A mix of increased efficiency, spending cuts, and reform-minded tax changes is still the best bet for North Carolina

Quick take: State lawmakers are barreling ahead with the 2010 short session and their plans to have a budget in place before June 30. Let's hope that this speedy approach doesn't cause them to lose sight of last year's proven formula for coping with large budget deficits – namely, a balanced combination of increased efficiency, smart and targeted spending cuts and reform-minded tax hikes.

It seems a strange thing to say, given the negative effects of the Great Recession and the large numbers of painful (often unpopular) budgeting decisions they were forced to make, but it is increasingly clear that the 2009 session of the North Carolina General Assembly was one of the most successful in many years. At a time when states across America were inflicting all sorts of disastrous – even ridiculous – cuts to essential services in order to cope with record budget deficits (e.g., shortening school years, closing all sorts of essential state services), North Carolina lawmakers did a pretty darned good job of working their way through an unprecedented crisis.

When all was said and done, state leaders managed to close a 20% budget shortfall with a reasonably balanced combination of increased efficiency, federal assistance, spending cuts, and new taxes. Though far from perfect (many of the cuts went too far and much of the new tax revenue was raised in regressive ways), the package was still a heck of a lot better than what was produced in most states. In keeping with North Carolina's longstanding traditions of moderately progressive, but disciplined and comparatively transparent budgeting, legislators kept state government "on the rails" and moving forward.

So what about 2010?

Thanks in part to last year's actions, the picture for this year is not quite as bleak as it might have been. As lawmakers push ahead with a bill to adjust the biennial budget passed last year, the hole is large but somewhat more manageable. Especially with the first hints of economic recovery beginning to seep into the picture, it is clear that the worst is probably over and that, with a steady diet of balanced, disciplined budgeting, brighter days may lie ahead.

The practical implications of this reality are, upon brief reflection, pretty clear. Last week, the budget policy coalition known as Together NC penned a letter to members of the Senate (the place where this year's budgeting process begins) that lays them out pretty clearly.

"The deep recession and weak, nascent recovery are continuing to batter state government, putting a damper on revenue growth and driving up costs for programs like Medicaid and the community colleges. We, the 100-plus organizations that make up Together North Carolina, believe that state government plays a critical role in stabilizing and growing the economy and supporting families and communities through tough times like these. That is why we are asking you to use this crisis as an opportunity to make North Carolina stronger by not enacting damaging cuts to services that weaken the ability of the public sector to respond to the current crisis and plan for and invest for our state's future.

We believe that the Governor's proposed budget was a good start. It identified savings from efficiencies, relied on the maximum amount of federal assistance and funded some important priorities. The Governor's budget, however, did not raise substantial new revenue and therefore included many harmful spending cuts that would result in job losses and cutbacks to effective programs and services.

Since the Governor's proposal was released the anticipated budget shortfall has grown by nearly $300 million. In order to address this year's budget shortfall, including the new $300 million additional gap, we strongly urge you to continue to take a balanced approach that relies on the following strategies: using all available resources, eliminating ineffective tax expenditures, finding efficiencies, improving tax collections, prioritizing when making cuts, and increasing revenues."

Finding additional revenue

The letter continued:

"When thinking about where to find additional revenue we suggest beginning with…the revenue-raising proposals that were considered in 2009, but were not enacted, including closing corporate tax loopholes and expanding the sales tax to some services. Together NC firmly believes that comprehensive state revenue reform must be a part of the state's long-term solution, but in the meantime we request that you fully consider the revenue proposals that were considered in 2009:

• Close corporate tax loopholes by adopting Combined Reporting (@ $50 m)

• Expand the Franchise Tax to include Limited Liability Business Entities (@ $65- $130m)

• Eliminate the Article 3J business incentive tax credits ($9-$16 m) and evaluate all other tax expenditures, which currently cost the state $5 billion in lost revenues, and eliminate those found to be ineffective.

• Expand sales tax to services including warranties, installations and repairs (@$252.9m at 4.75% state rate); recreation and entertainment ($106m); home and real property($232m); building repairs and alterations (@$74.6m); and storage and moving (@$19.6m)

• Convert entertainment privilege tax to retail sales tax (@$27.9 m at 4.75% state rate)

In other words…

No one disputes that service cuts and the sacrifices that will result must be a part of the 2010 budget-making process. To suggest otherwise during such tough times would be political folly. On the other hand, it's equally clear that a balanced approach to the challenges that confront the state must include sacrifice from all – not just schoolchildren or the vulnerable citizens who rely upon safety net services.

To this end, lawmakers should seriously consider a package of the kind recommended by the Together NC group: a modest and reform-minded set of tax hikes – particularly on profitable corporations – that were considered last year, but not enacted. With continued adherence to such a balanced approach, lawmakers have a chance to make the 2009-2010 session of the General Assembly a truly outstanding one. Without it, they risk diminishing many of last year's formidable accomplishments.