Budget Policy Guide.Indb

CIVITAS INSTITUTE PUBLIC POLICY SERIES THE STATE BUDGET UNLOCKING 1985-2015 THE CIVITAS INSTITUTE PUBLIC POLICY SERIES

UNLOCKING THE STATE BUDGET: 1985-2015

A GUIDE TO SPENDING AND TAXATION

www.nccivitas.org 100 S. Harrington St. Raleigh, NC 27603 919.834.2099 | 919.834.2350 (fax) Fifth Edition, Updated May 2016 ©Civitas Institute 100 S. Harrington St. Raleigh, NC 27603

Cover Photo — © Photographer: Matej Krajcovic | Agency: Dreamstime.com ABOUT THE SERIES The Civitas Institute Public Policy Series

The purpose of the Civitas Institute Public Policy Series is to equip the legislator, as well as the layman, with the tools necessary to understand public policy in North Carolina. Toward this end, each guide does three things: defines basic terms, answers essential questions, and provides a legislative and political history regarding a particular policy area. Thus each guide consists of three distinct sections — Key Terms, Q & A, and a year-by-year timeline — that can be used to easily find specific information on a particular issue or time period. Detailed charts and graphs provide additional data for those readers interested in learning more about select topics. Overall, the guides provide a roadmap for the citizen legislator — and perhaps more important, the average citizen — interested in learning more about essential policy ideas and long-term trends.

While each book in the Civitas series can be read on its own, the current guide on spending and taxation serves as a foundation for the series as a whole. Essentially, this is because the budget process is the annual focal point of the public policy debate in North Carolina. Whether or not this should be the case is a complex question, but the reality remains that the state’s priorities are best perceived by looking at how the state spends its – that is, our – money. CONTRIBUTORS

Peter Andros, M.A. Contributing Author

Brian Balfour Policy Analyst

Chloe Gossage, M.P.P. Senior Policy Analyst

Jameson Taylor, Ph.D. Policy Fellow and Project Director/Editor

Special thanks to all those who helped make this project a success. Chloe Gossage created many of the charts and contributed to the writing and editing of the guide. Peter Andros compiled and wrote the historical narratives while Chloe, Becki Gray, Sven Larson and Jason Bennett put together the year-by-year tax, healthcare and education boxes. Becki and Sven also helped in the writing of the guide, while Jason wrote several early drafts. Finally, thanks also to Faye Orr for designing the guide and the cover; Dion Terry for assisting with research; and Dennis Parker and Jennifer Taylor for providing editorial and design assistance. nd to preserve [the people’s] independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusionA and servitude. . . . Private fortunes are destroyed by public as well as by private extravagance. And this is the tendency of all human governments. … And the fore horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression. Thomas Jefferson to Samuel Kercheval (July 12, 1816)

CONTENTS

9 Executive Summary 17 Key Terms 27 Q&A 27 The State Budget 28 Funding the Budget 29 The Balanced Budget Amendment 30 Types of Budget Cuts 32 The State’s Debt 34 TABOR 35 Bond Ratings 37 Federal Funding and The Budget 39 The Corporate Income Tax 41 Large Corporation vs. Small Business 42 The Budget Crisis of 2001 48 The Intangibles Tax: Fulton/Smith/Shaver v. N.C. 50 Taxing Retirement Benefits: Bailey/Emory/Patton v. N.C. 51 Corporate Subsidies 56 Tax Increment Financing 58 "Temporary" Taxes of 2001 61 Structural Budget Deficit 62 The Unfunded Liability for Retired State Employee Health Benefits 63 American Recovery and Reinvestment Act of 2009

67 Timeline 67 Economic Overview: 1975-1984 75 1985 Session 81 1986 Session 87 Economic Overview: 1985-1989 91 1987 Session 97 1988 Session 103 1989 Session 113 Economic Overview: 1990-1994 117 1990 Session 123 1991 Session 131 1992 Session 139 1993 Session CONTENTS

145 1994 Session 153 Economic Overview: 1995-1999 157 1995 Session 165 1996 Session 171 1997 Session 177 1998 Session 183 1999 Session 191 Economic Overview: 2000-2005 195 2000 Session 205 2001 Session 217 2002 Session 227 2003 Session 235 2004 Session 241 2005 Session 249 Economic Overview: 2006-2010 253 Timeline: 2006-2008 254 2006 Session 262 2007 Session 274 2008 Session 285 Timeline: 2009-2015 286 2009 Session 299 2010 Session 312 2011 Session 320 2012 Session 329 2013 Session 339 2014 Session 347 2015 Session

355 Appendix 356 Budget Bill Votes 2001-2015 371 Significant Tax Changes by Year and Type 378 Additional Charts and Graphs 387 Index and Sources for Charts & Graphs executive summary l CIVITAS INSTITUTE l 9 Authorizations Total General Fund General Total FY1984-1985: $4.516 billion billion FY1984-1985: $4.516 billion FY1989-1990: $7.360 billion FY1994-1995: $10.268 billion FY1999-2000: $14.237 billion FY2004-2005: $15.918 FY2006-2007: $18.866 Tax revenues have increased by roughly 400 percent roughly by increased have revenues Tax about 700 percent debt has risen by capita state Per ➤ nearly 400 percent has increased Spending ➤ ➤ EXECUTIVE EXECUTIVE SUMMARY One would think that a 30-yearOne would much less the North history Carolina of anything, but boring. is anything however, guide, current The dull. be rather budget, would has it all. budget optimism – the state boundless corruption, deception, Intrigue, much higher. get stakes don’t the billion a year, $20 high-stakes drama? At Want decades: the past three that over example, for Consider, These numbers, however, only tell part of the story. In itself, the budget is simply part In only tell itself, of the story. however, numbers, These each for and expenditures revenue of the anticipated estimate an itemized session. It – the politics legislative is the budget process biennium, or two-year others – that is the story. certain get funded over of how priorities and programs of a detailed analysis guide not only provides the current that point in mind, With narrative in North but also a year-by-year spending and taxation trends Carolina, making In the for the end, these decisions. that identifies the people responsible not the budget. It is after all, is the people behind the budget, and main thing, being That the people of North serve. that the budget is supposed to Carolina the book. read In to this Executive have want the inside story if you you’ll said, be looking just Summary at the numbers. we’ll 10 l CIVITAS INSTITUTE l executive summary from 1985to 2005, thestate/local personaltaxburden Carolina thanintherest Asin North Figures ofthe Southeast. 2and3illustrate, As for taxes, asashare ofpersonalincome, state andlocaltaxes are muchhigher frame, even accounting after for inflation. growth2006-07, highlightingsomeoftheshorter-term trends withinthattime And Figure 1highlightsspendinggrowth trends from FY1985-86through FY the state’s population. even adjustingfor after inflation,state spendinggrew at increases markedthethree decadesleadingupto thecurrent recession. Indeed, As becomes clearfrom along-term trend theabove ofdramaticspending chart, recent recession. isby examiningspendingtrends forA goodstart the30years leadingupto the Carolina’sthat have shapedNorth economy. need to takeastep backandlookatthelong-term spendingandtaxationtrends current budgetcrisis–orwhatreally shouldbetermed aspendingcrisis–we the overall taxburden keepsrising. order to In come to grips withthestate’s By allaccounts, thestate isspendingmore andmore, whichalsoexplainswhy 1 went from 2.9percent three timesthepace of executive summary l CIVITAS INSTITUTE l 11 3 nationally. (Maine was first, with an overall tax burden of tax burden (Maine with an overall was first, nationally. rd to 23 th During the same period, North Carolina’s overall state/local tax burden tax burden state/local overall North During the same period, Carolina’s Fig. 1. Growth in General Fund Budget Fund in General 1. Growth Fig. 2 This figure does not include sales tax, but is the standard measure used by the Bureau of Economic Analysis for “personal “personal for Analysis of Economic the Bureau used by measure does not include sales tax, but is the standard figure This on personal property. and taxes taxes such, it includes income As taxes.” current of North 1991 and 1999, North similarly finds that between State Carolina Walden Michael Dr. measures, different Using the having from went the state the same time, At percent. 15.8 to 15.4 percent from went tax burden overall Carolina’s “The and income ranking for tax burden rose Walden, notes In particular, the 30th lowest. to tax burden 39th lowest for and was unchanged and other taxes, taxes license fuel and vehicle motor for fell and charges, fees and for sales taxes http://www.ag-econ.ncsu.edu/ from available Burden”; Tax Relative “North Carolina’s Walden, Michael the property tax.” faculty/walden/nctaxburdenranking.PDF. to 3.6 percent. When all taxes, such as sales taxes, are taken into account, North account, into taken are such as sales taxes, When all taxes, 3.6 percent. to 10.5 percent in 1985 to 9.1 percent from surged tax burden state/local Carolina’s in 2006. As bad as this sounds, things were actually worse. Consider that according that according Consider actually worse. things were bad as this sounds, As went from 35 from went 13.5 percent.) The result has been an overall increase of $2,295 tax dollars per of $2,295 tax dollars increase has been an overall result The 13.5 percent.) capita. should have tax burden the overall of 95 percent, an inflation rate for Accounting find we $2,400 in 2005. Hence into translated have $1,169, which would risen by quickly more more than inflation – by rose taxes spending, that, along with state and local tax state overall North a result, than $1,000 per person. As Carolina’s Va.). Tenn., Ga., S.C., 2006) ranked first in the Southeast (N.C., Fla., (for burden 1 2 12 l CIVITAS INSTITUTE l executive summary the governor andtheGeneral Assembly are necessary charged withmaking time span.According 5), Carolina Constitution to III,Section theNorth (Article Finally, let’s lookathow muchdebtpercapitahasincreased duringthat20-year problems. population growth hashelped masksomeofthestate’s long-term budgetary decrease inthetaxrate. Instead, the opposite hashappened, whichmeansthat productivity. Carolina’s As North populationgrows, a we should thusexpect debt base, butitalsocanbecorrelated to theincrease inpersonalincome and economy, theincrease inpopulation notonlybroadens thetaxbaseand for theeconomy. Becauseofthedynamiceffects ofaddingnewpersonsto the groundbreaking work oflate economist JulianSimon,populationgrowth isgood growing populationshouldhave according Indeed, hadasimilareffect. to the lowered taxes andstillbrought inthesameamountofrevenue. Carolina’s North caused anincrease intaxrevenue, whichmeansthatlegislators could have into adeclineinthetaxrate. This isbecausetheincrease inpersonalincome once we account for inflation,thisincrease shouldhave theoretically translated Carolina increasedin North from $12,699in1985to $31,029in2005.Even to theBureau ofEconomic Analysis, percapitapersonalincome (current dollars) 3 http://www.taxfoundation.org/files/northcar.swf; alsopersonalcorrespondence with Tax Foundation, March 15,2007. The Tax Foundation, Carolina State-Local “North Tax Burden Compared to U.S. Average (1970-2006)”;available from 4 Fig. 2.State/Local Taxes asaShare ofPersonal Income: Southe Southe ast States, 1985-1994 executive summary l CIVITAS INSTITUTE l 13 Southeast States, 1995-2005 Southeast States, Notes Simon: “Economic reforms away from totalitarianism and central economic planning in poor countries probably probably countries planning in poor economic and central totalitarianism from away reforms “Economic Simon: Notes … By population growth. to recourse was not explained by growth if slow widespread and more been faster have would is a view that population growth the previous from away completely has turned almost profession 1989, the economics Economics”; in Population Unreported Revolution “An Julian L. Simon, factor development.” in economic crucial negative http://www.juliansimon.com/writings/Articles/REVOLUTI.txt. from available “economies in State expenditures” to balance the budget. Nevertheless, the balance to expenditures” in State “economies issuing general obligation bonds, take on debt by is still able to government certificates of participation of June 30, 2010, As such instruments. and other Of was $6.1 billion. $1.3 billion net indebtedness total this, North Carolina’s years. doubled in just five an amount that had of special indebtedness, consisted avoid as to structured in such a way are debt instruments Special indebtedness traditional general the more that applies to approval of voter the requirement the ability skirt to over accountability Unsurprisingly, voter obligation bonds. Indeed, be very to legislators. popular among state debt spending has proven on the issue of new state vote to allowed were the last time North voters Carolina debt was 2000. of special in 2000 in favor process the bond referenda abandoning Since debt more capita state Per debt has predictably exploded. state indebtedness, Annual debt service on the payments (see Fig.4). years than doubled in just five has authorized, the state Moreover, debt tripled in less than a decade (see Fig.5). another $1.6 billion in debt (as of June 30, 2010). issued, but not yet 4 Fig. 3. State/Local Taxes as a Share of Personal Income: of Personal as a Share Taxes 3. State/Local Fig. 14 l CIVITAS INSTITUTE l executive summary

Millions $ !# # $# & #$ ' &' $% "# ! Fig. Payments: 5.Annual DebtService 2001-2011 million.) debt includesNontax-Supported(Revenue)Bondsoflessthan$10 Appropriation-Supported CertificatesofParticipation(COPs).(Other (GO Bonds),HighwayTax-Supported Bonds(Highway),and Sources ofDebt:Voter-Approved GeneralObligationBonds Fig. 4. Total Outstanding Debt:2001-2005 executive summary l CIVITAS INSTITUTE l 15 General Bonded/ General Obligation Debt Outstanding FY1984-1985: $131.14 per person per FY1984-1985: $131.14 FY1989-1990: person person $88.66 per per FY1994-1995: $142.50 person per FY1999-2000: $312.42 person per FY2004-2005: $741.51 FY 2010-11: $774 per person Moreover, the rapid rise of total outstanding state debt is also cause for debt is also cause for outstanding state of total the rapid rise Moreover, the 2010 and 2011 Debt has also warned in both office Treasurer’s The concern. its capacity to exhausted” “substantially has studies that the state Affordability rating. its credit issue new debt without threatening it became 25 years, nearly $15 billion over risen by budget having the state With than just spending crisis entails more Northclear that resolving Carolina’s such museums and other teapot on appropriations eliminating pork barrel budgetary is facing long-term state that will only The problems boondoggles. must caution though, we Here, reforms. fundamental long-term, by be solved viable theoretically with, even begin To against taking in easy answers. refuge a hearing even receive fail to to Amendment, continue TABOR like a solutions, more Even spending. in government growth against political climate in today’s unlikely in Northimportant that the majority are of voters Carolina is recognizing at the fiscally conservative alternatives advances that a platform by be swayed to Future wants it all. voter Today’s expense of education and healthcare. perceived forward-looking must be bundled with a confident, at budget reform attempts a wide across alternatives positive that provides fiscally conservative philosophy spectrum of public policy issues. The exclusive reliance on non-voter approved debt has raised concerns in the concerns debt has raised approved on non-voter reliance exclusive The the Study of 2011, their Debt Affordability to According Office. Treasurer’s State as a portion indebtedness of special share significant debt poses total of growing authors to lead the Study’s Such concerns rating. credit the state’s to threats of General Obligation the authorization consider “that the State recommend debt provide method to as the preferred debt voter-approved) (traditional, its capital needs.” financing for key terms

Ad Valorem Tax Baseline Revenue Growth Tax based on the assessed value of real Increase in the state’s revenue, assuming no property, as opposed to personal property. changes in the tax structure.

