Weekly Briefing

One little line that says it all

If you grasp this basic fact about the state budget, you'll see what we need to do

Even for those care a lot about public policy, budget and tax debates can be mind-numbing affairs. With all of the abbreviations, acronyms, wonkish jargon and (gulp!) actual math, that people must attempt to follow and grasp, such discussions can sometimes exceed the average person's attention span. To ask folks with real lives to figure out and become conversant with even relatively basic concepts like tax adequacy, stability, progressivity, elasticity and the like can be a pretty tall order.

This year's debate in North Carolina is no different. The new and conservative-led General Assembly has come to town shouting from the rooftops about "overspending" and arguing that state government growth is "out of control." Recently deposed legislative leaders, meanwhile, are doing their best to show the lengths to which they went to restrain growth in recent years. If one isn't careful, it's easy to get blown away in a blizzard of facts and figures.

So what to do? How does one get some kind of accurate but accessible frame of reference for assessing the competing claims? Is it even possible?

Happily, the answer to this last question is a resounding "yes." Indeed, if one wraps one's arms around the following simple line on a graph prepared by Edwin McLenaghan of the North Carolina Budget and Tax Center for this report last fall, the policy choices that naturally ensue become obvious.

Our stable tax bill

graphic

What you're seeing when you look at this line is the following: Between 1974 and the current fiscal year, North Carolina's general fund appropriations (the core of the state budget) have averaged around 6% of the state's "Total Personal Income" or "TPI" – that is, 6% of the actual income of all people in the state combined together. The 40-year average is actually 6.10% and the 25-year average is 6.22%.

Obviously, this line has wobbled somewhat, but as even a quick glance at the graph makes clear, it has generally been pretty stable. Indeed, when one steps back a little further from the graph, the line becomes event straighter. In other words, contrary to a lot of the common mythology about supposedly skyrocketing taxes and spending, North Carolinians have been paying roughly the same amount of their total income for the government services they receive for almost four decades.

Now, this doesn't mean that the relative responsibilities of different income groups (and between individuals and corporations) haven't changed; generally, the wealthy and corporations pay less than they did decades ago. But it does make clear that taxes have NOT been "skyrocketing." Indeed, as a general matter, taxes have been trending down over the last two decades.

But how is this possible?

At first blush, of course, the average person would question this conclusion: How can we be paying less – haven't we raised rates repeatedly?

The answer lies, at least in part, in the changing nature of our economy. For example, forty years ago, most North Carolinians (particularly middle and upper income households) spent much more of their income on tangible goods than they do today. Those purchases were all subject to the sales tax. Not today in our service economy-driven world. Even though the sales tax rate is higher, much less of our economic activity is subject to taxation.

The practical result of this and other similar phenomena is the line above. Even though many tax rates have risen, our total tax bill (as a percentage of our total income) has generally remained steady and even declined.

Impact on prosperity and growth

One area in which one doesn't have to be a numbers wonk in analyzing and making sense of this line and the data it represents is in the practical, real world changes that have occurred in North Carolina over the last four decades. By any rational analysis, North Carolina is a demonstrably bigger, healthier, fairer and better place than it was in 1974.

Have there been negative changes? Absolutely. We are more economically stratified than we were four decades ago. Our environment is under greater stress. Much of our old manufacturing base in textiles, tobacco and furniture has collapsed and many regions (particularly rural areas) are struggling.

Still, by any fair analysis, no reasonable person would trade places with the people of 1974 or dismantle the public systems and infrastructure that we have created since then.

North Carolina transformed itself from a sleepy backwater state into a rapidly growing, modern, progressive powerhouse over those decades – all while maintaining roughly the same basic tax bill of just over 6%. Not only did the tax bill not hold us back, it clearly helped move us forward by providing government with the resources it needed to build a public infrastructure that is in many ways "world class." What's more, state leaders maintained this overall rate even as huge costs beyond their control (most notably health care) really did skyrocket.

If there's compelling proof that a tax bill of 6% doesn't retard progress, a comparison of the 2011 North Carolina vs. 1974 North Carolina is it. There's a reason people continue to come here in huge numbers.

The 6% solution

The most striking thing about the line above, of course, is what happens on the far right – that is, in the new fiscal year that begins July 1. Look at what happens if we address the impending budget shortfall with a combination of spending cuts and tax cuts alone (as proposed by the new legislative leadership). Simply put, the bottom drops out of state spending.

North Carolina would, in effect, abandon a proven, decades-old recipe for success and lock in a new and potentially disastrous retrenchment. We would be buying a pig in a poke – giving up an arrangement with a proven record for a model favored by our less successful southern rivals – places like Alabama and Mississippi.

The solution to this dilemma is obvious: The state should avoid tax cuts and/or add new revenues so that it at least returns to somewhere approaching the historic average of around 6%. Indeed, according to McLenaghan, returning to our 25 year average of 6.22% would put state revenues at $22.6 billion – that is it would close our entire shortfall and provide an extra $700 million!

While no one is seriously proposing this plan in 2011, such a fact demonstrates just how radical the approach being advanced by conservative House and Senate leaders really is. In an era in which merely keeping our state's overall tax bill at normal, historic levels would alleviate enormous pain and keep our state on a steady pace, they have embraced a plan to slash spending to unprecedented depths.

Let's hope that before they act, lawmakers look closely at the line above. If they do, perhaps a more moderate approach will ultimately prevail.