, prices rose just a smidge over the last decade. Oh, and uh, also, in case you hadn't noticed, a few people moved into the state during that same period. Some of them even sent their kids to public school and drove on the highways.
As the N.C. Budget and Tax Center demonstrated quite clearly last month, there hasn't been "whopping" growth in state spending. If anything, state spending has been shrinking:
"While North Carolina's general fund appropriations increased almost annually in nominal terms between FY98-99 and FY08-09, the FY08-09 budget appropriated $19 less per person than the FY99-00 budget, when adjusted for population and inflation."
In other words, North Carolina doesn't have a spending problem, it has a revenue problem. While some fall in tax revenue was unavoidable during the current severe recession, the current precipitous decline that has greeted our new governor far exceeds the actual shrinkage in the economy.
The current and projected shortfalls are so enormous not because we've been spending too much, but because our current tax system is archaic and obsolete. Because the state's revenue system was largely designed in the 1930's and is now shot full of loopholes, we simply don't capture an adequate or fairly distributed share of total state income. The result is a leaky bucket revenue system that overflows when times are good and empties far too rapidly when times are tough.
Going forward
Given the depth and expected length of the recession, state revenues could be stuck at current levels for years to come absent aggressive action. This brings us back to the need for action step (c): longer term reform. If Governor Perdue and legislative leaders want to check this item off of their "to do" list, they must get serious about the business of modernizing and reforming our revenue system.
This means broadening the sales tax base while lowering rates, making the income tax more progressive and closing numerous business loopholes (and perhaps also lowering overall rates). Quick fixes like hikes in regressive and shrinking taxes like the ones on cigarettes and alcohol simply won't cut it and will only make matters worse in years to come.
None of this is to imply that greater government efficiency isn't important. There are significant savings that can be derived from taking on things like drug company reimbursements and criminal sentencing reforms. Just this week, experts at UNC-Chapel Hill told a study committee at the General Assembly that the state's most expensive tax credit for economic development is, essentially a complete waste of tens of millions of dollars per year. There is money to be saved.
But to embark upon the course endorsed by the far right – one that envisions permanent budget cuts of $3 billion per year or more – is an invitation toward a disastrous retreat that would take North Carolina back in time to a less prosperous, healthy and hopeful time. Let's hope state leaders reject such ideas out of hand and muster the courage and energy to build on this year's promising policy start.
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