Appropriation-supported Debt Budget Appropriation One of two forms of taxpayer-supported Money authorized by the Legislature to be debtA issued by the state; the other is general spent on a particular program or line item; obligation bonds. Unlike general obligation an unexpended appropriation is one that bonds, appropriation-supported debt is not could have been spent, but was not; an technically guaranteed by the state, but by unappropriated balance refers to cash reserves liens on property or equipment. Hence, such that have not been allocated for any purpose. debt can be issued without voter approval. Certificates of Participation (COPs) are the Budget Bill most popular form of appropriation-supported The session laws that appropriate funds for debt. COPs are tax-exempt lease financing the next biennium (or fiscal year). In sections agreements that promise investors a share of called special provisions, the budget bill whatever revenue is derived from the lease (or enumerates the total budget appropriated to lease-purchase) of the property or equipment each agency, salaries of government officials the COP is tied to. As of June 30, 2010, the and other public employees, and the legal state owed roughly $1.3 billion in COPs debt. language that specifies how agencies and other entities may or may not spend their Authorized Budget money and report on their expenditures. Although the certified budget specifies how See Special Provisions much money can be spent on each line item in an agency’s budget, the actual Capital Budget expenditures of a fiscal year are documented According to the OSBM, a “budget comprised upon completion of the year and captured of nonrecurring appropriations for capital on an ongoing basis in the authorized budget. improvement projects, such as new state Differences between the certified budget and buildings, repairs and renovations of facilities, key terms the authorized budget arise because agencies walks and drives, land purchases, and civil are allowed to move money between certain works projects.” The capital budget frequently line items as needed. For example, an agency includes appropriations for new or renovated can move money from “office supplies” buildings in the UNC system, plus other l CIVITAS INSTITUTE l 17 to “office equipment.” Each transfer between miscellaneous projectsC and renovations. The line items requires authorization from the state portion of the funds for water resources Governor’s Office of State Budget and projects are contained in the capital budget as Management (OSBM). well. Base Budget SeeB Continuation Budget percent between FY2002andFY2007. budgetary spendingincreased by 30 budgetary 18 l CIVITAS INSTITUTE l key terms 2006 Legislative Fiscal Actions Session andBudgetary North Carolina’sNorth GeneralFund Source: N.C. General Assembly Overview: Source: N.C.GeneralAssembly Overview: DID YOU KNOW? DID YOU can transfer moneybetween personal budget bill–isrequired before anagency used. Legislative permission–through the budgetcanbe allocated inthecertified Further existonhow restrictions monies budget. unchanged from thecertified mustremain for eachdepartment however,certified; total appropriations thebudgethasbeen after department moved amonglineitems withinaspecific ditures for eachlineitem.may Monies be expen- does notnecessarily actual reflect Authorized budget Budget),thecertified federal funds. As indicated above (see Fund, andothersources, including special fundssuchastheHighway budget includestheGeneralFund, receives themostattention, thecertified Although theGeneralFund budget the governor’s director ofthebudget. by funds andspecialfunds)ascertified The total state budget(includingfederal Budget Certified Debt Appropriation-supported See same biennium.” for expenditure inthesecond year ofthe the result thattheyare “brought forward in thefirstfiscalyear ofabienniumwith appropriated moniesthatwere unused fundsconsist of Division, carryforward As definedby thestate’s Fiscal Research Carryforward Certificates of Participation (COPs) ofParticipation Certificates for thefiscalyear wasenacted.” have beenforeseen whenthebudget changes incircumstances thatcould not or programs dueto complications or is required to continue thepurpose National Guard; orif an “overexpenditure expenditures required to calloutthe extra Act; Management the Emergency CommissionIndustrial order; exercise of these circumstances or are: acourt circumstances. among certain Primary are allowed to bechangedunder expenditures onapurpose orprogram other lineitems. Furthermore, total andbenefits) (salary services and N.C. Turnpike Authority. Phase II Tobacco Entity, Certification Inc., Carolina Company, Railroad North N.C. Economic Development Commissions, N.C. Partnership for Children, Inc., Regional Authority, N.C.Global TransPark Authority, Ports Authority, N.C.Agriculture Finance Nonmajor component unitsare: N.C. Carolina HousingFinanceNorth Agency. Education Assistance Authority andthe The GoldenLEAFFoundation, The State system, college thecommunity system, Carolinastate are: theUniversity ofNorth largest component unitsfundedby the funding from generalbondissues. The government” unitsreceive muchoftheir local governments, such “nonprimary financially responsible. Alongwith entities for whichthestate is Legally separate institutionsand Financial Report (C C the state’s combines thestatements to create statement to thestate controller, who is obligated to submit anannualfinancial By law state (G.S. agency 143-20.1),every (CAFR Report ) Comprehensive Annual Financial Component Units omprehensive Annual AFR). The CAFRis generally divided into two sections: particular, a $20 million initiative to reduce 1) financial statements and analysis; and K-3 class sizes. Even more controversial 2) statistical data on financial, nonfinancial was a 2005 resolution (S.L. 2005-144) that and demographic trends. The CAFR is continued the half-cent increase in the used by bond rating agencies, such as sales tax and the half-percent increase in Moody’s and Standard & Poor, to determine the highest income tax bracket, both of the credit risk, and thus interest rates, for which were scheduled to sunset at the end bonds issued by the state. of the fiscal year.

Continuation Budget Also known as the base budget, this is the budget required to continue Even more controversial was a 2005 existing programs at current levels. The continuation budget grows each year resolution that continued the half-cent based on increases in inflation rates increase in the sales tax and the half- and population increases affecting percent increase in the highest income institutional and entitlement programs, such as public schools or Medicaid. The tax bracket. budget also annualizes (i.e., provides full annual funding for) new programs and positions, and includes new operational costs of facilities opened in the last year. Deed Stamp Tax It does not contain nonrecurring cuts or Commonly referred to as the “transfer tax,” expansion from the previous year. The this is a statewide tax paid by the seller biennial continuation budget is organized when any real interest in real property is by department and published in multiple conveyed to another person. The applied volumes by the governor’s office. rate is 0.02 percent, or $1.00 for every $500.00 paid for the property. The revenue Continuing Budget Resolution from the tax is shared by North Carolina’s Legislation passed to continue critical local and state governments, with one-half operations of the state during those of the proceeds going to the respective sessions when debate over the budget county’s General Fund and the remaining bill extends beyond the end of the fiscal half, less administrativeD expenses, going to year. In even-numbered years, continuing the state Department of Revenue. Of the resolutions are less important because funds remitted to the state Department key terms the biennial budget that passed the of Revenue, 75 percent is credited to the prior year is still in effect. Resolutions are Parks and Recreation Trust Fund and 25 typically for a short period (one month or percent goes to the National Heritage Trust l CIVITAS INSTITUTE l 19 less), and more than one resolution may Fund. be passed if the budget process remains stalled. Not infrequently, the legislative Disproportionate Share Reserve leadership will use continuing budget A reserve account established in resolutions to pass substantive legislation. 1993 (S.L. 1993-321) to hold excess In 2001, for instance, the Legislature used payments, dispersed by the Medicaid a continuing budget resolution (S.L. 2001- Disproportionate Share Hospital (DSH) 395) to increase spending for education, in DID YOU KNOW? program, to hospitals that serve a North Carolina’s top three “disproportionate number of low-income employers are: the state of North patients with special needs.” Throughout the 1990s, federal policymakers expressed Carolina, the federal government concern that many states were taking and Wal-Mart. Four of the state’s advantage of the DSH program to decrease top 10 employers are government their own contributions to Medicaid and subsidize general spending initiatives. entities: the state, the federal government, the Charlotte Board Earmark of Education, and the Wake County A requirement that revenue be spent on public school system – with Duke a specific project or purpose, therefore intercepting the money before it is pooled University, Food Lion and the with other revenue and appropriated as Charlotte Hospital Authority also part of the General Fund. At the federal level, earmarking is often equated with making the list. pork spending. Source: N.C. Comprehensive Annual E Financial Report (FY2006) Expansion Budget Appropriations for new or expanded programs, new positions, increased expenditures above those allowed in the 2009 legislature. The intent was to ensure continuation budget, and salary increases. that the gas tax wouldn’t drop below that amount due to falling gas prices. Fiscal Year (FY) The 12-month period covered by the state General Fund budget: July 1 to June 30. Funds general needs, as opposed to specific or restricted purposes. The Gas Tax General Fund accounts for about half The Motor Fuels Excise Tax levied on all of the state’s total budgetary financing fuels (including alternative fuels) sold, and is supplied by revenue from a wide F variety of taxes and fees, as well as money distributed or used in the state; the excise tax has a fixed rate of 17.5 cents per gallon from court fees, disproportionate share plus a variable component rate that is 7 receipts, investment earnings and bonds, percent of the average wholesale price of the tobacco settlement, the Highway Fund motor fuels. The gas tax is computed twice and the Highway Trust Fund. a year in January and July and cannot fall below 3.5 cents per gallon. In January General Obligation Bond 2006, in the aftermathG of Hurricane Katrina A debt, issued in the form of a tax-exempt and the war in Iraq, the gas tax reached a bond, secured by the taxing power of the high of 29.9 cents. The governor and the state, or what is referred to as “the full faith Legislature capped the rate at this level for and credit of the State.” North Carolina’s the 2006-07 fiscal year, thus preventing Constitution (Art. V, Sec. 3) requires that a further increase, but providing no voters approve all general obligation additional tax relief at the pump. Just two bond issues. As of June 30, 2010, North key terms INSTITUTE l key 20 l CIVITAS years later, however, the 29.9 cents per Carolina’s tax-supported general obligation gallon cap was converted to a floor by the bond debt was more than $4.4 billion. Governor’s Recommended Highway Fund Adjustments Dedicated to supporting the operations After releasing the multivolume biennial and capital construction needs of the continuation budget, the governor Department of Transportation (DOT) and submits another document detailing related services, the Highway Fund is recommendations for expansion and derived from the following sources: 75 reductions to the continuation budget. percent of fuel tax revenues, various fees These recommendations include funding collected by the Division of Motor Vehicles for new programs and the expansion of and investment income from the existing existing programs, as well as the proposed Highway Fund. The Highway Fund pays reduction or elimination of existing line for road maintenanceH and construction, items or programs. the operations and capital needs of the Division of Motor Vehicles and the State Highway Patrol, and other transportation- related functions. While the Highway Trust Fund is focused on construction, the greatest expenditures from the Highway Fund are for road maintenance. Under the auspices of the Highway Patrol, the Highway Fund was also used to pay for part of the development of the proposed 800 MHz statewide emergency communications network, VOICE. In addition to roadwork, the DOT is directly responsible for various matters related to aviation, ferries, bikeways and walkways, bridges, public transportation and rail.

The Highway Trust Fund (HTF) GPAC (Government Performance Created in 1989 with the goal of rapidly Audit Committee) expanding North Carolina’s highway/ road system for economic development Legislative committee established by purposes, the HTF is supplied by the the General Assembly in 1991 in order following taxes and fees, totaling $1 billion to review the efficiency and efficacy of

annually: 25 percent of motor fuel and key terms various state departments and programs. related tax revenues; a special 3 percent The 1991 GPAC audit resulted in more highway use tax levied on title transfers; than 300 recommendations, ranging from

various title and registration fees; and l CIVITAS INSTITUTE l 21 broad initiatives, such as establishing a investment income from the existing strategic planning process, to agency- trust fund. In 1996, voters approved specific recommendations, such as closing an additional $950 million in general small, inefficient prisons. The committee obligation bonds to support the HTF. By was dissolved in 1993 following the final law, $170 million was transferred annually audit report. A new GPAC was established from the HTF to the General Fund, but in the 2006 Studies Bill (S.L. 2006-248) and between 2001 and 2005 the governor and completed its work February of 2008. the Legislature raided the fund to subsidize other projects. Beginning with the FY Joint Conference Committee 2008-09 budget, the annual transfer from This committee is comprised of the HTF was phased down to $71 million legislative members appointed by the over the course of three years. The rest of House speaker and the Senate president the traditional transfer to the General Fund pro tempore. Typically, the committee is will instead be directed to the NC Turnpike chaired by the Appropriations chairs Authority and to pay off various highway and includes the Appropriations projects. subcommittee chairs and some of the members of the Appropriations Information Technology Budget subcommittees. The conferenceJ Refers to agency requests for expenditures committee is charged with reviewing exceeding $500,000 for the state’s technical the approved House and Senate budget infrastructure, generally included in the proposals and reconciling differences expansion budget for each agency. In some between the two budgets. Conferees are years, the General Assembly has appointed supposed to follow certain self-imposed a separate Appropriations Information ground rules when they come together Technology Subcommittee to review to craft a final budget: large requests of this type. In other years, 1. Items that are the same in both these requests have been reviewed by the I approved budgets are no longer appropriate subject area subcommittees negotiable: they are to be included as (i.e., Health and Human Services) or by the is in the final budget. chairs of the full appropriations committee. All requests for technology expenditures 2. Items in which the two chambers over $500,000 must be approved by the differ in terms of money can be Chief Information Officer (CIO). Passed in negotiated to the Senate position, 2004, S.L. 2004-129 required a review and evaluation of all major technology projects proposed or being undertaken, gave the state CIO more authority, and created the Information Technology Advisory Board and the Information Technology Fund.

Intangibles Tax The intangibles tax was enacted in 1937, but was repealed in 1995 after being challenged on the grounds that it violated the Interstate Commerce Clause of the U.S. Constitution. Along with taxing accounts receivable, notes and bonds, and beneficial interests in foreign trusts, the intangibles tax stipulated that all shares of stock owned by either a business or an individual taxpayer be taxed at a rate of 25 cents per $100 of total fair market value of stock, regardless of whether the stock earned a dividend or not (cf. G.S. §105-203). See key terms INSTITUTE l key 22 l CIVITAS Q & A: 12. by the end of the fiscal year reverts to The hardest thing in the world to the General Fund and is carried forward into the next fiscal year. The spending of understand is the income tax. lapsed salary is one of the most common instances of spending reversions and Albert Einstein reduces the General Fund cash balance available in the following year. See also Reversions the House position, or any point in between. For example, if the Senate Long Session appropriated $200,000 for a certain With elections held in November of item, and the House appropriated each even-numbered year, the General $400,000, the conference committee Assembly convenes from January to July may appropriate $300,000 – but not (but often even longer) of each odd- $500,000. numbered year for what is called the long 3. Only items that are in either budget session. The biennial budget is crafted and can be considered by the joint adopted during the long session. conference committee. No new items may be added to the reconciled budget. Management Flexibility Reserve See Negative Reserve The reconciled budget produced by the joint conference committee is presented Money Report to both chambers, each of which must Informal name for the Joint Conference vote for or against the “conference budget” Committee ReportM on the Continuation, without amendments. Once the Expansion and Capital Budgets. The conference budget is passed by both Money Report contains an itemized bodies, it goes to the governor who can account of changes – reductions and either sign it into law or veto the budget – expansion – to the continuation budget. sending it back to the General Assembly. It is passed by the General Assembly along with the Budget Bill, and together Joint Conference Committee Report these two documents direct the executive on the Continuation, Expansion and branch in spending appropriations.

