Civitas Review

Does NC Have a Revenue Problem?

By | Posted in Budget & Taxes |

The N&O editors offer up this hard-left spin on the Governor's state of the state speech. A few items in particular jump out at me. When discussing the proposal to reduce the state's 6.9% corporate tax (highest in the SE) to 4.9% (lowest in the SE), the N&O editors lament "the $400 million to $600 million it would cost, at a time when the state's running a $2.4 billion deficit." The use of the word cost is of course meant to mislead. Reductions in tax rates don't "cost" anything – they merely allow companies to keep more of what they earned. Government programs "cost" money – tax rate reductions don't.

Moreover, their estimate that a 29% decrease in the corporate tax rate would reduce corporate tax revenue by up to $600 million is inaccurate. Even in the robust economic fiscal year of 2006, corporate tax revenue topped out at $1.2 billion. So how do they figure a 29% reduction in the corporate tax rate will reduce corporate tax revenue by up to 50%?

Then there is this reality-defying claim:

The big-spending argument also is hurt by the fact that next year's budget revenues are projected to be $200 million less than in the 2005-06 budget year – when the state had a million fewer people. That sounds like a revenue problem, not just a state that's gone wild with the checkbook.

A revenue problem – not a spending problem? Their premise of comparing revenue to that of five years ago is misguided. The state was flush with revenue then – and the state spent virtually every penny. Not because they had to, but because they wanted to. Unemployment and poverty rates were low, there was relatively little need for government programs. But yet the state spent the money anyway, rather than setting some aside for a rainy day. And then there is this – the 2005-6 budget itself was a high-water mark in spending. Budget writers ramped up state spending a whopping 71% during the decade leading up to the 2006 budget year.  

The N&O's narrow window of comparison is also sloppy and misleading. Try looking at the bigger picture, and see what the real problem is. From 1979-2009, state spending grew at three times the pace of population – even after adjusting for inflation. During that same time frame, even if state budget writers had restricted themselves to growing inflation-adjusted spending to only twice the rate of population growth, the 2008-09 budget would have only been around $15.3 billion – a full $6 billion less than the actual budget.

Furthermore, let's not forget about the billions of federal dollars spent in the state, but not accounted for in the N&O article. Since 2005-6, federal dollars being disbursed in NC increased by nearly $4.3 billion. Seems like a nice boost in revenue.

Don't be fooled by claims about how the state government doesn't have any money to spend. Has the current recession caused a dip in the revenue trendline? Sure. But step back and gain a little perspective and realize that the state's current (and past) budget problems have been caused by a long-term unsustainable commitment to ratcheting up state spending during good economic times without setting anything aside for a rainy day.

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