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WATCH NOWThe Battle for Senate Heats Up in Georgia | Inside the StoryWatch Here


Goal is Balance

BY Amy Gardner
by Amy Gardner on 7/14/01.

Gov. Mike Easley would love for voters to compare North Carolina's budget crisis to their own struggles to keep their checkbooks balanced without sacrificing the essentials during these tough economic times.

Mom and Dad's paychecks may have gone up a little bit this year - but so did their health insurance premiums and their gas bill. There's a net decrease of family income, in fact, so some belt-tightening is in order if that bank account is going to be kept out of the red. Oh, and there's no money in savings, either, thanks to last year's home repairs.

So what about that new roof planned for August?

In Raleigh, Easley and the General Assembly are struggling to write a budget under remarkably similar circumstances:

n They expect to have 4 percent more revenue than the last fiscal year, or about $ 560 million in a $ 14-plus billion budget. That's substantially less growth than recent years, and it's the result of a declining economy. Among other things, consumers are buying less - and paying less sales tax. Companies are profiting less - and paying less corporate income tax.

- They must fund more than $ 600 million in mandated new expenditures, including enrollment growth at public schools, community colleges and universities; higher Medicaid costs; and higher costs for employee health insurance. Those alone are more money than is expected in new growth.

- They want to add or expand a number of other programs, including as much as $ 40 million to lower class sizes in the early grades and provide teacher bonuses for high performance, $ 8 million to expand Health Choice, the insurance program for children of the working poor, and $ 6 million to launch an academic pre-kindergarten program.

- They have no money in the state's emergency "rainy day" fund, which not only is risky in the event of another disaster, such as a hurricane, but also threatens the state's exemplary bond rating, which keeps interest rates low on state borrowing.

Just in the past week, Easley, a Democrat, has raised the pitch on his message that North Carolina should address all these issues, even calling on the General Assembly to raise taxes to help come up with the $ 700 million to $ 800 million he believes is necessary to replenish the reserves, meet the mandates and finance the new initiatives.

"You can always reduce your standard of living more," Easley said. "But the kids have to go to school. Johnny has to go to the dentist, Sally has to go to the doctor if she breaks her arm. And those are expenditures that no Mom and Dad would cut back on. Those are things where I'm drawing the line in the sand. I'm not willing to cut back on education."

Easley may yet get what he wants - or at least some of it. On Thursday, the House gave its final approval to closing three tax loopholes, hoping to yield as much as $ 61 million in additional corporate income tax from limited liability corporations, royalty payments and subsidiary dividends. (It will have to be reconciled with a larger Senate version.) Next week, the House will look at other tax options.

House Speaker Jim Black said he can't deliver everything Easley wants. Democrats have a slim 62-58 majority in the House, so contentious tax measures typically need bipartisan support to pass.

"I'm telling him what I can do, and he'll have to settle for it unless he can come down here and get more votes than I can," said Black, a Matthews Democrat. "Maybe he can."

A local-option sales tax is the most frequently mentioned of several tax options that House leaders will test in the House. The proposal would give cities and counties the option of raising the local sales tax by a half-penny. It would generate as much as $ 330 million annually for the state, because if local governments get that money, the state would no longer reimburse the cities and counties for two taxes it ended years ago: the intangibles tax and the inventory tax.

Black said the House also will look at an income tax on people with annual taxable income of more than $ 200,000, and taxes on alcoholic beverages.

"All of those are limping along on one leg," said Rep. David Redwine, co-chairman of the House Appropriations Committee. "I don't know that any of those has any more legs than the others."

Redwine, an Ocean Isle Beach Democrat, said he wasn't sure at this point that the House would pass any other tax proposals.

"If I was a betting man, right now I'd say it would be mighty difficult," Redwine said. "Maybe next week will bring a new garden variety."

The legislature's chief budget writers, meanwhile, are reviewing the versions passed by the House and Senate. They must wait for the outcome of the tax debates to know how much revenue they'll have with which to work, but they are now trying to find at least $ 100 million more in cuts to help balance the budget.

"We're developing a turtle budget, where you pull in all your extremities and hunker down under a hard shell and don't go anywhere fast," Redwine said. "It will keep North Carolina at a standstill until the revenues and economy picks up."

The state Senate, with a substantial Democratic majority, is widely expected to approve the local-option sales tax if the more narrowly divided House does the same.

"I would say if you get a mixture of $ 400 million, we're in pretty darn good shape," said Senate President Pro Tem Marc Basnight, a Manteo Democrat. "If we were to raise taxes, our financial condition would be strengthened."

Republican leaders are balking at the need for a tax increase in a year when revenue is increasing, if less dramatically than in recent years, thanks to declining growth in several key categories of tax receipts, especially the sales tax and corporate income tax.

They are rallying their colleagues who signed a no-tax pledge during last year's campaign to not change their minds, and they are demanding that their Democratic colleagues across the aisle - and down the street at the Capitol - try a little harder to trim unnecessary spending before resorting to a tax hike. Republicans said they'd prefer to borrow a portion of the state's 25-year, $ 4.6 billion share of the national tobacco settlement than raise taxes.

"That's going to be a hit on a few special interests, sure," said Rep. Art Pope, a Raleigh Republican. "But it's better than a tax increase."


(Staff writer Wade Rawlins contributed to this story.)


The options:

Raise revenue:

- Close tax 'loopholes.' Gov. Easley proposed $ 118 million in changes. Senate approved $ 190 million; House approved $ 61 million.

n Half-cent local option sales tax. $ 382 million for cities and counties. State keeps $ 330 million in reimbursements it no longer would pay to local governments.

- One-cent hike in sales tax. $ 765 million. Local governments get half cent, $ 382 million. State gets $ 382 million in new money plus $ 330 million from no longer making local reimbursements.

- Higher alcohol taxes. $ 95 million. State would levy a 3-cent increase in excise tax on a can of beer, 11-cent tax increase on a bottle of wine, and a 12-cent-per-dollar increase in tax on liquor.

- Income taxes. $ 200 million. Create a fourth bracket with a rate of 8.75 percent for families with taxable income of more than $ 200,000.


Reduce spending:

- Postpone new initiatives. Delaying the governor's plan to lower kindergarten class size would save $ 25 million.

- Deeper cuts in programs and services. Every 1 percent cut in the state's General Fund budget produces $ 143 million in savings.

- Efficiency measures. $ 123 million. Easley proposed saving money with a package of efficiency measures, including stepping up collection of delinquent taxes and publishing manuals and reports electronically, among others.


Others to watch:

- N.C. Citizens for Business and Industry. The state's largest business group has come out for a 1-cent increase in the state's sales tax.

- N.C. Citizens for a Sound Economy. The anti-tax group has pledges from 62 House members and 18 senators not to support a tax increase.

- Teachers and state employees. Both groups are influential with Democrats and are pushing for better salary increases and opposing reductions in their health care plan.

- Advocates for poor and disabled. These groups have built strong opposition to proposed cuts in human-services programs, including the closing of mental-health facilities proposed in the Senate budget.