Capital Budgets key terms See Money Report Negative Reserve Also called a “management flexibility reserve,” a negative reserve is a one-time Lapsed Salary l CIVITAS INSTITUTE l 23 Funds budgeted for positions that are “hole” placed in an agency’s budget by the temporarily vacant. Lapsed salary is General Assembly in lieu of specific line sometimes used by an agency to hire item cuts. The deficit must be filled over contractual or temporary employees, but the course of the fiscal year with budget may also be used to fill a negative reserve, cuts determined by the agency. Negative or with legislative permission through the reserves are frequently filled with lapsed salaries generatedN by vacant positions (see budget bill, to pay for other line items. LapsedL salary that has not been obligated Lapsed Salary). See also Q & A: 4 Nonrecurring Recommended Budget Applies to revenue or changes to Budget the governor submits to the appropriations – increases and decreases legislature. Includes the continuation – that are not continued beyond the budget and the reductions and expansion biennium (and typically not beyond one – including capital – detailed in the fiscal year). When nonrecurring revenue or Governor’s Recommended Adjustments nonrecurring reductions in expenditures to the Continuation Budget. By law, are used to fund recurring expenditures, the governor is charged with preparing other revenue sources must be found to a budget that “will promote the more pay for those expenditures in future years. efficient and economicalR operation and For example, the 2006 General Assembly management” of the state (G.S. §143-3). added to the FY2006-2007 budget more than $850,000 in new recurring Recurring expenditures, using $500,000 in new Applies to revenue or changes to recurring revenue and $350,000 in new appropriations – increases and decreases nonrecurring money. – that will continue beyond the biennium. Recurring cuts or increases in the budget Nontax Revenue are built into the base (continuation) Revenue from a source other than taxes, budget in the next biennium. If an agency including Medicaid disproportionate is undertaking a project that will continue share money, investment income and fees for several years, the money for the project collected by various state agencies that is placed in the budget on a recurring are deposited in the General Fund. These basis, and then must be cut when the funds cannot be retained and used by the project is complete. agencies without legislative approval. One of the largest sources of nontax revenue Reversions is judicial fees – court costs charged to Unspent appropriations from previous individuals whose civil or criminal cases years. Unless otherwise authorized, are not dismissed. In FY 2009-10, judicial these funds generally return to the fund fees brought in approximately $217 from which they came. Reversions to the million. General Fund are included as nonrecurring revenue in the following year’s budget. Performance-Based Budgeting Reversions come from lapsed salary, other A method of budgeting that ties funding unspent funds and any funds the governor to results by reporting on select outcome may have held back over the course of the measures. For instance, the 1999-2001 year in anticipation of a budget shortfall. Justice and Public Safety budget tied See Lapsed Salary funding for district attorney positions to the ability to dispose of all superior Savings Reserve Fund court felony cases filed each year. During Also called the “Rainy Day Fund,” the the 2001 budget crisis, Governor Easley Savings Reserve Fund was established in abandonedP performance-based budgeting 1991 as a means for setting aside General and eliminated the performance planning Fund monies in anticipation of economic division of his office. Easley resurrected fluctuations or fiscal crises (G.S. 143-15.3). performance-based budgeting as “Results- Under the law, the Legislature is required key terms INSTITUTE l key 24 l CIVITAS Based Budgeting” after the passage of the to earmark 25 percent of the year-end budget in 2006. S key terms l CIVITAS INSTITUTE l 25 State Budget Act Surtax on its own merits. The 2005 Budget Bill, for for Bill, 2005 Budget The merits. on its own special a substantive contained example, mandating (section 10.59F.(g)) provision all kindergartners. for exams eye See G.S. §143c. The State Budget Act State The See G.S. §143c. amended the Executive and recodified actThe the 2007- applies to Budget Act. every2009 biennium and biennium thereafter. (or surtax) essentially “surcharge” A tax surtax a tax on a tax. A amounts to is a tax liability so that one’s applied to rate an extra pays above amount the taxpayer For their normal liability. and beyond is a surtax if there of 10 percent instance, for taxes $1,000 in on a person who owed the surtax $100. In to amounts the year, a total owe would the taxpayer this case, of $1,100. North of 2009 budget The state Carolina a temporary(S.L. 2009-451) created surtax and corporate both individual income for A surtax to was applied of 3 percent taxes. actually meaning that they corporations, of their tax liability. 103 percent owed tax surtax corporate at the The expired The of the 2011 tax year. beginning surtax corporate cost to was estimated an extracorporations $23.1 million in fiscal million in fiscal 2009-10 and $25.5 year 2010-11. year surtax individual income The targeted percent A two earners. higher income surtax filers earning was applied on single than $60,000 and married couples more surtaxThe than $100,000. earning more single filers for percent three to rose than $150,000 and married earning more Like filers earning $250,000 or more. surtax,the corporate at this tax expired The of the 2011 tax year. the beginning Special Provisions Special Indebtedness Short Snappy Short Session The provisions that comprise the actual that comprise provisions The the statutorybudget bill containing that delineate changes and session laws the budget should be implemented. how often are special provisions “Substantive” budgetary to and may not related matters be inserted the budget bill when a into debating a bill avoid wishes to legislator See Appropriation-supported Debt Informal term for the text description that for term Informal each budget change – i.e., accompanies the continuation to or decrease increase budget – in the Money Report. The legislative session that convenes in session that convenes legislative The meets session The years. even-numbered July (and often longer) in to May from the biennial make adjustments to to order during the long session. budget adopted credit balance for the Savings Reserve the Savings for balance credit equals 5 balance the account until Fund General Fund of the prior year’s percent its reached Fund The budget. operating and remained cap in 1995-96 5 percent the 1997-98. During fully funded through however, bienniums, 1998-99 and 2001-02 thanks to zero, to dropped the balance intangibles the for made withdrawals settlement (1998-1999), the tax lawsuit effort recovery (1999- Hurricane Floyd the to transfer 2000), and a 2001-02 shortfall. a revenue cover to General Fund up, inched back the balance Subsequently, approximately with 2006 funding reaching be significantly $636 million, only to FY $150 million by to down reduced the dipped into 2008-09 as budget writers budget deficit sizeable fill the to account of that year. individual income surtax was projected initiative in her budget plan the following to cost taxpayers $172.8 million in 2009-10 year. and $177.1 million the following year. Zero-based Budgeting Truth in Budgeting Budgeting approach that advocates “Truth in budgeting” was a term coined crafting the budget from the ground by Gov. Bev Perdue when she released her up – or a zero base – rather than using budget plan for the 2009-10 fiscal year. the previous year’s budget as a starting What Perdue was referring to was the point. “Modified” zero-based budgeting practice by state agencies of including entails “zeroing out” specific programs money for positions in annual budget or agencies or line items, with the requests when in actuality many positions intention of inviting an agency to justify remain vacant for extended periods of each expenditure.Z In 2001 and 2005, for time. Despite the vacancies, agencies example, the appropriations committees receiveT funding as if the positions are chose to examine line items such as filled the entire year. Agencies then use travel, cell phone usage, and contracted the unspent payroll money on other miscellaneous and personal services obligations. across all agencies in an effort to find efficiencies. In previous years, the chairs Perdue’s intent in establishing “truth in of the appropriations committees have budgeting” was for agencies to submit determined when and how to implement budget requests more closely reflecting any form of zero-based budgeting. the actual payroll expenses they expect for the budget year, factoring in positions that become vacant throughout the year through the expected amounts of turnover – as well as positions that are vacant at the time the budget is written and are likely to remain vacant for weeks or months.

Despite estimates that it would save $150 million in 2009-10 alone, Perdue’s “truth in budgeting” initiative received mixed reviews. Budget hawks lauded the idea not only for the savings but because it increased transparency. Critics expressed concern about the initiative because state agencies have traditionally relied on the unused payroll money to meet unexpected expenses, and this would leave agencies little wiggle room.

Perdue’s truth in budgeting idea quickly and quietly faded into memory as neither the House nor the Senate incorporated the technique in their budget plans for

key terms INSTITUTE l key 26 l CIVITAS 2009-10. Perdue opted not to include the q & a l CIVITAS INSTITUTE l 27 C. The budget process begins with begins budget process The submitting his the governor the budget to recommended after it convenes General Assembly in January of each odd-numbered recommended The year. (1) predictions budget contains: revenue; available regarding of appropriations (2) estimates necessary existing continuing for and levels at current programs reductions recommended any budget); (3) (the continuation expansions of existing programs or additional new programs (the or other expenditures expansion budget); and (4) (the capital capital improvements budget). In both the House and the Senate, Committee the Appropriations are Committee and the Finance simultaneously for responsible crafting parts separate of the Appropriations The budget. Since the 1975-77 biennium, North Carolina’s North the 1975-77 biennium, Since Carolina’s 1 Resources SENATE: • Health & Human Services • Safety & Public Justice • Natural & Economic • Transportation Education • Higher Instruction • Public Technology • & General Government Information

HOW IS IT MADE? IT IS HOW The State Budget State The

Effective July 1, 2007, the Executive Budget Act was repealed and replaced with the State Budget Act (S.L.) 2006-203; G.S. §143 with the State and replaced Budget Act was repealed July 1, 2007, the Executive Effective General Assembly has put the biennial budget together in the odd-numbered year (long year in the odd-numbered biennial budget together has put the General Assembly (short year fine-tune session) to the even-numbered in of returning session) in anticipation it factors. economic changing and make adjustments for Committee determines how much money should be spent in each category while the Finance in each category much money should be spent how determines while the Finance Committee fund these expenditures. to will be available much revenue establishes how Committee for responsible subcommittees issue area is divided into Committee Appropriations The agencies. state respective budgets of North continuation the line item reviewing Carolina’s

1 1 that which stipulates “The Act,” Budget State by is governed process budget North Carolina’s on a biennial basis. the budget be prepared

& a q HOUSE: Issues reserved for the consideration of the full committee chairs of the full committee the consideration for Issues reserved in one or both chambers: • budget totals Overall and subcommittee • Salaries & Benefits • Capital Technology • Information • Health & Human Services • Safety & Public Justice • Resources Natural & Economic • Transportation • Education Government • General • Capital House & Senate Appropriations Committees Appropriations House & Senate Subcommittees: 2010 Appropriations 28 l CIVITAS INSTITUTE l q & a different. as happenedduringthe1995-1996and1997-1998biennia–two budgetswillbequite the two proposed – budgets. Especiallywhenthechambersare dividedby politicalparty from eachchamberare appointed to aconference committee responsible for reconciling Once approve theHouseandSenate theirrespective versions ofthebudget, members sometimes meetjointlytowards thebeginning ofthesessionto discussbudgetmatters. the interest ofexpeditingthebudgetprocess, committee HouseandSenate memberswill point. the Housebudgetasastarting The following biennium,theorder willbereversed. In and senditto theSenate. The willthencreate Senate itsversion –butitmay ormay notuse each biennium. The House, for example, willcreate itsown version ofthebudget,vote onit, budgets, votes onthesecombined budgets, andpassestheresulting budgetonto thefull budgets to thefullAppropriations Committee, whichcombines allofthesubcommittee fromauthority thechairsoffullcommittee. The subcommittees recommend their the governor. Eachsubcommittee receives aspendingtarget itcannotexceed without The committees alsoreview expansionrequests or with thatoriginate witheachagency 2 court fees, sharecourt disproportionate receipts, investment earningsandbonds, thetobacco and issuppliedby revenue from oftaxes awidevariety andfees, aswell asmoneyfrom Fund. The GeneralFund accounts for abouthalfofthestate’s financing total budgetary permitted to begin operatingunderthenewbudget. thebudget. (OSBM),and Management whichmust certify Thereafter, is eachagency Assembly. Once thebudgetissigned by thegovernor, of State itgoesto Budget theOffice may eithersign thebudgetinto law orveto the budget,sendingitbackto theGeneral After theconference budgetpassestheHouseandSenate, itgoesto thegovernor who against theconference budgetwithoutamendments. version ofthebudgetto bothchambers. The mustthenvote fullHouseandSenate for or 2 In 1998theHouseandSenatewere In unableto agree —well to afinalbudgetuntilOctober pastthetechnical deadlineofJ 1999), 11-12;available from http://www.sog.unc.edu/pubs/nclegis/nclegis99/pdf/Chfin02.pdf. DavidSee W. Owens, State Budget,”“The in The Budget Funding WHERE DOES THE MONEY COME FROM? 2 When itsnegotiationsare complete, thecommittee willrecommend areconciled An unlimited power necessarily, apower to taxinvolves, Daniel Webster to destroy North Carolina LegislationNorth 1999,ed. David W. (Chapel Owens ofGovernment, Hill,NC:Institute take turnsinitiatingthebudgetprocess The traditionally HouseandtheSenate second vote iscalled “third reading.” vote iscalled “second reading” andthe separate days ineachchamber–thefirst or fees, votes on mustbetaken twice generally includeschangesto taxes the chamberfloor. Becausethebudget in subcommittee, fullcommittee, andon budget canbeoffered andvotes taken chamber for avote. Amendmentsto the Highway Trust Fund, andthe Highway of whichare theGeneralFund, the of different funds, themostimportant dollars. These taxes gointo anumber your state andfederal short, tax In une 30. q & a l CIVITAS INSTITUTE l 29 In order to accomplish this accomplish to In order branch (i.e., the executive end, with is charged the governor) insure “To duties: the following does not incur that the State fiscal period, any a deficit for shall continually the Governor survey the collection of the the and shall affect revenue

Total State Budget by Source of Funds Source Budget by State Total

WHAT IS IT? IS WHAT The Balanced Budget Balanced The Amendment DID YOU DID YOU KNOW? 3 The North Carolina Constitution stipulates that the governor and General Assembly must Assembly and General that the governor stipulates NorthThe Constitution Carolina “The of the State expenditures total Article III, Section 5 reads: the budget each year. balance during that of receipts the total the budget shall not exceed by the fiscal period covered for of the period.” beginning at the Treasury in the State fiscal period and the surplus remaining settlement, the Highway Fund, and the Highway Trust Fund. Federal tax dollars used tax dollars Federal Fund. Trust and the Highway Fund, the Highway settlement, transportation,also healthcare, in education, and other areas expenditures subsidize to tuition fees, university part from comprise does revenue (see Q& A: 8), as of the budget a variety fair and the state activities. of other prison enterprises, triple what it was ten years ago. years triple what it was ten service than debt is more the state North Carolina’s annual payments to annual payments North Carolina’s necessary economies in State Total Outstanding Debt: 2001-2005 expenditures.” The Balanced Budget Amendment was submitted by the General Assembly and ratified by voters in 1977 with the intention of reigning in state spending, as indicated by the fact that the amendment explicitly requires that “economies in State expenditures” be made to balance the budget. At times, however, the amendment has been used as an excuse to raise, or refrain from cutting, taxes. In recent years, in Sources of Debt: Voter-Approved General Obligation Bonds (GO Bonds), Highway Tax-Supported Bonds (Highway and Appropriation-Supported Certificates of particular, the governor has Participation (COPs). (Other debt includes Nontax Supported (Revenue) Bonds of less than $10 million.) sought to balance the budget, not by taking “necessary economies,” but by illegally taking revenue from reserve funds not intended for general spending.

