MEDIA RELEASE: Budget analysts: Struggling economy still placing state budget in a vise grip

Budget analysts: Struggling economy still placing state budget in a vise grip
A report released today by the NC Justice Center's Budget & Tax Center explains how the continuing economic struggles are affecting the state budget and  lays out eight strategies policymakers should adopt to get the state back on track

RALEIGH (April 8, 2010) - After navigating troubled budget waters last year, North Carolina's lawmakers must once again guide the ship of state through perilous fiscal circumstances, a new report finds.

According to a study released today by the NC Justice Center's Budget & Tax Center, the state will face a budget shortfall of approximately $1.6 billion in fiscal year 2010-11 and an estimated $3.3 billion-$4.4 billion in the ensuing fiscal year. But, say report authors Elaine Mejia and Meg Gray Wiehe, it's important to take the right approach in address the unpleasant financial news. 

"State leaders must continue to take a balanced approach that includes finding efficiencies, tapping all available resources, eliminating ineffective tax expenditures, improving tax collections, and other strategies," said Elaine Mejia, director of the Budget & Tax Center. "One tactic alone simply won't work: we have to leave all options on the table."

The state's budget predicament is a direct result of national economic woes. Short- and mid-term economic projections are still weak and historically, revenue recovery lags behind economic recovery.  North Carolina is not alone. 48 states currently face budget shortfalls and the cumulative state budget shortfalls for the current year plus next year will likely top $375 billion. In addition to depleting tax revenues, the recession has increased the demand for some critical public investments, namely health insurance for low-income children and adults and post-secondary education for workers who find themselves out of a job and thus turn to retraining opportunities.

"Maintaining investments in vital programs that educate children and retrain adult workers are effective ways to save money long-term and stimulate North Carolina's economy," said Meg Gray Wiehe, a BTC analyst and the report's second author. "To maintain these investments in a better future, we need state policymakers to leave no stone unturned as they look for solutions to the state's fiscal crisis."

Mejia and Wiehe's report, "All Hands on Deck," offers eight strategies for addressing the state's budget crisis. (See a one-page summary of the eight strategies following this release).

"Struggling families need state leaders to protect crucial investments in health care, the community college system and education," said Mejia. "Working North Carolinians need access to these programs more than ever, and they build a foundation for further growth."

The report is available online at: http://www.ncjustice.org/?q=node/474

FOR MORE INFORMATION, CONTACT: Elaine Mejia, 919.856.2176; Meg Gray Wiehe, 919.856.3192; Jeff Shaw, director of communications, 503.551.3615 (mobile), jeff@ncjustice.org.

8 WAYS TO ADDRESS NORTH CAROLINA'S ONGOING BUDGET GAPS (Full report at ncjustice.org)

Finding efficiencies - Evaluate expenditures based on their goals and determine whether there are better ways to reach those goals.

Using all available resources - Employ reserves, rainy day funds and federal fiscal relief funds responsibly and wisely. For example, North Carolina may need to explore transferring money from other funds, including the state's annual tobacco settlement proceeds, which currently go to the Health and Wellness Trust Fund and the Golden Leaf Foundation.

Eliminating ineffective tax expenditures - evaluate all special tax breaks (credits, exemptions, deductions, etc.) and eliminate those that have not achieved their goals.
Companies that receive tax credits for research and development have stronger job growth than other companies, while companies that receive credits for capital investment actually experience job declines, on average. There are countless examples of costly tax preferences that the state has established over years that have not been evaluated, such as the state's sales tax holidays and the recent move to exempt manufacturers from paying sales tax on electricity purchases. Subject these proposals to rigorous analysis.

Improving tax collections - Aggressively seek taxes due that are not being paid. During the current fiscal year the department generated an additional $420 million in tax payments after it subjected several hundred corporate taxpayers to closer scrutiny of their tax liability to North Carolina. The original revenue target for this effort was only $150 million, meaning that the department generated $270 million more than it originally projected.

Increasing taxes - particularly those that have a more positive impact on the economy than spending cuts. There were several revenue-raising proposals that were considered but not enacted in 2009 that could be part of a balanced approach to addressing the FY 2010-11 budget shortfall. These include closing corporate tax loopholes ($30 million), expanding the franchise tax to limited liability businesses ($65 million), expanding the sales tax base to include warranties and repairs to real property ($224 million), and converting the entertainment privilege tax to a retail sales tax ($32 million).

Prioritizing when making cuts - Make careful decisions based on goals and effectiveness when budgets must be cut. Rather than taking an across-the-board or discretionary approach to budget reductions, state policymakers should consider developing a list of priorities by which they can judge current and proposed state spending. The state of Washington has established an ambitious prioritization process called Priorities of Government that could serve as a model for North Carolina and other states.

Rethinking the distribution of state and local responsibilities - Consider transferring some responsibilities to local governments, and provide them with the tax authority needed to fund those responsibilities.

Paying close attention to future impact - Don't create future messes when dealing with today's problems. Lawmakers should avoid cuts to areas of the state budget that result in long-term savings, including areas like early childhood development and community-based corrections programs.

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