Fitzsimon File

The debate over the federal stimulus package in Washington continues, but state leaders are clearly counting on federal funding not only to create jobs, but to help balance the budget. The federal money won't solve all the state's problems, but it will help for the next two years. And it makes budget and tax reform this session more important than ever.

House Speaker Joe Hackney knows more about the federal plan than most lawmakers as the President of the National Conference of State Legislatures. Hackney said an N.C. Policy Watch luncheon Tuesday that the stimulus plan will include roughly $500 million a year in state Medicaid funding for the next two years.

That would certainly help with the $3 billion budget shortfall expected next year, though some of the federal money would pay for the annual increase in Medicaid costs and the increase in the number of people who qualify for coverage as a result of the economic downturn.

The latest version of the stimulus plan also includes $919 million a year for the next two years in a fiscal stabilization fund. That is explicitly to address state budget problems and stave off damaging cuts in education and human resources.

The plan has plenty more money for North Carolina, though most of it is for specific programs and not as easily applied to the General Fund shortfall. Elaine Mejia with the North Carolina Budget Tax Center said at Tuesday's luncheon that the federal money may take care of up to half of next year's budget problem.

That still leaves $1.5 billion for lawmakers to come up with through revenue increases or budget cuts or a combination of the two.  Hackney says everything is on the table as the legislative session begins Wednesday, though he has said previously that he's not enthusiastic about raising taxes on cigarettes and alcohol, an idea floated by Senate President Pro Tem Marc Basnight. 

Most Republicans and the conservative think tanks are calling for only budget cuts, no new taxes, all part of their claim that state spending is out of control. Mejia points out that after adjusting for inflation, state spending per capita is less now than it was ten years ago.

That ought to put to rest the claims about big spending, though that old debate continues. What is less discussed is what happens when the money from the federal government stops coming in two years from now.

The increase in Medicaid funding is temporary and the fiscal stabilization money is too. One reason for the mess we are in now is that lawmakers funded more $150 million worth of ongoing programs with one-time money last session, money that will not be available next year.

That's a practice roundly criticized by both parties in the legislative halls and it has declined in recent years. The federal stimulus package is the mother of all one time monies, creating a hole in the budget of more than $1.5 billion when the temporary federal funding runs out.

That doesn't mean lawmakers should balk at using the money to address problems now. People who need to see a doctor don't really care if it is paid for by one-time state money or recurring money or money from the moon.

These are desperate times and thank goodness the Obama Administration recognizes it and knows that the national economic collapse is forcing every state to consider devastating cuts to vital institutions.

But the federal money will end, sending the state budget over a cliff unless lawmakers use the current crisis to eliminate waste and duplication where they find it and finally reform the state's outdated tax system that is no longer in sync with the state's growth and increased economic activity.

Hackney said Tuesday that the federal stimulus package and the priorities of the new administrations in Washington and Raleigh may allow the state to do things that have been needed for a long time, like investing heavily in green jobs and more transit in urban areas.

The current budget crisis provides challenges and other opportunities too. Even with the federal money, lawmakers can't cut their way of next year's budget hole without reducing human services at the very time they are needed the most.

That means new revenue. A good place to start is to change corporate tax law to stop multistate corporations from moving money around to avoid paying the state, an idea approved Tuesday by a legislative study committee.

But that's not enough. The General Assembly and the Perdue Administration need to commit themselves now to comprehensive tax reform to stay away from that cliff that's coming when the federal money stops, and to make future budget shortfalls less severe and less likely.

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This entry was posted on Tuesday, January 27th, 2009 at 6:48 pm and is filed under Fitzsimon File. You can follow any responses to this entry through the RSS 2.0 feed.