What Is It? The phrase “budget cut” is used in an equivocal manner Budget when speaking of various budgetary actions and thus Cut lends itself to misinterpretation. For the ordinary voter, 4 a budget cut implies an actual reduction in the amount appropriated for an item or program — an amount that is less than the amount spent in the previous year’s budget. The problem here is that there is more than one budget – for instance, the governor’s recommended budget as opposed to the legislatively authorized budget. A “budget cut” to the 2007 recommended continuation budget may, in fact, still result in an increase in spending as compared to the 2006 authorized budget. In short, it is politically beneficial to claim credit for cutting the budget (while not cutting spending in certain areas), so the phrase tends to be interpreted in the broadest way possible. In general, a “budget cut” is used to refer to the following actions: ➤ Reductions to the continuation budget itself. These are cuts to specific personnel, programs or line items that reduce the budget for those items below the level of the previous year. In 2002, for example, the General Assembly eliminated nearly 70 positions in the Department of Agriculture and Consumer Services. This reduction was an actual budget cut in relation to the year’s previous budget and saved the state $2.55 million annually. ➤ Reductions that slow down the growth in the continuation budget, typically by reducing (but not entirely eliminating) increases recommended by the governor for inflation or population growth. For example, in 2005 the Money Report specified

l CIVITAS INSTITUTE l q & a 30 l CIVITAS a cut of $1.4 million to the Indigent Persons Attorney Fee Fund. This “cut” was a reduction to a $13 million increase placed in the continuation budget by the Growth in General Fund Budget

governor due to anticipated claims from attorneys representing indigent clients. Therefore, the budget for the fund actually increased by $11.6 million compared to the previous year. Another example of such a “cut” is the 2002 reduction of $2.3 million for public school classroom materials, supplies, and equipment. This cut was accomplished by reducing the rate of inflation used in the continuation budget from 5 percent to 3 percent. Thus the cut actually increased spending by 3 percent. ➤ Temporary reductions to the continuation budget. Nonrecurring cuts are temporary reductions to line items in an agency’s budget. Such cuts require the agency to make short-term economies that may not be possible on a long-term basis. One common example is a nonrecurring cut to the vehicle replacement line items in criminal justice agencies, requiring that the agencies postpone replacing some

vehicles for another year. Another example of a temporary cut is a negative reserve q & a l CIVITAS INSTITUTE l 31 placed in an agency’s budget (see Key Terms). Whether the cuts are recurring or nonrecurring, legislators tend to prefer line item cuts to the use of negative reserves because it allows the General Assembly to control which programs or areas are cut. The fear here is that agencies will use the negative reserve to choose to cut a program that legislators – and the public – want to keep. In voters’ minds, however, legislators will be blamed for the cut, rather than the agency heads. ➤ Reductions to the appropriation for an item that will be made up with funds other than the General Fund. For example, in 2005 the appropriation for the community 32 l CIVITAS INSTITUTE l q & a significant pace. continued to climbata payments annual debtservice terms ofpercapitadebtand but thestate’s debtburden in state borrowing slowed bit, ofthedecade, in later part onset oftheGreat Recession percent in2006. With the 1.3 percent in2002to 2.07 expenditures went from percentage ofnoncapital Similarly, asa debtservice it hadrisento $657.7million. $281.5 million;asofFY2006 the state’s was debtservice Financial inFY2001 Report, Comprehensive Annual According to the2006 –i.e., thosepaymentsso hasdebtservice ontheprincipalofdebt,plusinterest. Carolina, doublingfromNorth $2.8billionin2001to $5.7 billionin2006.As thedebthasrisen, approval. As show, thefollowing charts debtgrew tax-supported rapidly earlierthisdecadein more thanbalanced by higherappropriations for otheragencies. some agenciesreceive lower appropriations thanintheprevious year, are thesereductions cuts,” theoverall GeneralFund budgetalmostalways increases from year to year. Even when budgetpassedby theGeneralAssembly hascontainedAlthough every numerous “budget 5 Reductions to anagency’sReductions ➤ overall budget.Frequently, budgetcutsto specific appropriated by the2001GeneralFund. governor’s continuation budgetrequest and$43.9millionlessthantheamount Fund ofCorrection appropriation was$51millionbelow for the theDepartment appropriation ascompared to the previous year. For example, in2002theGeneral tight budgetyears, intheir seeareduction though,someagencieswillactually items orprograms are more thanbalanced by theexpansion ofotheritems. In reduced. to bespentdidnotchange amount expected colleges wasreduced by $5.6milliondueto anincrease inthetuitionrate. While the Debt The State’s HOW MUCH IS IT? as Certificates ofParticipation, thatwasissuedwithoutvoter as Certificates $4.4 billion,$1.3billionconsists of “special indebtedness” such interest payments roughly doublesthatdebtliability. the Of net indebtedness exceeded $4.4billion.Adding inscheduled Carolina’sAs oftheendFY2009-10,North total principle Outstanding Net Tax-Supported Debt:2001-2006 , theGeneralFund appropriation was Annual Debt Service Payments: 2001-2011

Millions $ !#

! "# $% &'

The annual Debt Affordability Study, usually issued in early February, provides additional information on the state’s debt and is often used by policy makers to calculate how much additional debt the state can take on without jeopardizing its bond rating. A copy of the study can be found at www.nctreasurer.com.

Per Capita State Debt: 2000-2010

q & a l CIVITAS INSTITUTE l 33

34 l CIVITAS INSTITUTE l q & a Legislative Exchange Council. – have beenaddressed innewer versions of TABOR, by suchasthatdrafted theAmerican suspension of TABOR inColorado –inparticular, theabsence ofaBudgetStabilizationFund their taxdollarsare spent. TABOR advocates alsonote thattheproblems thatledto the spending andto give voters more control over thebudgetprocess –andthusover how with economic growth. argue thatsuchlaws to Supporters limitirresponsible are necessary Critics claimthat TABOR prevents isinflexibleandoften state revenue from keepingpace but theproposed law hasnever beenpermitted to come upfor avote. Carolina haveNorth introduced a TABOR amendmentannuallyover thepastten sessions, that would have cappedstate spending;noneoftheseproposals passed. Legislators in andOregon heldreferendums Maine, Nebraska the 2006election, on TABOR-like initiatives did, however, keepinplace aprovision preventing taxincreases withoutvoter approval. In TABOR’s automatic refund mechanism,thustriggeringstatewide spendingincreases. They suspended its TABOR requirements. particular, In voters decidedto shelve for five years TABOR wasfirstimplemented inColorado 2005, however, in1992.In thestate partially permission from voters orapproval by alegislative (60percent, supermajority for instance). downturn. Surplusrevenues could notbespentby thegovernment withoutspecific Fund” oreconomic intheevent ofamajoremergency thatwould fundbudgetshortfalls returned to thetaxpayers and/orusedto funda “Rainy Day Fund” anda “Budget Stabilization 6 Bill Of Rights Bill Of TABOR: Taxpayer WHAT IS IT? TABOR Carolina:Limit for 1997-2007 North also require that surplustaxrevenue eitherbe population, plusinflation. The amendmentwould increases) to arate equalto thestate’s increase in lawmakers to limitnewspending(andthustax constitutional amendmentthatwould require The TA xpayer’s B ill O f R ights isaproposed q & a l CIVITAS INSTITUTE l 35 Bond sales are used by the state to borrow borrow to the state by used Bond sales are investment, with any As investors. money from factors key look at two when investors and the risk of return bonds: the rate purchasing the greater of return, higher the rate The of loss.

HOW IMPORTANT ARE THEY? ARE IMPORTANT HOW Bond Ratings 7 TABOR is not to be confused with recent attempts at passing statutory at passing attempts (as legislation with recent be confused is not to TABOR “North Carolina the mention not to limiting spending, language) constitutional to opposed courteous of is a promise which service the North made by Carolina Bill of Rights,” Taxpayers’ Department Revenue. of the risk some investors are willing to incur. Conversely, investors will accept a lower rate of rate a lower will accept investors Conversely, incur. willing to are the risk some investors likely that that if it is more this means bonds, For opportunity. investment on a safer return issues. on its bond rate interest will obtain a lower its debt, the state can repay a state investment private three by determined are each state ratings for credit In States, the United Ratings. Rating Services, and Fitch Service, & Poor’s Standard Investors houses: Moody’s & Poor’s Standard rating is AAA for the highest bond Each house uses similar rating systems: Moody’s. Aaa for and Fitch; the higher the rating, The its debt. ability repay to each state’s ratings indicate credit These A high bond rating permits of a bond. in the form that state money to lend it is to “safer” to in turn, enable the state rates, Lower rate. interest at a lower bonds repay to the state If a efficient use of public revenue. and thus entail a more cost money at a lower borrow with the result fall, may high, its bond rating too becomes revenue ratio of debt to state’s money. borrow to in interest more pay to will have that the state Moody’s Although North possible, the highest bond rating has typically enjoyed Carolina Aa1 Aaa to from rating one level, credit Services NorthInvestor downgraded Carolina’s continued “the state’s to the downgrade specifically attributed 2002. Moody’s in August sheet.” balance and its weakened revenues, on non-recurring its reliance budget pressure, an Aaa rating. did not have 1960 that the state since marked the first time downgrade The an by increased the state on bonds sold by rates decision, interest of Moody’s a result As 2002 bond market. A report the University on the August issued by 0.05 percent estimated “The in debt service $292 per cost additional total would of North predicted, Carolina of the bonds.” the course over million dollars in bonds per year often“Bond ratings are Stateline.org, Center’s Research of the Pew White Jason to According performance who produce because the analysts as a report on government card regarded political an obvious have budget game who don’t in the state players among the few them are used in the in bond ratings has been of a downgrade the threat the same time, At grind.” to axe raising taxes. – as a justification for during the 2001 long session instance, past – for had upgraded that Moody’s announced Richard Moore Treasurer On January 12, 2007, State Aaa – making bond rating to (Delaware, states North one of only seven Carolina the state’s all three a triple A rating from enjoy to Virginia) Maryland,Georgia, Missouri, and Utah the of the confidence “The evidence are agencies all three superior ratings from agencies. 36 l CIVITAS INSTITUTE l q & a 6 5 4 decade, North Carolinadecade, could befacingadebtdowngrade North inthenearfuture. otherwords,In becauseoftheexclusive reliance onspecialindebtedness over thelast for ‘double A’ states aswell. is projected to increase well beyond themediansfor ‘triple A’ states andexceed themedian conclude that “including allauthorized butunissueddebt, thepercentage debt ofnon-GO over well thelastdecadecould leadto very adebtdowngrade Carolina. for North They Treasurer’s office suggestthattheexclusive useof “special indebtedness” such as COPs of thestate’s indebtedness. Specifically, recent DebtAffordability studiesfrom theState ofParticipation, suchnon-voterCertificates approved debtcomprises amuchlarger share total outstandingdebt.Largely through theuseof of non-voter approved debtasapercentage of concern, however, particular Of isthegrowing share on astate’s bondratings. seemstomight claim,taxstructure have littleeffect to whatcriticsonbothsidesoftheaisle Contrary reductions.” enacting “permanent revenue increases orspending Carolina by needsto address budgetshortfalls cautioned, North Instead, theagency shortfalls. time solutions” to address “long-term” budget over concerns thatthestate wasrelying on “one- was placed onStandard &Poor’s CreditWatch list frowned 1990,for Carolina upon.In example, North nonrecurring fundsto pay for recurring programs is which thebudgetisbalanced. For instance, using spending increases shouldnotoutpace revenue. What counts aswell isthemannerin however,important, thisrespect, isthelikelihoodofastate balancingitsbudget.In trends, state thataffect debtpercapitaare alsotakeninto consideration. What ismost have a “clearly debtmanagementpolicy.” articulated principal andinterest. According to Standard &Poor’s, moststates with aAAAratingalso particular, by thepercentage ofstate revenue dedicated i.e. to debtservice, payments on basic isthestate’s to takeonnewdebtandmanageexistingasmeasured, ability in inassessingastate’sInvestment offactors housesuseavariety bondrating. The most of “conservative budgeting, tightexpenditure controls, andanimproving economy.” can borrow atthebestrates possible.” According to Moody’s, theupgrade wastheresult market hasinourstate andinourbonds,” claimedMoore. Carolina meansthatNorth “ It generally thoughtto embodya “conservative approach” to budgetmanagement. replenishmenthealthy andrecent ofreserves financialoutlook, economic gains” –actions strong relatively financialperformance, moderate debtburden, effective management, ofthe State Department Treasurer alsoexplained theupgrade by referring to “the state’s Ibid, 1. able from http://www.nctreasurer.com/NR/rdonlyres/599BB76E-EA20-4705-9D15-A086DF3EB490/0/2007DAAC_Final.pdf. Carolina, DebtAffordabilityState Committee, ofNorth ofState Advisory DebtAffordability Department Study(Raleigh: Treasure triangle/stories/2007/01/08/daily36.html?surround=1fn. See “Moody’s restores N.C.bondratingto Triple A,” Triangle 12,2007;available from Business Journal, http://triangle.bizjournals.com/ January 6 Other factors, suchasdemographic Other 5 4 The r, 2007);avail- HOW DEPENDENT ARE WE? Federal influence over state budgets increases Federal Funding & almost every year. Today, every state is critically dependent on federal funds just to make ends North Carolina 8 meet. North Carolina is by no means an exception to this trend. According to the state’s FY2006 Comprehensive Annual Financial Report, “The state receives significant financial assistance from the federal government in the form of grants and entitlements, which are generally conditioned upon compliance with terms and conditions of the grant agreements and applicable federal regulations, including the expenditure of the resources for eligible purposes.” Over the past ten years, North Carolina’s dependency on federal funds has grown markedly. In FY 1999-2000, federal receipts totaled $5.95 billion. By FY 2009-10, that number had reached $14.2 billion – an increase of roughly 240 percent. For sake of comparison, the state’s General Fund increased at a rate of 43 percent during that time. Put differently: in FY 2000, the state’s General Fund expenditures were 2.4 times greater that federal receipts. By FY 2010, that difference had shrunk down to under 1.5. The majority of federal dollars go to Medicaid and transportation – always with strings attached. In particular, states that accept federal funds must adhere DID YOU KNOW? to federal regulations regarding the In 2003-04, North Carolina use of this money. Take Medicaid, for collected more than $400 million example. North Carolina pays 39 percent of Medicaid expenditures,7 with the in liquor store revenue. federal government paying the remaining Source: U.S. Census Bureau 61 percent. In return for accepting this money, the state must provide health insurance to the groups that the federal government requires be covered – for example, low- income families that qualify for welfare, as well as elderly and disabled people eligible for Supplemental Security Income. The state must also provide all the services that are specified by federal mandates. The result is a loss of control over who the state can and cannot cover. Federal funding also hinders states from exercising financial independence by preventing cuts in services that a state no longer wants or can no longer afford. By being forced to subsidize these services, state expenditures become automatic – preparing the way for virtually automatic tax increases. As federal money pays for a larger and larger share of the state budget, voters and

taxpayers in North Carolina have less and less say in how to run the state’s business. In addition q & a l CIVITAS INSTITUTE l 37 to limiting financial independence, federal dollars are also used to force certain social agendas – for instance, regarding tax-paid health care, abortion, or the environment – on the states. The chart on page 38 illustrates the long-term impact of federal funding for North Carolina by delineating the relation of state tax revenues to federal dollars in the N.C. state budget. As the history of the founding of the United States suggests, the right to set tax rates is an important part of state sovereignty. At current rates, federal funds will soon replace state tax collections as North Carolina’s primary source of revenue. As the chart shows, in 1996 the state took in $2.19 per federal dollar it received; by 2005, this ratio had fallen to $1.56 per federal dollar.

7 This percentage represents all state and local (county) contributions. 38 l CIVITAS INSTITUTE l q & a Federal Taxes Paid vs. Federal SpendingReceived* North Carolina North 1981 to2005 q & a l CIVITAS INSTITUTE l 39 All corporations doing business and charteredAll corporations in North of their net taxable a flat tax of 6.9 percent pay Carolina income. can be a joint a corporation Under North law, Carolina company, or association, an insurance company stock a laws), under state (organized a domestic company

IS IT FAIR? IT IS The Corporate The Tax Income State Taxes Collected per Federal Dollar Received by North by Carolina Received Dollar per Federal Collected Taxes State 7.50 percent effective for taxable years beginning on or after January beginning taxable years for 1, 1997 effective ➤ 7.50 percent on or after January beginning taxable years for 1, 1998 effective ➤ 7.25 percent on or after January beginning taxable years for 1, 1999 effective ➤ 7.00 percent on or after January beginning taxable years for 1, 2000 effective ➤ 6.90 percent 9 foreign company (organized under laws other than those of North or a limited under laws Carolina), (organized company foreign (LLC). liability company in particular companies, tax. Many income the corporate pay however, Not all businesses, under the pay partnership, or S Corporation, smaller firms operating as a sole proprietorship, to 6.0 percent tax brackets range from personal income The tax provisions. personal income at the higher rate. smaller firms taxed with many 7.75 percent, twice in the last decade increased “temporarily” been have tax rates While personal income tax actually income 1990s: in North declined during the late the corporate Carolina, In addition, a variety of exemptions and credits make the effective corporate income tax rate much lower – perhaps by as much as half – than the 6.9 percent rate would indicate. In fact, when measured in proportion to each person’s overall tax burden, North Carolina’s corporate tax burden is roughly 7 times less than the individual income tax burden. Thus the personal income tax burden, on average, equals 2.8 percent of personal income while the corporate tax burden only represents 0.4 percent of personal income, according to data from 2010. To put these numbers into perspective, consider that in 2010 the state collected about $9.2 billion in individual income taxes, but only $1.3 billion in corporate income taxes.8 Still, the corporate income tax remains an important source of revenue for the state. For the past several years, the corporate income tax was the third-highest revenue generator, with only sales and use taxes and individual income taxes generating more revenue. The amount of money derived from the tax, however, fluctuates from year to year, depending upon the economy. For FY2004-05, the corporate income tax accounted for 7.7 percent, or $1.2 billion, of all tax revenue taken in by the state. In 2003-04, the tax accounted for 5.6 percent of total revenue; in 2002-03, 6.4 percent. In 2009-10, the tax accounted for 6.7 percent of state tax collections. Economists frequently note that high corporate income taxes have an adverse impact on economic growth (cf. Lee & Gordon, 2004). All things being equal, businesses are more likely to relocate to states that have lower corporate tax rates. At the current 6.9 percent rate, North Carolina’s high taxes place it at a disadvantage with neighboring states. By comparison, as of 2010, Tennessee’s corporate income tax rate is 6.5 percent; Georgia and Virginia charge 6.0 percent; Florida’s is 5.5 percent; and South Carolina’s is 5.0 percent.

