Policy Reports
The Freedom Budget: Nine Rs for North Carolina Fiscal Responsibility

April 01, 2003

Executive Summary: North Carolina faces significant fiscal and economic challenges over the next two years. But it need not resort to higher taxes, a state-run lottery, higher debt, or gimmickry to balance its budget. Nor does North Carolina need to skimp on crucial needs such as education and highways. By setting firm priorities within state government, eliminating unnecessary or duplicative programs, and charging users of some services a reasonable price, state leaders can generate sufficient savings to invest in the future needs of the state.

North Carolinians are not undertaxed. While a series of reductions in income, sales, and other taxes from 1995 to 1998 saved taxpayers more than $1.4 billion, this tax relief followed even larger tax increases in 1990 and 1992 and more than $1 billion in new taxes in 2001 and 2002. The tax burden in North Carolina is significantly higher today than it was in 1990, with its income tax rates among the highest in the nation. Lawmakers would have to cut taxes more than $1 billion annually just to reduce North Carolina’s tax burden to the regional average.

North Carolina was particularly hard hit by the recent recession, and its recovery in most sectors has been sluggish. Now is the time to cut taxes, not raise them. Higher marginal income tax rates, in particular, depress entrepreneurship, discourage job creation, and hamper the state’s economic development.

North Carolina’s real fiscal problem is a lack of productivity in state government, not a short-run money crunch. The state’s General Fund operating budget grew by an annual average of 7.3 percent from 1993 to 2001 — far faster than the 6.3 percent annual growth of personal income. Taxpayers are not receiving benefits commensurate with the escalating amounts their state government is taking from them.

The Freedom Budget presents an alternative state budget for the next two fiscal years. In brief, the plan:

• Identifies General Fund savings worth $1.3 billion in FY 2003-04 and nearly $1.7 billion in FY 2004-05. Major areas of savings include redirecting some public school and university spending, reforming the Medicaid program, merging some departments and divisions, and slicing corporate subsidies.

• Spends some of the savings to offer at-risk children a private-school scholarship and to restore school construction funds eliminated in the governor’s budget, while devoting $62 million more than Easley’s budget does to pay raises for state employees, particularly in the community college system.

• Puts forward a comprehensive tax-reform package that would end $369 million in tax biases and loopholes but more than offsets it with income and sales tax cuts worth $950 million.

• Develops a new strategy for promoting statewide economic growth by increasing annual road maintenance by $179 million, boosting major highway construction by $229 million, and adopting a flat 6 percent tax rate on individual and corporate income to create new jobs and assist struggling families.

Under the alternative budget, General Fund spending would shrink by about 1 percent over the next two years — a modest amount and a budgetary change far below the combined rate of inflation and population growth that a proposed Taxpayer Protection Act would allow. By comparison, the governor’s budget increases spending by 9 percent over the next two years.

In last year’s Agenda 2002 poll, the overwhelming majority of North Carolina voters rejected the idea that their taxes had been cut too much during the 1990s, and most favored state spending limits, additional tax relief, and other recommendations contained in the Freedom Budget.

Download PDF file: The Freedom Budget: Nine Rs for North Carolina Fiscal Responsibility (214 k)

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