Fitzsimon File

The state's budget crisis hit the public schools this week, despite assurances earlier this fall that education would be spared the across the board cuts made to address the state's slumping revenue collections.

State officials are now demanding that school districts reduce their budgets by $58 million and it may not be last budget-cutting from Raleigh. The cuts come on top of the General Assembly's refusal last session to reinstate the sales tax refund for schools that was eliminated several years ago. Losing that refund costs schools $33 million a year.

UNC campuses are scrambling to find their own five percent cuts and it looks like most campuses will ask lawmakers to increase tuition next year to offset some budget reductions.

Even the struggling and already underfunded mental health system is cutting back, reducing $10.5 million in funding to local mental health agencies and cutting another $8.6 million to the scandal-plagued mental hospitals.

All the cuts are to balance the current budget. There is certain to be another, even more painful round of reductions when lawmakers put next year's budget together facing a shortfall of as much as $3 billion to keep services at current levels.

That means three billion in cuts unless budget writers muster the political courage to raise taxes and protect the vital institutions of the state and the people who need them. So far the courage is in short supply.

House Speaker Joe Hackney told the Associated Press this week that he "doesn't anticipate any new revenues."  That must mean he anticipates devastating cuts to education, human services, and criminal justice, cuts beyond the ones Governor Mike Easley is making now.

Wednesday's meeting of the Revenue Laws Study Committee provided a preview of the battle to come over balancing next year's budget. Lawmakers heard presentations about combined reporting for businesses, forcing multistate companies to honestly report their income when calculating the taxes they owe North Carolina.

Many multistate companies shift income from state to state to avoid corporate taxes. Many set up holding companies and subsidiaries in Delaware, which has no corporate tax, and then use them to shelter profits. That not only means less revenue for the state, it means that in-state companies pay more in corporate taxes than the huge multistate corporations.

Twenty-two states already require combined reporting and another 10 states considered it last year and are expected to consider it again.  Lawmakers heard Wednesday from Mark Morton, General Counsel for Revenue in West Virginia, which passed combined reporting last year. Morton told the committee there were several reasons why combined reporting makes sense, starting with the fact that it addresses the income shifting that allows corporations to avoid paying state taxes.

That doesn't sit to well with the corporate lobbyists who packed the committee room. North Carolina Chamber lobbyist John McAlister told the committee that many businesses have concerned with the proposal, which is putting it mildly.

McAlister passed out information critical of combined reporting from the Council on State Taxation, a national trade group of corporate interests.  No surprise there. More difficult to understand was the apparent consensus on the committee that if the state adopts corporate reporting and it brings in more business tax revenue, then the corporate tax rate should be reduced.

A revenue neutral proposal may be easier to pass, but if the justification for combined reporting is that corporations are currently shifting money around to avoid taxes, why does it make sense to reduce their tax rate?

It would be a reward for their creative accounting, the state saying since you have been smart enough not to pay your taxes, we won't make you pay them.

Legislation to require combined reporting went nowhere in the last General Assembly session despite past support from high-powered panels that included business leaders and tax experts. The 2001 Governor's Commission to Modernize State Finances recommended it, as did a subcommittee of the 2007 State and Local Fiscal Modernization Commission.

But independent commissions won't decide if multistate corporations should pay their fair share of state taxes, the General Assembly will, and it is hard to be optimistic that lawmakers will be able to part the massive sea of corporate lobbyists and do the right thing.

Maybe they will surprise us and realize that collecting the $120 million the corporations owe the state but aren't paying would mean fewer cuts to public schools, mental health services, and children's health care.  Tax fairness and taking care of people seems like a winning combination.

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This entry was posted on Wednesday, November 19th, 2008 at 3:47 pm and is filed under Fitzsimon File. You can follow any responses to this entry through the RSS 2.0 feed.