8 "Statistical Abstract of North Carolina Taxes, 2010” North Carolina Department of Revenue, Policy Analysis and Statistics Division

Corporate Income Tax as Percent of General Fund Tax Revenue 12%

10%

0% l CIVITAS INSTITUTE l q & a 40 l CIVITAS 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 q & a l CIVITAS INSTITUTE l 41 tax whatsoever, and Tennessee Tennessee and tax whatsoever, dividends and only taxes but not earned income, interest critics claim North Many income. tax high marginal Carolina’s regionally make the state rates especially for uncompetitive, small businesses.

highest in the nation. By comparison, South Carolina has a top rate rate has a top South highest in the nation. By comparison, Carolina th How Does The Tax Rate Compare? Tax The Does How Large Corporations vs. Corporations Large Businesses Small

Southeast States, 1984 and 2006 Southeast States, 10 rate of 6.9 percent. By contrast, many small many contrast, By of 6.9 percent. tax is a flat rate income corporate North Carolina’s of 7.75 percent. tax rate income at the individual taxed businesses are small many and to individuals both to tax applies individual income North Carolina’s partnerships, liability limited companies, as sole proprietorships, businesses that operate scale that taxes is based on a sliding tax rate individual income The and S Corporations. tax bracket (as current The at a higher rate. with higher incomes persons and businesses those for 7.75 percent to those with the least income for 6 percent of 2010) ranges from filing jointly. married (single filers) or $100,000 for than $60,000 earning more these the highest individual tax categories, fall into small businesses Because many of the many Thus, tax of 7.75 percent. income the higher individual businesses must pay than their corporate rate at a higher being taxed it are businesses that can least afford Small Business the U.S. to according Yet, only 6.9 percent. who pay competitors, in the United workforce half of the private for account small businesses Administration, on small Higher taxes of net new jobs annually. 80 percent 60 to and between States those wages for Americans and lower hardworking jobs for fewer into businesses translate employed. that are in the tax rate as of 2010, North marginal has the highest top 7.75 percent Carolina At southeast, and is 10 of 7 percent, Georgia 6 percent, and Virginia 5.75 percent. Florida has no state income income no state has Florida 5.75 percent. Virginia and percent, 6 Georgia of 7 percent, Tax Burden as Share of Personal Income: of Personal as Share Burden Tax 42 l CIVITAS INSTITUTE l q & a the state government. to describenotsomuchagenuinefiscalcrisisasmerely aslowing intherate ofgrowth for of4percent.positions –areduction from Seen thisperspective, the crisis”“budget appears expanded theiremployment by 3.3percent. Meanwhile, private employers cut163,000 increased itsnumberofemployees by 4.1percent. Local Carolina governments inNorth Carolina wasatthestate level.North As wascutting positions, theprivate sector thestate between 2001and2003from 18.5to 19.2. The largest increase inpublic employment in the burden ofpublicemployees (includingfederal) per100private employees increased nodoubtto thetaxincreases– thanks, passedin2001Even inpart, more telling isthat spite Carolina oftheeconomic much In recession, didnotcutbackspendingvery North state workers aflat$625raise. (see 2002 Timeline). The year before, thestate alsogave teachers a2.86percent raiseand spent $28milliononMore atFour, andallocated another$27millionfor class-size reduction the “crisis” in2002,thestate hired 1,000new teachers, gave teachers araiseof1.84percent, billion to $29.397billion,withnodrop offinbetween. Moreover, even duringthepeakof Budget”). Thus from FY2000-2001to FY2003-2004, thetotal budgetincreased from $24.501 of federal dollars)undergo anabsolute decline(see Appendix, “Trends inthe Total State Even more to thepoint,innoneoftheseyears didthetotal budget(dueto theinclusion authorizations onlydecreased by $31millionover thecourse ofFY2001andFY2002. $14.914 billioninFY2003-2004. FY2000-2001asabaseline,Thus GeneralFund taking $500 million. Total authorizations, however, rose from $14.384billioninFY2000-2001to decline–by 3.44percent,2004. OnlyinFY2002-2003didauthorizationsactually orover 2001; by 3.34percent for FY2001-2002;andthenincreased againby 3.92percent inFY2003- That beingsaid, total GeneralFund authorizationsincreased by 1.02percent for FY2000- alsocannotbedeniedthatGeneralFund2002. It revenues decreased inFY2001-2002. above) andthatcorporate(see chart income taxrevenue alsodropped between 2000and dropped cannotbe deniedthatbaselinesalestaxcollections sharplyin2001and2002 It course,Of the questionofthere beinga “crisis” atallisamatter ofperception (seeQ&A:4). more convincing andthusgave intheHouse2002election. theGOPaslimmajority Carolinatime, tended slightly to thepeopleofNorth findtheRepublicanversion ofthestory the Republicansweren’t orthegovernor’s inthemajority mansionin2001and2002.At the that fiscal disciplineandpoorfinancialplanning–thishassomethingto dowiththefact by raisingtaxes. Republicans, ontheotherhand, tended to blamethecrisisonalackof thatDemocratsattemptedsomething to to dowiththefact resolve thebudgetshortfalls tax changes” inthoseyears’ charts really causedthecrisis–thishas timelinesections) that thetaxcutspushedthrough by Republicansbetween 1995and1998(see “significant helped causeorcontribute Democrats, to ofcourse, thebudgetshortfalls. emphasize 9 11 www.ncga.state.nc.us/fiscalresearch/frd_reports/frd_reports_pdfs/Overview_2006.pdf. 2006 Legislative Fiscal Fiscal(Revised)(Raleigh: Actions Session available Research fro Division,2006),Q2-Q3; andBudgetary These adjustmentsfor numbersreflect total current operations. Fiscal Carolina Research GeneralAssembly Overv Division,North of 2001 The BudgetCrisis WHAT CAUSED IT? 11 terrorist attack…allthesethingsarguably spending, anationalrecession, theSeptember 2002. Hurricanes, lawsuits, taxcuts, education to have causedthebudgetcrisesof2001and canbesaid isatruismthatnosinglefactor It 9

m http:// iew: iew: q & a l CIVITAS INSTITUTE l 43

Bailey/Emory/Patton $10,239.1 $10,239.1 Actual Tax Actual Loss intangibles tax lawsuits (see Q & A: 12). In (see Q & A: 12). 1998 tax lawsuits intangibles Revenue Collected Collected Revenue $9,428.9 FY1995-96 $363.6 FY1996-97 $454.2

FY1997-98 $601.5 $11,092.2 $11,092.2 $11,965.3 FY1997-98 $601.5 $12,423.8 FY1998-99 $972.2 $12,572.9 FY1999-00 $1,007.3 $13,956.1 FY2000-01 $1,543.9 $14,707.8 FY2001-02* $768.5 FY2002-03* $770.4 in 2001; *Estimated includes tax increases Amounts in millions ) do not in any way correspond to the FY2003 budget shortfall. to Of correspond way and Bailey) do not in any Fulton Fulton The box suggests that as the impact of the tax cuts grew larger, the amount of actual tax larger, suggests that as the impact of the tax cuts grew box The suggests that the tax cuts had a dynamic effect on the correlation This increased. revenue in overall an increase to contributed growth In of economic turn, higher rates economy. of the state was peaking, the growth the same time that the economy At tax revenue. for 1.02 percent by authorizations only increased General Fund Thus slowed. government and the in which the impact their zenith FY2000-2001 – the year of the tax cuts reached might be seen, as tax cuts thus The effect. into went the 2001 tax increases before year grow to the government as part Republicans, force by to certainly of a strategy they were is that the tax cuts interesting more What is perhaps even manner. in a fiscally responsible arising and litigation costs page also include tax refunds (which in the table on the previous from this for accounting but even the shortfall the 2001 tax increases, course, by was mitigated More dollar. the decline in authorizations dollar for it is not as if the cuts match revenue, Even granting the existence of a budget crisis, we need at least to mention the impact mention least to need at of we crisis, of a budget the existence granting Even economy North demonstrates, 1 (below) Carolina’s Figure As and lawsuits. those hurricanes Irene and Floyd Dennis, Hurricanes in 1999. In 1997 and again peaked in however, 1999, met in special the Legislature In response, damage. causing widespread hit the state, Recovery Act 1999- (S.L. Floyd million Hurricane and passed the $830 December session in $596 million in tax refunds was liable for 1997 and 2000 the state between 463es). Similarly, the Fulton/Smith/Shaver from stemming and 1999, the state also paid out $799 million in connection also paid out $799 million and 1999, the state with the lawsuits (see Q & A: 13). Each of these settlements likewise resulted in millions of dollars in in millions likewise resulted Q & A: 13). Each of these settlements (see lawsuits lost tax revenue. changes law revenue to attributable in revenue the decrease indicates below box The and other factors) FY2003: FY1996 and made between payouts (including litigation 44 l CIVITAS INSTITUTE l q & a were badfor theeconomy, badfor thepoor, badfor thecommon good. tax cutsofthe1990scaused thebudgetcrisesoffollowing decadeisthatthetaxcuts question asclearlywe might. What many criticsreally meanwhentheycharge thatthe far,So though, we haven’t really answered thequestionbecausewe stillhaven’t askedthe helped thestate respond to subsequentbudgetshortfalls. came. Let itbegranted, Account then,thatfullyfundingthe Savings Reserve would have Rainy Day Fundthe so-called itwould have hadmore moneyto spendwhenthatrainy day target level. Still, itmakesbasiceconomic sense thathadthestate setasidemore moneyin years –FY1993-1994andFY1998-1999inwhichtheaccount wasbarely fundedathalfits the taxcuts)from FY1995-1996to FY1997-1998. Ontheother, we shouldmentionthe Account fullyfunded(interestingly was, infact, enough,by thesamepeoplewhopassed this issuebothways. Ontheonehand, we thattheSavings canpointto Reserve thefact the recession, whichitshouldhave would come, known soonerorlater. Onecanargue The firstquestionwe needto address, then,iswhetherthestate adequately plannedfor financially prepared for downturns. thesecyclical Carolina cannotprevent nationalrecessions thestate, from impacting butitcanbebetter and central bankcontinue to orchestrate boomandbustcycles. Unfortunately, North Recessions,shortfall. however, willcontinue to occur aslong theFederal government therecession causedthebudget are misguided.short, often In and 2002budgetshortfalls thatdebates aboutwhatreallyAll ofthesescenarios highlightthe fact causedthe2001 might barely Carolina have at all. touched North Andifnotfor therecession … ride outthe2001recession. notfor If HurricaneFloyd,Who knows? theeconomic recession Account,aside additionalfundsintheSavings Reserve whichwould have helpedthestate could have entirely. beenaverted Likewise, ifnotfor onecouldIndeed, argue thatifnotfor the revenue. likely isthatthecutsstimulated economic growth, contributing to anincrease inoverall tax State andLocal Sales Tax Revenue Growth Fulton settlementtheFY2003budgetshortfall Bailey, theLegislature could have set q & a l CIVITAS INSTITUTE l 45 Finally, then, here is our question: “Did the tax cuts of the 1990s help or hurt North Carolina’s 1990s help or hurt the tax cuts of the “Did North Carolina’s is our question: then, here Finally, passed in 2001 the tax increases “Did A necessary corollary is: this question to economy?” help or hurt economy?” the of economic measures will examine three questions we these answer to begin In to order growth. tax revenue and employment, GDP growth, well-being: stable slightly more GDP remained state NorthDuring the three-year recession, Carolina’s 2002. 2000 to from of 1.9 percent growth real with annual average GDP, than the national 1.5 percent dipped below never growth North Carolina’s economy, Unlike the national with a period of tremendous the 1990s tax cuts correlated 1 indicates, Figure As per year. the start until 1999, NorthThus in late of the recession in North growth Carolina. economic one. every rate except year growth the national exceeded growth economic real Carolina’s year. per 1.6 percent advantage was a healthy growth NorthOverall, Carolina’s GDP strong North for solely responsible Carolina’s were that the tax cuts say is not to This corresponds GDP roughly in the state’s that the spike note to it is interesting Still, growth. with corresponds GDP roughly the decline in state the cuts while with the period following GDP state aftermath is that in the of the 2001 tax increases, telling More the tax increases. average. the U.S. behind but fell as in earlier years, did not rebound visible. impact was not immediately the real expected, might be tax increases of the As taxable year effect for into went of 0.5 percent tax increase income “temporary” (The on October sales tax began 2001). As 16, “temporary” Januarybeginning 1, 2001, while the rate at an average GDP grew trickledthe effects of the tax increases North down, Carolina’s grew economy U.S. the 2004. During the same period, 2002 and between of 2.17 percent rate growth economic By 2003, North Carolina’s per year. of 2.73 percent rate at an average Fig. 1. GDP Growth (current prices): North Carolina vs. U.S., 2001 Recession U.S., North vs. prices): Carolina (current 1. GDP Growth Fig. 46 l CIVITAS INSTITUTE l q & a 100% 20% 40% 60% 80% 0% downturn. Tax to slow theeconomic hikesserved recovery. commitments leadingupto therecession alongwithalack ofpreparedness for the revenue collection. culpritinthebudgetcrisiswasescalatingstate spending The primary sum,itisfairto sayIn thatthenationalrecession merely caused aslowdown intherate of growth was26.1percent. state budgetrevenues grew by 32.5percent. From FY1998-99to FY2003-04,revenue between thetaxcutsandaspikeinstate revenue. Between FY1993-94andFY1998-99, Finally, for ourpurposes, andperhapsmostimportant istheclearcorrelation thatexists reach year 2000employment levels until2006. Carolina anotherthreeNorth years to match thisachievement. Carolina didnot Thus North While theU.S. economy hadrecreated by 2003allthejobslostduringrecession, ittook to expandagain. Carolina started actually in North increases played itwasnotuntil2004thatemployment arole inholdingbacktherecovery: economy, however, Carolina’s North jobmarkettook longerto recover. Again, the2001tax Job growth fallingonlywhenthenationalrecession began. Unlikethenational started inandreenergizedkicked thejobmarket. economy asthetaxcutstook Jobscreation effect. wasslowing down untilthetaxcuts Carolina’s2 shows how North employment growth sustainedanadvantageover theU.S. Carolina’s stimulated North By contrast, itseemsthatthetaxcutsactually economy. Figure tax increases hindered thestate’s economic recovery. behind, slowing to 68centsfurther perdollarofU.S. itseemsasifthe2001 growth. short, In was only85cents to thedollarofU.S. growth. 2004,therate ofgrowth In hadfalleneven 1991-92

