Progressive Voices

It's difficult to recall a period more jam-packed with bad fiscal news for the state of North Carolina than the past few weeks. At the beginning of October the NationalEmploymentLawCenter concluded that North Carolina is one of only a few states whose unemployment insurance system is considered "nearly insolvent." According to officials from the North Carolina Employment Security Commission, the state only has a few months worth of money left in the Unemployment Insurance Trust Fund before the fund runs dry and the state will be forced to borrow from the federal government.

A few weeks later the state's transportation officials announced that they will have to trim another $50 million from the roads budget because of slumping gas tax revenues and car sales tax revenues. Because the gas tax is charged per gallon and not as a percentage of the purchase price the revenue shrinks as people drive less and buy more fuel-efficient vehicles. Not surprisingly, revenue from the sales tax on car purchases is extremely vulnerable to the economy's ups and downs. Moreover, it includes an overly generous loophole for the people who can afford to keep buying cars during a slumping economy - they get to deduct the value of their trade-in when determining the taxable value of the purchase.

Then, most recently, legislative economists released data showing that the state's general fund revenues came in $230 million below the forecast for the first quarter of the fiscal year. If that pace keeps up the budget will be fully $1 billion below the budgeted projections. Add that $1 billion to the anticipated costs of continuing to provide state services and lawmakers are very likely going to be facing a very serious budget shortfall next spring much along the lines of the shortfalls of the early 2000's. Those were not pleasant times - funding for programs such as Smart Start funding was cut significantly, state employees and teachers went without pay raises, the state withheld funds rightly owed to local governments and funds slated for the retirement system had to be diverted to cover operating expenses.

All three news items together makes for a fiscal trifecta of bad news. And which of the gubernatorial candidates has announced a plan for how to deal with these crises? That would be none of them. Which legislative candidate has issued a plan for how these problems should be addressed? That would be none of them. Perhaps they're employing the old "I'll cross that bridge when I get to it" technique of problem-solving. To deal with these budget crises the state will need courageous leaders not afraid to get real with special interest groups and make decisions that don't poll well.

For years many experts have said that the state should raise the tax that employers pay to provide unemployment benefits. More specifically, corporations that currently do not pay into this system must begin to pay their share of this civic responsibility. Next, the general fund's tax structure needs to be reformed so that it's more stable. Among other things, the sales tax needs to be expanded to include more services and the state must take steps to make multi-state corporations pay their fair share. Finally, the state is going to have to revamp the way it finances transportation. The state needs to invest more in public transportation and it desperately needs revenue sources in the mix that are based on road use. The gas tax and the sales tax on cars are going to be increasingly inefficient sources of revenue for meeting the state's transportation needs.

These solutions are not new ideas, but they haven't received a lot of attention because they're not the kind of popular (i.e. simplistic and pain free) solutions that politicians like to talk about. But solutions can't become popular unless courageous leaders have honest conversations with the electorate. The tradeoff for not having these difficult conversations is that leaders are losing or at the very least postponing the opportunity to build public support for the tasks that must be taken by the next administration and the incoming state legislators. That strategy can be viewed seen as wisely "crossing the bridge when they come to it." On the other hand, it could be that the state's leaders and would-be leaders are not telling citizens that there are difficult crossings ahead and that there are some bridges that must be crossed, preferably together.

Elaine Mejia is the Director of the N.C. Budget and Tax Center

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This entry was posted on Thursday, November 6th, 2008 at 9:54 am and is filed under Progressive Voices. You can follow any responses to this entry through the RSS 2.0 feed.