Clearing the mental hurdle of raising taxes to balance the budget

Death by a thousand cuts

| June 03, 2009

A drab, airless committee room in the Legislative Office Building in Raleigh was the right setting last week for the House Appropriations Subcommittee on Education to do its work. Having settled for the time being on sweeping cuts to state spending for the public schools, community colleges and university system—totaling almost $1.7 billion a year, with an estimated 10,000 teaching and other jobs eliminated—the subcommittee had turned its attention to budget minutiae. No program, it seemed, was too big or small to be on the chopping block.

Ending the practice of waiving fees for prison inmates taking college-level courses would save the state $2.4 million annually, the members were told. Loaning teachers the $2,500 it costs them to become nationally board-certified (under a program started by former Gov. Jim Hunt) would save $6 million a year. Dropping the 13 "richest" low-wealth counties—including Warren and Yancey, for example—from the state's supplemental aid program would save $19.4 million.

As legislative staffers droned through the data, subcommittee members seemed almost dazed. Most of them, said Chairman Rep. Rick Glazier, D-Cumberland, have been teachers, school board members or active in some way as education champions in their communities. Now, Glazier said, they were under orders from the House leadership to cut or eliminate programs they believed in strongly while securing only "the core missions" of the K-12 and college systems.

"We do not have the money," Glazier added sternly, "even to do that."

The same scene was repeated in the subcommittees on social services, prisons and other state programs as House budget writers began to grasp the enormity of the budget hole projected for the 2010 fiscal year, which starts July 1. In brief, tax collections are expected to fall $4.6 billion short of the $21 billion needed to continue state programs at current spending levels. As a percentage of current spending, North Carolina's shortfall is 11th worst in the country, according to the nonprofit N.C. Budget & Tax Center, among the 47 states in fiscal distress, and is far worse than the revenue shortfalls the state faced in the recession of the early '90s and after 9/11 in fiscal year 2002.

A steep drop in state revenues during the April tax season, worse than expected even given the wretched economy, deepened the budget hole from the $3 billion that Gov. Bev Perdue anticipated when she submitted her 2010 spending plan in March. The state Senate used the same figure when it whipped through a slightly altered version of the Perdue budget three weeks later.

Thus, the House—in particular, the Democratic majority—will write the first draft of the real budget, and the big question is whether it will do so using spending cuts alone or some combination of cuts and tax hikes.

Raise taxes? Which ones?

Gov. Bev Perdue's budget plan included a $1-per-pack hike in cigarette taxes and higher taxes on alcoholic drinks, together worth more than $600 million a year. The Senate's budget penciled in an unspecified package of tax hikes worth $500 million. So far, House budget writers have anticipated no tax increases. But if they do, their options—based on the ideas floated so far by progressive leaders—could include:

  • An income-tax surcharge on high-income taxpayers: If the same 0.5 percent surcharge is used that applied, before its repeal, earlier in this decade, it could raise: $250 million.
  • "Modernization" of the sales-tax structure to cover most services (legal fees, for example). Depending on what's covered and the rate—proponents typically say overall sales-tax rates could be reduced—it could raise: $500-600 million.
  • Cigarette taxes: A 50-cent-per-pack increase would raise: $220 million.
  • Booze taxes: Perdue's 5 percent surcharge on alcoholic drinks would raise: $200 million.

So far, Speaker Joe Hackney, D-Orange, and his leadership team, including top budget writer Mickey Michaux, D-Durham, have chosen to use cuts alone, perhaps as a way of demonstrating why the other alternative is preferable.

But it's also clear that there's no consensus yet among the Democrats about raising taxes, let alone which taxes to raise or by how much. And the Republican Party's position is: No new taxes in a recession.

To Glazier, the choice is obvious. Having surveyed the wreckage of the education budgets if taxes aren't increased, he's urged that at least $750 million in new revenues be raised. Otherwise, the UNC system budget could be cut by 18 percent, class sizes dramatically increased in grades K-12, and the school year reduced from 180 days a year to 175 or even 170.

Rep. Verla Insko, chair of the subcommittee on health and human services, agrees. Insko, D-Orange, led the process of deciding how to slash spending by $1.2 billion, if need be. The cuts would be deepest in community programs for the mentally ill and developmentally disabled; but they would also freeze enrollments in the N.C. Health Choice program, which provides health coverage for the uninsured children of low-income working parents, and eliminate such services as dental care and prescription drugs for low-income families and seniors enrolled in Medicaid—while also cutting providers' reimbursements for the remaining services. (Funding for the Wright and Whitaker schools, which serve children with severe behavioral and emotional problems, has been restored after the Senate cut it, although the programs will be up for review in the future.)

Insko was asked Monday if she would raise taxes. "I'm for it," she said immediately. The alternative of cuts alone "isn't acceptable."

But as grim-faced House Democrats emerged from their closed-door caucus meeting Monday night, their finance committee leaders warned that they haven't yet been told to draft a list of revenue options. "The caucus is just starting to get the information" about the severity of the proposed cuts, said Rep. Jennifer Weiss, D-Wake. So is the public. She declined to join the call for tax hikes unless and until she hears that message from her constituents and fellow Democrats.

Rep. Paul Luebke, D-Durham, senior finance committee chair, said he personally favors tax increases. "I've long favored using the progressive approach," meaning that tax hikes should fall on those best able to afford them.

But he, like Weiss, said the Democratic caucus "is going to need to absorb the cuts and what they mean for their constituents" before a decision is reached to raise any taxes. "There's widespread concern about the cuts," Luebke said. "But there's also widespread concern about raising taxes in a very tough economy." For many Democrats, he said, "It's a tough choice."

A coalition of progressive groups and social-service program providers, under the banner of Together NC, is calling on the General Assembly to raise taxes and avoid "devastating" cuts to critical programs. It hosts a public meeting Wednesday, June 3, 6:30-8:30 p.m., at N.C. Central University in Durham, in the School of Education Auditorium. Ironically, the auditorium is named for Rep. H.M. (Mickey) Michaux, the senior House Appropriations Committee chair.

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"Monday night, their finance committee leaders warned that they haven't yet been told to draft a list of revenue options. "The caucus is just starting to get the information" about the severity of the proposed cuts, said Rep. Jennifer Weiss, D-Wake. So is the public. She declined to join the call for tax hikes unless and until she hears that message from her constituents and fellow Democrats... "

Just want to be sure that Rep. Weiss, who represents me and my fellow consitutents in Cary, hears that I support both a reform of the tax system and a tax increase that would actually just represent an adjustment to the tax base that has been repeatedly diminished by the NCGA over the years. As Ty Harrell so aptly stated it, "we are beyond cutting fat--we were down to bone, and now are going into marrow."

I am not surpised that Republicans are reiterating the "No new taxes" mantra, but I did expect better from Rep. Weiss and the Democratic finance leaders. I will be personnally emailing her about this today.

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Posted by mbrock49 on 06/04/2009 at 7:32 AM
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