1992-93 Savings Reserve asaPercentSavings Reserve Cap oftheStatutory 1993-94

1994-95

1995-96 100% 1996-97

1997-98

1998-99

1999-00

2000-01 0% 2001-02

2002-03

2003-04

2004-05

2005-06 q & a l CIVITAS INSTITUTE l 47 Revenue Changes Due to Tax and Fee Changes and Fee Tax Changes Due to Revenue Fig. 2. Private Sector Job Growth: North Carolina vs. U.S., 2001 Recession U.S., Sector North vs. Growth: Job Carolina 2. Private Fig. 48 l CIVITAS INSTITUTE l q & a corporations for theyears 1990to 1994(Fulton v. Faulkner decided thatthetaxshould beretroactively Carolina appliedto stock heldinallNorth to theGeneralAssembly’sContrary Carolina clear intentions, Supreme theNorth Court who own small, in-state businesses.” commission, theresult would be “a taxincrease for many taxpayers, individuals particularly to economic development. thelaw were If rewritten instead ofrepealed, concluded the the Legislative Research Commission characterized thetaxas “unfair” anddetrimental thattherepealto wasa mediareports “Grey Poupon bill” aimedathelpingthewealthy, entire tax,effective for 1,1995(S.L.1995-41). Contrary taxable years beginning January Already, however, Carolina lawmakers North haddecidedinApril1995to repeal the repealed altogether orbeappliedequally to allshareholders. remanded to determine, thecasebackto theN.C.Court ineffect,whetherthetaxshouldbe hopes ofencouraging firmsto dobusiness” Carolina. Subsequently, inNorth thehighcourt Constitution becausethetaxdiscriminated againstcorporations inotherstates “in the determined thatthelaw violatedhigh court the(Interstate) Commerce ClauseoftheU.S. aunanimousdecision,the heardSupreme 1995.In thecaseonappealin October Court Carolina upheldthetax(Fulton SupremeAfter theNorth Court v. Justus Salisbury, N.C.,challengedthelaw onconstitutional grounds inasuitfiledMay 1,1991. intangibles tax. The taxwasnoteliminated, however, untiltheFulton Corporation of For many years, thebusinesscommunity, inparticular, lobbiedfor therepeal ofthe Fulton Corp. v. Faulkner: Carolina.by As thebusinessto explainedinthe1996U.S. North decision, Supreme Court amendment) atarate inversely to theamountofcorporate proportional income taxpaid tax on100percent ofitsincome. Allothershares ofstock were taxed (thanksto a1939 however, didnotapplyto stock heldinany company thatpaidthestate corporate income regardless ofwhether thestock earnedadividendornot(cf. G.S.§105-203). The tax, or individualbetaxed atarate of25cents per$100oftotal fairmarketvalueofthe stock, foreign trusts, theintangibles taxstipulated thatallshares ofstock owned by abusiness 1995. Alongwithtaxingaccounts receivable, notes and bonds, andbeneficialinterests in The in1937andremained intangibles taxwasenacted onthebooksuntilitsrepeal in 12 by North Carolina residentsby North beingtaxableon95%ofitsvalue. Carolina, withitsstockto held be95%,meaningthatIBMdid5%ofitsbusinessinNorth for determined theappropriate example, theSecretary taxablepercentage ofIBMstock ofRevenue. Carolina 1990, determined andpublishedannually by Secretary In theNorth were ableto lookupthetaxablepercentage for alarge numberofcorporations as would betaxableon100%ofitsvalue. For theintermediate cases, holdersofstock Carolina,100%. Stock ontheotherhand, inacorporation doingnobusinessinNorth resident owners ofthatcorporation’s stock undertheintangibles taxwould likewisebe income taxon100%ofitsincome, andthetaxablepercentage allowed deduction to Thus, acorporation doingallofitsbusinesswithintheState would pay corporate Intangibles Tax? What isthe WHY WAS IT DECLARED UNCONSTITUTIONAL? (1997)). In response, (1997)).In theGeneral (1994)),theU.S. q & a l CIVITAS INSTITUTE l 49 Source: API Source: United States. States. United DID YOU DID YOU KNOW? Assembly passed legislation preventing retroactive collection (S.L. 1997-17) and of the tax retroactive preventing passed legislation Assembly 1990 Country the years Superior Court) tax for the refunded Wake the by also (as prompted with accordance the tax in protested who formally A plaintiffs) (Class all those to 1994 to (The (S.L. 1997-318). regulations state the to back as 1990 due only as far refunded tax was North State (1998), the Carolina In refunds). Smith v. regarding of limitations five-year statute who B plaintiffs) (Class class of taxpayers a second to refunds CourtSupreme also granted 1991 to from paid with the Department taxes for protests had not filed timely of Revenue paid in 1990. taxes for additional refund an State (1998) brought v. Shaver 1994. Finally, the elimination of the tax be applauded, tax is to of the intangibles While the nullification with, the repeal begin To in other areas. tax increases regressive more even set the stage for For local governments. for – in particular, loss of revenue in a significant of the tax resulted of revenue. this lost stream for 1994 level) local entities (at the reimbursed the state six years a one-half by replaced cent and were stopped the reimbursements In 2001, however, in the local-option increase Act sales tax that was passed with the 2001 Budget and went of the tax the nullification arising from the refunds 1, 2002. Similarly, effect December into partially the so-called to the passage of several contributed crisis that precipitated budget including a one-half sales tax, a one-half in the state increase other new taxes, cent percent sales tax on liquor. and a 6 percent earners, income the top for tax increase than more to (including interest) $596 million in tax refunds was liable for the state All in all, of first refund The history. in state tax settlement second-largest 400,000 taxpayers—the refund second The General Fund. the taken from $156 million was paid out in 1997 and which Reserve the Savings Account, in 1999 and taken from of $200 million was allocated (cf. been repaid in FY2000-2001, but has never been reimbursed have was supposed to money in 2000 and taken from million was allocated of $240 S.L. 1999-327). A final refund accounts payroll which funds Units, School Administrative Local Aid to State to devoted in the loss of tax also resulted of the intangibles repeal The (S.L. 2000-67). teachers for the state. for $125 million in annual revenue approximately As of late 2010, North of late As Carolina had the second highest gas tax highest gas had the second South and the 13th highest in the rate (30.15 cents per gallon) in the (30.15 cents rate 50 l CIVITAS INSTITUTE l q & a court withorders regardingcourt whowould sent May 1998,theN.C.SupremeIn Court case. little comment onthespecificsofeither likewise settledby thecourt’s ruling, with timely protest. be limited onlyto those whohadfileda alsoruledthatrefunds could not court compensation.” As inSmithv. State without just ofproperty and ataking unconstitutional impairmentofcontract tax onretiree benefitsconstituted “an foundN.C. Supreme thatthe Court Taking upthethree casesin1998,the benefits, thus reinstating thetaxinequalitiesthatexisted before retirement benefitsfor state retirees atthesametimethatithadimposedataxonthose existed between state/local retirees andfederal retirees becausethestate hadincreased the retirees also filed suit( state, represented by then-Attorney for thosestate andlocalretirees whohadfiledatimelyprotest (cf. N.C.G.S.105-267). The 1995 the Wake ruledintheirfavor County SuperiorCourt andordered anincome taxrefund September 1992,theplaintiffs October filedsuitagain.In delineated inN.C.G.S.105-267.In the plaintiffs over matters related to compliance withincome taxprotest requirements as initiallyruledagainst 1991,theN.C.SupremeBailey wasfinallysettledin1998.In Court After several years oflitigationandfive appearances before thestate Supreme Court, brought suit( filed asimilarlawsuit basedonslightlydifferent grounds ( lawsuita classaction representing some200,000plaintiffs. Subsequently, state retirees excluding 1990,state andlocalgovernment thefirst$4,000(S.L.1989-792).In retirees filed response,In theGeneralAssembly imposedataxonallgovernment retirement benefits, unconstitutional to taxfederal retirement benefits differently from state orlocalbenefits. 1989,theU.S.from taxation. In v. ruledinDavis Supreme Court thatitwas Michigan state andlocaltaxes; offederal by retiree contrast, onlyaportion benefitswere exempt Prior to 1989,benefitsreceived by state andlocalgovernment retirees were exempt from retirement government benefitsfor employees. certain Carolina etal. –thatsuccessfully challengedthestate’s of income taxon collection Carolina etal. etal.; v. Emory Carolina etal.; StateofNorth The 13 Bailey/Emory/Patton Bailey/Emory/Patton Patton). andPatton Emory were Retirement Benefits Taxing WA I THE IS WHAT Patton), claimingthatBaileyhadnotresolved theinequitiesthat decisionrefers to three lawsuits –Baileyetal. v. StateofNorth backto the trial BAILEY/EMORY/PATTON , the General Michael Easley,General Michael appealedthedecision.Federal of thepeopleoughtnever to give way to those of the subject. to thoseofthesubject. The real wants manner, regard shouldbehadboth to the imaginary wantsofthestate.to theimaginary to thenecessities ofthestate and To fi To DECISION? andPatton etal. v. StateofNorth x theserevenues inaproper ) whilefederal retireesEmory also Davis v.Davis . Michigan Montesquieu q & a l CIVITAS INSTITUTE l 51 e ina es Division, 10 Repealed, effective January effective Repealed, 1, 2007 , 53 PA 96 (1998); available from http://caselaw.lp.findlaw. from 96 (1998); available , 53 PA Established in 2006 (S.L. 2006-66) with a $10 Established in 2006 (S.L. 2006-66) with

HOW MANY DOES THE STATE OFFER? STATE THE DOES MANY HOW Corporate Subsidies

per position); business property tangible of capitalized in of the cost that is placed percentage service during a taxable year); 1 county gets a Tier at least 200 jobs in a creating years, within three investment investment). estate of the real worthcredit 30 percent For creating jobs (must create 5-15 jobs with credits ranging from $12,500 to $750 $12,500 to from ranging with credits 5-15 jobs jobs (must create creating ➤ For is based on a credit years, in business property four (taken over investing ➤ For property (at least $10 million in the state in real counties in the poorest investing ➤ For Economic Development Reserve Fund: Development Economic William S. Lee Quality Jobs and Expansion Act: Quality Jobs and Expansion S. Lee William Office of the State Controller, 2000), 11. Finally, see North Carolina Department of Revenue, “Directive PD-99-1,” Personal Tax Personal PD-99-1,” “Directive see North Department Carolina of Revenue, 2000), 11. Finally, Office Controller, of the State www.dornc.com/practitioner/individual/directives/pd-99-1.html. from 4, 1999; available March Pou Bailey, et al. v. State of North et al. Carolina, v. et al. Bailey, see Pou information, more For

Controller, North Carolina Comprehensive Financial Annual Report: For the Fiscal Year Ended June 30, 2000 (Raleigh: North Carol Year the Fiscal Annual Report: For Financial North Comprehensive Carolina Controller, 14 10 Division, Office of the Stat See Accounting also Statewide com/scripts/getcase.pl?court=nc&vol=1998/supreme0508/&invol=bailey. At least 15. At 1. qualify for a refund. But the state settled the cases before the trial court the issue a final could before settled the cases But the state a refund. qualify for pay to consented the state that June, Assembly the General by passed legislation Per ruling. local on state, taxes refund FY 1999-2000 – to FY 1998-99 and – years two over $799 million retirees and local government state, federal, all vested paid by benefits retiree and federal tax, the state of the unconstitutional repeal of the a result and 1997. As 1989 between million dollars in annual revenue. $130 approximately forfeited The Bill Lee Act was replaced in 2006 by (S.L. 2006-252) North Carolina General Statutes, (S.L. 2006-252) North in 2006 by General Statutes, Act was replaced Carolina Bill Lee The for Credits “Tax called program a new tax credit Article 105, Chapter which created 3J, business activities after January occurring for repealed are credits Lee Businesses.” Growing 1, 2007, with Article on or after January beginning 3J credits 1, 2007. typesArticle of credits: three 3J provides and franchise tax income of state 50 percent take up to to can be combined credits The can be carried one year in any Unused credits tax liability. off of the taxpayer’s taxes income million appropriation from the General Assembly, the Economic Development Reserve Development the Economic the General Assembly, from million appropriation projects. development and economic acquisition site for grants funds for provides Fund SecretaryThe the fund and makes the final administers of the Department of Commerce but the Office Budget and Management of State and the Fiscal awards, decision on grant how the funds go and also keep track of where Division of the General Assembly Research used. they are 2. over for five additional years. A bonus program for investments in real estate can be carried over for 15 years, with a 20-year carry forward for an investment of at least $150 million over a two-year period. In order to qualify for the credits, a business must meet certain requirements: ➤ The credits are offered only to businesses or industries the government has targeted for growth and special treatment. These are as follows: aircraft maintenance and repair firms; air courier services that establish a hub within North Carolina; companies that move their headquarters to North Carolina and create at least 75 new headquarters jobs; customer service call centers; electronic shopping and mail order houses; information technology services; manufacturing; motor sports racing teams; research and development; warehousing; and wholesale trade. ➤ The average wage for all full-time jobs created under the program must meet or exceed the applicable wage standard of the county where the business is located. ➤ The business must offer health insurance for all full-time employees and pay at least 50 percent of employee insurance premiums. ➤ The business must have a clean record (no significant violations) with the North Carolina Department of Environment and Natural Resources for the previous five years. ➤ The business must have a clean record with OSHA with no serious “willful” or “failure to abate” violations for the previous three years. ➤ The business cannot have any past taxes due. Enhanced credits are offered based on designated special needs areas of the state. Counties are divided into tiers based on economic health. The poorer the county, the more generous the credit. Cities with a population of 10,000 or more can designate poorer areas as Urban Progress Zones (UPZ). Counties that have a city with a population of 10,000 or more can designate poverty areas as Agrarian Growth Zones (AGZ). Additional credits are available to businesses willing to expand or locate in UPZ or AGZ. 3. Industrial Revenue Bonds: Issued to help new and expanding businesses, Industrial Revenue Bonds (IRBs) provide funds to a manufacturer at a tax exempt interest rate. They are available only to a company engaged in manufacturing and only for land, buildings, and equipment. IRBs are regulated by both state and federal laws. Three types of IRBs: ➤ Tax Exempt: $10 million maximum to include the bond amount and capital expenditures over a six-year period that spans three years before and after the baseline date. Federal regulations prohibit any company from issuing more than $40 million nationwide in outstanding tax exempt IRBs at any given period. ➤ Taxable: Exempt from North Carolina taxes, but not federal taxes. Taxable IRBs cost the borrower more, but can exceed the $10 million tax exempt limit. ➤ Exempt Facility/Solid Waste Disposal Bond: No restrictions on the amount, and the

