Leaders: Tax Hike Now Likely Warning By Bond Rating Firm Tips Balance

N.C. state leaders, deep in budget negotiations and facing an unexpected $170 million drop in revenue, are openly talking about a topic dreaded in politics: a tax increase.

In less than a week, Gov. Mike Easley, the speaker of the House and the leader of the Senate have joined a variety of lawmakers and business executives in saying they expect this year’s budget to include some kind of tax hike, likely giving localities the option of a 1/2-cent boost in the sales tax.

Ordinarily, such talk amounts to self-inflicted wounds in a conservative state with a tax-resistant legislature. With an economic slump and parallel decline in tax revenues, though, state leaders are reconsidering.

“There is a change in thinking, I believe,” said House Speaker Jim Black, D-Mecklenburg. “This is a pretty sobering thing when these bits of information come in and revenue collections are off.”

Easley announced the projected revenue shortfall Saturday, saying the state had “used all the bubble gum and bailing wire” and likely would have to raise taxes to bridge the gap. The news came as the House and Senate, already 10 days into the new fiscal year, had just finished passing competing versions of the budget. North Carolina remains one of only six states without a budget agreement for the fiscal year that began July 1.

Lawmakers’ growing openness to a tax increase is driven in part by a July 6 warning letter from Moodys Investor Services, a major bond rating house, saying current budget proposals leave the state vulnerable to a further economic downturn.

Moodys Managing Director Renee Boicourt wrote of worries over a “negative state credit trend” but stopped short of putting the state on “credit watch,” a precursor to downgrading the bond rating. A lower rating means the state has to pay more to borrow money.

“I don’t believe you’re in a popularity contest today,” said Senate leader Marc Basnight, D-Dare. “I believe you’re out to shore up North Carolina’s credit rating and to provide an education for her people to recruit industry and retain industry so that people have jobs.”

Republican legislators pounced on the Democrats’ tax predictions. Senate Minority Leader Patrick Ballantine, R-New Hanover, Monday called Easley’s dire descriptions of state finances as “cavalier.”

“A governor can’t make callous statements like the state is going broke or we ‘re bankrupt. That’s just not the truth. We’re increasing government spendingThere’s no revenue problem, there’s a spending problem,” Ballantine said.

“If a family is short on money, they don’t get the new car. Why are we spending money (on Easley’s proposal) to reduce (elementary school) class size? Why are we spending money on these new programs?”

In the House, Black successfully supervised a budget with no tax increases. House leaders instead cut spending, shifted funds and dipped into reserve accounts to come up with their spending plan.

The Senate plan included several targeted tax increases or loophole closings.

Leaders in both houses, seeing the need to reconcile the two budgets and with a new $170 million gap to fill, are predicting some form of tax increase. One proposal is to include a handful of the Senate’s loopholes and give the localities the option of raising the sales tax by 1/2-cent.

The local option tax would let the state keep about $330 million in annual reimbursements that have been sent to counties and cities since the state eliminated a set of inventory taxes more than a decade ago.

Easley is looking for more money – $700 million to $800 million a year, a figure that could require a full 1-cent sales tax boost but would also stuff a healthy balance back into the state’s rainy day fund.

These proposals come amid tax increases at the local level. More than half of N.C. counties, facing their own fiscal woes, have raised property taxes because of increased state mandates such as Medicaid.

Government watchdog groups are rallying against a possible state tax hike, saying state leaders need to find another source of funding besides consumers’ pockets.

“The easy route here is to raise taxes,” said Linda Hunt Williams, deputy director of Citizens for a Sound Economy. “We didn’t elect them to do the easy thing, we elected them to do the right thing.”

Chris Fitzsimon, executive director of the Raleigh-based liberal Common Sense Foundation, says the state should try to squeeze more out of its banks and large corporations.

“They’re going to raise the tax on bread and milk at a Charlotte grocery, instead of closing corporate loopholes,” Fitzsimon said. “Nobody is saying loudly enough that corporations have to pay their fair share.”

Overall Tax Situation

Going up

Local: Taxpayers in more than half the counties across North Carolina – including Mecklenburg, Gaston and Lincoln – will pay higher property taxes this year. In Union County, the separate property tax for schools increased.

Going down

Federal: Later this month, taxpayers will start receiving federal tax rebate checks of up to $300 for individuals, $500 for single parents and $600 for married couples. The federal tax relief package approved last month also reduces the four highest income tax rates by 1 percentage point. That means 35 million people will have less tax withheld from their paychecks.

Proposed

State: N.C. Gov. Mike Easley says the state is broke, and some kind of tax will have to be implemented. One proposal is a half-cent sales tax increase.