l CIVITAS INSTITUTE l q & a 52 l CIVITAS interest is exempt from both federal and state taxes. q & a l CIVITAS INSTITUTE l 53 A bond program run by by run A bond program Composite Bonds: Composite Block Grants: Development Community Community Development Block Grant (CDBG) (CDBG) Block Grant Development ➤ Community assist to cities or counties to available funds are with projects aimed at helping businesses create Started new jobs or keep jobs in that city or county. specifically for designed are in 1982, such grants levels. family income moderate to with low counties 4. between bonds tax exempt that offers the state medium-sized small to and $2 million for $500,000 the bonds with IRBs, As manufacturing companies. engaged in some a company to only available are must be used for type Proceeds of manufacturing. assets). equipment (fixed buildings and land, 5. types: Two government providing a 25 percent cash match. a 25 percent providing government construction buy machinery, or to of the funds needed for or more equipment, or property. a) with the local of cost, 75 percent public facilities of up to Grants for b) 50 percent a participating business for through the targeted Loans bank to in two areas: areas: in two per job created or $500,000 per project and can be used for water, sewer, gas or sewer, water, project or $500,000 per and can be used for per job created industrial and electrical distribution lines; building renovations; utility system equipment. been lost in the manufacturing 500 or more jobs have where in areas governments 12 months. previous water, $500,000 per project and can be used for funds cannot exceed These 2, and 3. and construction. gas and electrical utility line improvements sewer, impact under the clean water a favorable must have such funding projects, water Economic Development Category projects provide assistance to local governments local governments to assistance Category➤ projects Development provide Economic Basic IDF grants or loans to local governments. These grants cannot exceed $5,000 cannot exceed grants These local governments. ➤ or loans to Basic IDF grants local loans to interest low are These ➤ Assistance. Emergency Development Economic 1, Tiers Act in under the Bill Lee industries eligible to Available funds. ➤ Utility Account clean for local governments to grants provide to Used Bonds proceeds. Water ➤ Clean Provides grants, some to local governments local governments some to grants, (IDF): Provides Fund Development Industrial The 6. state of the areas in the poorer Act criteria Lee under the Bill eligible businesses, and some to that are full-time jobs on the number of new, depends 1, 2, and 3. Funding Tiers — namely, Funds renovations. equipment or building infrastructure needs, and can be used for created build new facilities. land or buildings or to purchase IDF cannot be used to from of funding: categories four are There 54 l CIVITAS INSTITUTE l q & a the grant. for Eligibility thecredit requires thatthebusiness provide healthinsurance and employee’s withholding taxfor eligible positions, witha12-year maximumonthelength of employers ataxcredit equivalentofanywhere from 10percent to 75percent ofan to stimulatebusinesses inaneffort theeconomy andcreate newjobs. JDIGgives select 2002-172, s. 2.1(a))withtheaimofproviding recurring yearly grants to newandexpanding 8. Easley $15million. help “close deals”; in2006,they gave Gov. Hunt’s specialpoolofgrant moniesto Assembly allocated $5 millionfor Gov. Fund 1993,theGeneral in2004.In CarolinaEasley renamed ittheOneNorth Recruitment Competitive Fund; Gov. Mike in 1993astheGovernor’s Industrial Governor JimHuntestablishedthefund been committed, disbursed andused. Carolina Fundin theOneNorth has onhow themoney each fiscalquarter required attheendof to fileareport ofCommerceThe Department is Carolina fundscanonlybeusedforOne North thefollowing purposes: distributed vialocalgovernments thatmustalsoprovide matching grants. the recruitment, expansion,orretention ofnewandexistingbusinesses. The moneyis a subsidyandhow muchtheyget.More specifically, thefundisusedto closedealsfor the governor’s around money.”“walking The governor decideswhichcompanies receive of thegovernor referred isoften andisdispersedsolelyathisorherdiscretion. It to as Carolina. to to locate companies orexpand inNorth seeking The fundisunderthecontrol 7. Job Development Investment Grant Program (JDIG): One North Carolina Fund:One North Any other actions deemedappropriateAny➤ otheractions by theGeneralAssembly. Improvements➤ ofnewwater, to orconstruction sewer, lines utility gasorelectric Improvements➤ ofnewwater, to orconstruction sewer, linesor utility gasorelectric Repairs orrenovations➤ to existingbuildingsfor expansions; Equipment installationorpurchase; ➤ operations; or equipmentfor neworproposed buildingsusedfor orindustrial manufacturing equipment for existingbuildings; treatment plants, orwater supplysystems. orimprovementscan includeconstruction to water andsewer lines, wastewater targeted undertheBillLee thatare Act located in Tier 1,2,or3counties. Projects setoutbyobjectives thestate. The moneymust alsobeusedto benefitindustries Carolina FundThe OneNorth existsto provide cashpayments We mightcome closerto balancingthe Commandments andtheGoldenRule. Budget ifallofuslived closerto the JDIGwaspassedin2002(S.L. Ronald Reagan q & a l CIVITAS INSTITUTE l 55 News & Established in 2006 with a nonrecurring $5 with a nonrecurring Established in 2006 Counties and cities have recently joined the corporate joined the corporate recently and cities have Counties Tax increment financing (TIF) increment local governments is used by Tax Pots of money are available to the Speaker of the House and President Pro Pro the Speaker of the House and President to available of money are Pots Funds offered through the North through Carolina offered Funds Fund: Access Industrial Access/Road help in to new or expanding industries to offered Funds Funds: Rail Industrial Access Financing: Increment Tax Subsidies: and Local County Slush Funds: Slush Funds: One North Small Business Fund: Carolina million appropriation (S.L. 2006-66), the One North Carolina Small Business Fund provides provides (S.L. 2006-66), the One NorthFund Small Business million appropriation Carolina grants. innovation federal apply for them to encourage businesses to small money to 10. new to access needed for when the construction of roads for Transportation Department of businesses. or expanding industrial 11. with a a business, to access tracks needed for railroad financing construction or rebuilding a certain that the business create or capital investment number of new jobs requirement results. 12. not otherwise would and others who presumably developers to incentives provide to land subsidies for Such financing often in certain entails providing areas. invest choose to and streets, sewerage, water, infrastructure for installing or improving and/or for acquisition or selling land at an attractive away entail giving even may financing The local services. (see Q & A: 15). developers to price 13. pay at least 50 percent of insurance premiums for all full-time employees hired under JDIG. under JDIG. hired employees all full-time for premiums of insurance least 50 percent at pay JDIG grants. receive to not eligible are Retail facilities in January beginning was effective in sunset to 2003 and is supposed program JDIG The January 2008. 9. welfare bandwagon by offering select companies taxpayer subsidies, often in addition to often in addition to subsidies, select taxpayer offering companies bandwagon by welfare instance, for of Holly Springs, In July 2006, the town the state. by offered those already Novartis the offering to a $20.8 million package by made news that, according , included providing 167 acres of cleared land, new road, water and sewer service, a and sewer water new road, land, of cleared Observer 167 acres , included providing truck, service.new fire and priority snow-plowing in 1999 at the urging created corporation A non-profit Golden Foundation: LEAF The 14. share North Golden LEAF uses funds from Carolina’s General Mike Easley. of then-Attorney tobacco- to grants development economic distribute settlement to of the national tobacco by is appointed board foundation’s The counties. distressed dependent and/or economically By 2025, it and the Speaker of the House. of the Senate, Tem Pro the President the governor, of North billion (or 50 percent) $2.3 Carolina’s received will have the foundation is estimated Golden LEAF had dispersed By the end of 2010, settlement monies. of the tobacco share Critics entities and non-profits. various government to than $450 million in grants more Democrat by than a slush fund controlled as little more operates foundation that the charge leaders. 15. Reserve and the Economic Transportation the Department through of the Senate, of Tem select or to with little or no accountability distributed companies funds are These Fund. oversight. 56 l CIVITAS INSTITUTE l q & a Development Financing Carolina voters North Act, narrowly approved a constitutional http://www.development-strategies.com/images_NEW06/evolving_tif.pdf. 11 not permititsuse. more than 40years insomestates, andfor onlyafew years in others. OnlyArizona does Tax increment financingwasfirstimplemented in California in1952;ithasbeenusedfor money isrepaid, theincreased taxrevenue goesinto themunicipality’s generalfund. from aproscribed area isthenusedto pay backthe bondorborrowed funds. Once the government andwithoutvoter approval. The taxrevenue incremental increase inproperty Municipalities cantherefore issuebonds withoutcommitting the “full faithandcredit” ofthe revenue increase isusedto secure bondsorguarantee therepayment ofotherfunds. area taxrevenue. and, inturn,bringaboutanincreaseparticular inproperty The projected The TIF concept valuesina isbasedontheideathatdevelopment willenhance property priceselling landatanattractive to developers. water, sewerage, streets, andlocalservices. The financingmay even entailgiving away or providing subsidiesfor landacquisition and/orfor installingorimproving for infrastructure chooseto invest areas.would nototherwise entails incertain Suchfinancingoften used by localgovernments to provide incentives to developers andotherswhopresumably Called “Project Development Financing” is Carolina, taxincrement inNorth financing(TIF) 15 Larry Marks, "The Evolving Marks, "The Use of Larry TIF," Financing Tax Increment What IsIt? 11 U.S.

In 2004,following In theGeneralAssembly’s 2003passageoftheProject Sources ofRevenue: U.S. andN.C.,2006 18,no.REVIEW 1(2005);available from N.C. q & a l CIVITAS INSTITUTE l 57 (September 29, 2004); available from http://www. from (September 29, 2004); available Opponents argued that in that argued Opponents 12 (October 12, 2004); available from http://www. from 12, 2004); available (October Works Freedom Carolina Journal Online Carolina 13 carolinajournal.com/exclusives/display_exclusive.html?id=1845. carolinajournal.com/exclusives/display_exclusive.html?id=1845. what is it, and what does it mean?" One, Robin Staudt, "Amendment freedomworks.org/informed/issues_template.php?issue_id=2107. Michael Lowery, "Debate About Amendment One Heats Up," About Amendment One Heats Up," "Debate Michael Lowery, addition to encouraging suburban sprawl, such financing is just another form of corporate of corporate just another form such financing is sprawl, suburban encouraging to addition TIF represents Moreover, of the local decision-making out takes voters that process. welfare fails such loans if new development repay to obligated who are existing taxpayers a risk for in tax revenue. cause an increase to 13 12 amendment to allow TIF. Proponents argued that the financing method is needed for is needed for financing method that the argued Proponents TIF. allow to amendment the claimed They development. financed risky privately too for that are areas blighted communities. attract would financing jobs and revitalize 58 l CIVITAS INSTITUTE l q & a billions (this date wassubsequently pushedforward to December 1,2002). entities to permanentlyraisetheirown salestaxrate by ½cent beginning July1,2003 1998, whichisstillinplace). The budgetalsoincluded aprovision thatpermitted local consumers reached 6.5percentCounty leviedanadditional0.5cent in (Mecklenburg with thelocalsalestaxrate of2percent, total Carolina salestaxes paidby North By law, thetaxwasto remain ineffect from 16,2001,to July1,2003.Combined October increase of½cent thatraisedthestate salestaxrate from 4.0percent to 4.5percent. downturn –theFY2001-02budget(S.L.2001-424) mandated a “temporary” salestax and exacerbated by thestate’s refusal to prepare for suchaneventual economic of$791million–causedby response the 2001recessionIn to aprojected budgetshortfall 16 WA AE THEY? ARE WHAT 2001 Taxes of “Temporary” General Fund Tax Revenue: 1986-2006 of thetaxes becoming permanent. ofone remained until2008,withaportion ineffect taxes thatweretwo temporary firstpassedin2001 rarely come Carolina, offthebooks. Here inNorth – “temporary.” reality, In taxes though,temporary called a “permanent” tax,issupposedto bejustthat tax,asopposedto whatmightbe A temporary q & a l CIVITAS INSTITUTE l 59 awmakers once again once awmakers faith with voters break he FY2006-07 budget includes a provision L T 2005 2006 by renewing the temporary taxes. The FY The the temporary renewing by taxes. 2005-06 budget extends the ½ cent years, another two sales tax for statewide 1, 2007. of July with a new expiration date the 8.25 percent the sunset for Similarly, January is pushed back to tax rate income 1, 2008. to accelerate the expiration of the accelerate to statewide The sales tax. “temporary” as of Dec. ¼ cent by sales tax is reduced sales tax on the overall 1, 2006, lowering 6.75 percent. North to consumers Carolina ¼ No mention is made of the remaining sales tax rate, statewide “temporary” cent on July 1, expire meaning it is still set to tax local option sales ½ cent The 2007. remains 2002, however, from increase individual “temporary” The on the books. of 8.25 is scheduled tax rate income The tax is renewed in spite of the ½ cent of the ½ cent in spite tax is renewed The approved local option sales tax increase tax rate the sales Thus, year. the previous the Likewise, at 7 percent. remains income expiration of the highest marginal is extended for of 8.25 percent tax rate January to 1, 2006. years, another two ect when the s partFY2001-02 of the budget, the General .L. 2002-123 accelerates .L. 2002-123 accelerates the implementation of n the FY2003-04 budget, on their renege lawmakers A I S ective January it applies 1, 2001 (so that promise to let the temporary taxes expire. let the temporary expire. to promise taxes tax is extend- sales statewide ½ cent The July 1, 2005. – to years another two ed for 2003 2002 2001 Along with raising the state and local sales tax by one cent, the FY2001-02 budget also the FY2001-02 one cent, tax by and local sales raising the state Along with on annual earnings of 8.25 percent tax bracket income “temporary” new a created tax bracket The manner of filing. depending on the or $200,000, of $100,000 in excess remain was to 8.25 percent) to percent 7.75 points (from of 0.50 percentage increase on or after January beginning taxable years “taxable for expire 1, 2001, and in effect for on or after January beginning years 1, 2004.” part to lawmakers so-called than The with. More difficult for temporary proved taxes In 2003 and 2005, expire. to these taxes allow to promises their broke legislators once, the November extend Only in 2006 – just prior to to the temporary voted taxes. legislators of the temporaryelections half (¼ cent) finally allow – did the General Assembly tax sales the temporary permitted In tax increase 2007, legislators income expire. to increase half of the temporary sunset, but then made the other to permanent. tax increase sales taxes: “temporary” of the 2001 is a timeline summarizing the life Following Assembly passes both “temporary” taxes. taxes. “temporary” both passes Assembly ½ cent by sales tax will increase state The – on October 16, 4.5 percent 4.0 to – from expire to law 2001, and is scheduled by budget the on July 1, 2003. Moreover, sales tax a local option ½ cent contains eff will go into that increase The temporarystatewide sales tax ends. is increased tax rate income marginal top 8.25 percent, to 7.75 percent from eff and is scheduled 2001 tax year) the to on January sunset to 1, 2004. the ½ cent local option sales tax rate local option sales tax rate the ½ cent 1, 2002 (up from December to forward is July 1, 2003). No expiration date the increases law The included in the bill. in North 7 tax rate sales to total Carolina MecklenburgCounty, for (except percent the to another ½ cent which adds yet sales tax). 60 l CIVITAS INSTITUTE l q & a 2007 sunset taxableyear beginning Jan.1,2008. beginning Jan.1,2007,andthenfully to fallto 8percent for taxableyear nally scheduledsunsetdate of2003. Carolina’sNorth economy since theirorigi- taxes drainedmore than$2billionfrom that the “temporary” salesandincome by theGeneralAssembly, we estimate issued reports overview Using budgetary the 2000level. percent increase inthesalestaxrate over all salestaxrate of6.75percent –a12.5 Carolina withanover-nent, leaving North cent statewide salestaxismadeperma- originally promised. The remaining ¼ 1,2008–afullfour years after January rate, meaningitwillfi regarding the “temporary” income tax does notreverse lastbudget’s promise ■ billioninaddi- Since theoriginal sunsetdate of four years. taxes over sales porary tional tem- $1.72 total comes to 08 andthe for FY2007- projected Add to thisanother$258.4 million due to the “temporary” salestax. taxesthan $1.46billioninextra 2003, taxpayers have paidmore I FY2007-09 biennialbudget n spite ofmuchdebate, the nally sunseton the economy recovered in2003. spending thatlegislators engagedinonce used to fi taxes, itseemstheadditionaltaxes were generated the by extending “temporary” to theestimated revenue of$2.03billion we compare thesurplusduringthistime from FY2003-04through FY2007-08.If of more than$3.1billion intotal surpluses Meanwhile, lawmakers enjoyed awindfall millioninadditionalincome taxes intotal surplus revenue. more collected than$3.1billion ■ ■ ■ ■ temporary taxes beyond temporary their In total, In lawmakers taxed North Taxpayers paidanother$312 Duringthesameperiod, thestate Spendingincreased by 39percent temporary income taxrate.temporary ofthe thanks to theextension originally approved sunsetdates. the billion by extending Carolina $2.03 citizens anextra 08. from FY2003-04through FY2007- nance muchofthesurplus q & a l CIVITAS INSTITUTE l 61 cit cit. it ugly head in 2008-09, as the state has reared cit decline, when revenues will reappear cit, the imbalance the FY2006-07 budget was masked by by created cit $2 billion. a budget hole exceeding ll

Structural Deficit Budget when cit occurs WHAT IS IT? IS WHAT cits have been an ongoing problem in North Carolina for the past few years. years. the past few in North for been an ongoing problem Carolina have cits

going forward. scrambles to fi scrambles to the state to $882 million in new recurring expenditures, with only $500 million in expenditures, $882 million in new recurring to the state new $382 million The the ongoing obligations. for pay to revenue new recurring surplus of $1.4 billion for FY2007-08, allowing lawmakers to continue to postpone to continue to lawmakers allowing FY2007-08, surplus of $1.4 billion for structural defi the state’s decisions regarding tough underlying structural The defi budget committed The 10 percent. spending by budget increased FY2006-07 The structural The defi with one-time a structural obligations paid for in permanent defi money created ■ ■ ■ FY2007-08. In a budget fact, for enjoyed the state revenue higher-than-anticipated fund to revenue use of nonrecurring the often by caused cits are especially during an economic downturn. In response In downturn. response an economic especially during cut spend- to will be forced – legislators 2001 recession – such as the such downturns to or both. raise taxes, ing, Structural defi following: the Consider recurring expenses. Nonrecurring revenue is “one-time money” that cannot be expected money” “one-time is revenue Nonrecurring expenses. recurring growth. revenue tax structure and anticipated state’s the from derived be regularly to anticipated While higher than mask a structural will defi revenues A structural defi Such existing budgetary revenue. current outpace commitments defi 17 62 l CIVITAS INSTITUTE l q & a legislation to increase thepayroll contribution rate usedto appropriate GeneralFund accordingly.unfunded liability 2007,Representative In DaleFolwell (R-Forsyth) introduced other purpose. Currently, thefundcontains $296 million,whichreduces thestate’s RHBTF isto accumulate unusedcontributions and protect themfrom beingusedfor any fi to facing. FY2003-04,thestate created In theRetiree HealthBenefi t Trust Fund (RHBTF) To itis date,nothingto address thenearly$29billionshortfall thestate hasdonevirtually to grow asthenumberofstate employees continues to multiply. Carolina’sDecember 31,2007,North ARCcomes to $2.7billionannually, anamountsure plus paying down thealready accrued obligationsspread outover 30years. thenext As of the amountrequired to keepupwiththefuture benefi tobligationsastheyare acquired amine the “annual required contribution” Carolina. for (ARC) thestate ofNorth The ARCis To better understandtheburden willplace onthestate thisliability budget,we canex- otherwords,31, 2007.In grew theliability by $5billioninjusttwo years. released inlate at$29billionasofDec.A newreport 2008calculated theunfundedliability only 18percent ofitsannualbudget. entire GeneralFund budgetfor FY2007-08.Bycomparison, thestate of Texas’ was liability at$23.79billion,whichwas113percent estimated thisunfundedliability The ofthe report of theunfundedretiree healthpremium benefi tsaccumulated asofDecember 31,2005. Carolina hired 2006thestate ofNorth AonIn Consulting ofChicagoto calculate thecost agencies to determine thecredit riskofstate bondobligations. of any legalobligation,butbecausesuchunfundedliabilitiesare usedby bondrating Accounting Principles (GAAP). States tend to comply withGASBstandards, notbecause organization thatsetsstandards for publicagencies to meetGenerallyAccepted – ofpaying for enrollment premiums to future retirees. GASBisaprivate, nonprofi Board (GASB) calledfor states to calculate anddisclosethefuture costs –intoday’s dollars standards establishedin2005byNew reporting theGovernmental Accounting Standards adjusted annuallyto refl in FY2005-06toward fundingstate retiree healthpremiums. The pay contribution rate is equal to 3.8percent ofbudgeted payroll. Underthismethod, $477millionwasdedicated duringthefi agency isgivenstate General Fund agency dollarsbasedonapercentage oftotal payroll for that the enrollment premiums ofcurrent retirees. To fi state workers, meaningthateachyear thestate allocates fundssuffi cientonly to pay for Carolina usesapay-as-you-go methodoffundinghealthcareNorth premiums for retired state’s for unfundedliability thesepayments at$29billion. universities, localpublicschools, colleges. andlocalcommunity Recent estimates place the enrolled inthestate healthplan. This group includesformer employees ofstate agencies, CarolinaThe pays state ofNorth 100percent ofthepremiums for retired state employees 18 nance thehealthplanenrollment premiums for state retirees. The purposeofthe WHAT IS IT? AND HOW LARGE IS IT? Employee HealthBenefits The UnfundedLiabilityfor Retired State scal year. For example, thepay contribution rate for FY2005-06was ect theanticipated costs toect cover current retirees only. nance theretiree healthpremiums, each t q & a l CIVITAS INSTITUTE l 63 in 1978. rst implemented dollars to each state agency each state dollars to in order obligations future the state’s fund better to died bill Folwell’s ts. health benefi retiree for in committee. of the size A major factor to contributing the unfunded liability are the state’s established eligibility criteria generous health retiree nanced when fully fi fi were premiums for a required years of servicewere ve Only fi health of unfunded retiree ort in the growth reign to on and after October hired rst members of 1, 2006, and rst taking offi ce on and after February 1, 2007. ce on and after takingrst offi

American Recovery and Reinvestment Recovery American Act of 2009 WHERE DID THE MONEY GO? MONEY THE DID WHERE

credit and a credit to companies investing in renewable energy production. energy in renewable investing companies to a credit and credit mostly is allocated money This and local governments. state $144 billion in aid to Most of the their budgets. help them balance to in order governments state to education spending. and public Medicaid programs for money was designated bridges, included highway, This infrastructure improvements. $105 billion for investments. energy $288 billion in tax incentives for individuals and businesses. Incentives included a Incentives individuals and businesses. for $288 billion in tax incentives (S.L. 2006-174) in 2006 passed legislation Assembly the General t obligations, tax a homebuyer expansion of the child tax credit, temporary tax credit, payroll and renewable broadband parks, sewers, building, government high-speed rail, ■ ■ ■

The American Recovery and Reinvestment Act (ARRA), often referred to as the federal as the federal to often referred Act (ARRA), American Recovery and Reinvestment The Barack Obama. In response President 17, 2009 by Feb. on law into was signed stimulus bill, 2007, the 1,100 page in late that began recession the deep and lasting economic to or of saving spending plan passed with the intent federal stimulus bill was a massive spending – much of it ARRA included $787 billion in total 3.5 million jobs. 2.5 to creating major categories: in the bill included the following Funding borrowed. 19 the General Assembly fi the General Assembly state employee to become eligible for fully subsidized health insurance premiums for the for premiums health insurance fully subsidized for eligible become to employee state In an eff duration of their retirement. benefi be to service credit” “retirement of years 20 or more have to retirees future requiring 10 with retiring employees State premiums. health insurance fully subsidized for eligible State the state. by covered premiums of service half of their insurance 20 years to will have health of service in the state 10 years enroll with 5 to still be able to will retiring workers Employees payments. premium their own for plan, but will be fully responsible insurance new The health plan. retiree the state of service for not eligible with less than 5 years are fi employees state rules apply to $13,000 for a family of four. $13,000 for a family child in North Carolina – or nearly North Carolina child in $3,200 for every man, woman and for every man, $3,200 health benefits comes to more than comes health benefits The unfunded liability for state retiree retiree for state liability unfunded The 64 l CIVITAS INSTITUTE l q & a billion for state publiceducation, largely to avoid teacher andstaff toward subsidizingthestate’s share expenses. ofMedicaid The billalso included$1.2 of two years viathestimulusbill. The largest share –about $2.35billion–wasdirected Carolina wasslated toNorth receive roughly $6.1billioninfederal dollarsover thespan Carolina’sNorth share stood above 9percent. (seechart) predicted unemployment would belessthan7percent, thenationalunemployment rate remained Bymid-2011,whenadministrationeconomists muchhigherthanexpectations. reality,In national unemployment reached above 10percent withthestimulusplanand ing ataround 9percent anddropping below 8percent by mid-2011. Their for projections unemployment withoutthestimulusplanhadjoblessrate peak- mists predicted thattherecession would acouple fadeafter ofyears, albeitmore slowly. down under7percent by mid-2011.Even withoutthestimulusplan,thosesameecono- ment isprojected to remain below 8percent –thanksto thestimulusplan–anddrop released by anow-notoriouspredictions. In chart White Houseeconomists, unemploy- terms oftheObamaadministration’s ofjobcreation,In thestimulusbillfallswell short program. ■ ■ University research investigating project theeff enhancing unemployment benefi $81 billionfor welfare programs. of thesefundswent Most toward and extending funded with federal stimulus money in North Carolinafunded withfederal involved stimulusmoneyinNorth a Wake Forest nature for ofmany becamesubject ridicule. oftheseprojects Onesuchproject $18 billionfor scientifi c research andothermiscellaneous projects. The dubious ts alongwithanincrease ofthefood stamp ect ofcocaine useonmonkeys.ect layoff s. Alsoincluded q & a l CIVITAS INSTITUTE l 65 ciency, ciency, , cit cut. cit Fund General ll state M. Kathryn Eickhoff Chief Economist, OMB Chief Economist, to have the defi have to You just don’t see people just don’t You running through the streets the running through appropriations. infrastructure highways projects in North for for included $776 million Carolina Funding $72 million treatment, water transit, $66 million for mass for $131 million and bridges, homes. low-income “weatherizing” and $113 million for sewers, for “I am stimulus bill was extremely of the upbeat. the signing reaction to Perdue’s Gov. of effi high level use with a funds to recovery putting the federal to committed all of the challenges facing won'tWhile the funds solve transparency and accountability. The getting North to critical track. back on North and the nation, they are Carolina Carolina and get our budget stabilize economy, our grow our infrastructure, funds will help rebuild said Perdue. North work” back to Carolinians in North Unemployment be a bit misplaced. Carolina to proved Her optimism, however, and years, Two at 9.9 percent. – stood – when the stimulus bill was signed 2009 in February virtually remained rate unemployment unchanged the state’s billion later, than $6 more at 9.8 percent. was $339 million for high-poverty schools, $334 million for special education, and $17 special education, high-poverty million for $334 million for was $339 schools, Start. Head million for backfi was used to stimulus dollars federal $2.4 billion of the Roughly economic overview 1975-1984 l CIVITAS INSTITUTE l 67 1975-1984 age. Virginia, by contrast, contrast, by Virginia, age. Southeast States, 1975-1984 Southeast States,

General Economic Trends: 1975-1984 Trends: Economic General two through went economy the U.S. the mid-1980s, to the mid-1970s From a marked by last half of the 1970s was a period The phases. distinctlydifferent and double-digitdramatic recession while the first half of the 1980s inflation, the followed North economy The Carolina recovery. under the Reagan thrived came somewhat the state for although recovery economy, path of the national later. a shift by in two is indicated In of the recovery Norththe nature Carolina, nonfarm of total share as a employment private indicators: economic the national average. to compared and personal per capita income employment employment private 1984 North 1975 to 1, from Carolina’s in Figure shown As 83 to nonfarm employment of total 81 percent from marginally, rose share North remained Carolina strongly, more grew economy While the U.S. percent. the national aver point behind one percentage experienced stronger growth in private employment, although at much lower although at much lower employment, in private growth stronger experienced 76.5 percent. to nonfarm employment of total 73 percent from levels: Fig. 1. Private Share of Total Nonfarm Employment: Total of Share 1. Private Fig. OVERVIEW 68 l CIVITAS INSTITUTE l economic overview 1975-1984 1 implemented in North Carolina erodedimplemented inNorth purchasing power andconsumer remained relatively stablethroughout seemsthatthetaxincreases theperiod. It million. same rate would asitdidin1975,theprivate sector have keptatleast$639 thestate had taxed1975 and1980.If personalincome from 1976-1980atthe Carolina increasedexplanation could alsobethatNorth personaltaxes between Carolinaslight delay compared inrecovery inNorth to otherstates. Another hiring, whichfreed uplaborfor theprivate market. This may alsoexplainthe to several factors. Onewasthatstate andlocalgovernments slowed their The rebound ofthestate’s economy inthemid-1980scanbeattributed from 81cents to 85cents oftheaverage U.S. percapitapersonalincome. period, althoughfrom 1980to 1985,thestate’s percapitapersonalincome rose Carolina, by contrast,North trailed national average. This meansthatby 1985, Virginians were 3percent more making thanthe U.S. average, Virginia’s percapitapersonalincome grew from 96cents to $1.03. translated into rapidlygrowing percapitapersonalincome. Compared to the neighboringstates,In suchas Virginia, thegrowth employment ofprivate sector personal income. The ofalower dynamiceffect taxtrajectory, however, would have likelycontributed to aneven greater increase in 1 Bycomparison, personaltaxes throughout therest ofthecountry Select Southeast States Southeast vs.Select U.S. Average, 1975-1984 Fig. 2.Per Capita Personal Income: the nationalaverage for theentire time economic overview 1975-1984 l CIVITAS INSTITUTE l 69 North 1975-1984 Carolina, confidence. When taxes stabilized in the early 80s, consumer confidence confidence consumer in the early 80s, stabilized taxes When confidence. recovered. of total and local share the state page) illustrates 4 (on the following Figure once Virginia neighboring states. in Northemployment three and Carolina and local in state with a drop the most dramatic change, again experienced In North 11 percent. to employment of total 12.5 percent from employment but was less pronounced, the trend Tennessee, and South Carolina Carolina, of total share period began, the public sector’s the Reagan-eraonce growth as well. dropped gradually employment did in North employment however, and local government Carolina, State of the that the size say which is also to numbers, in absolute not decrease the In working fact, for increased. the number of employees government 1975 and 1984. between 25 percent by grew and local governments state was still the net result 30 percent, by grew employment But because private economy. North for positive Carolina’s Fig. 3. State/Local Taxes as Share of Personal Income: of Personal as Share Taxes 3. State/Local Fig. 70 l CIVITAS INSTITUTE l economic overview 1975-1984 10% 12% 14% 0% 2% 4% 6% 8% Table 1shows: ofthegrowthMost instate andlocalemployment took place in1976-1979,as US FL NC 9517 9717 9918 9118 931984 1983 1982 1981 1980 1979 1978 1977 1976 1975 GA

SC Fig. 4.State/Local Government Share of Total NonfarmEmployment: TN VA

FL GA SC 17 2.2% 1977 1976 18 2.2% 1984 -0.1% 1983 -0.2% 1982 -0.3% 3.2% 1981 3.9% 1980 4.4% 1979 1978 TN

EMPLOYMENT GROWTH VA

FL GA SC STATE, LOCAL TN VA Table 1 FL States,Southeast 1975-1984 GA SC TN VA 7.6% FL GA SC TN VA US NC FL GA SC TN VA

FL GA SC TN VA

FL GA SC NC TN US VA Figure 5 reflects this expansion. It shows how state taxes, especially state income taxes, grew as a share of personal income in North Carolina between 1975 and 1984.

Fig. 5. State/Local Taxes as Share of Personal Income: North Carolina vs. U.S. Average, 1975-1984 economic overview 1975-1984 l CIVITAS INSTITUTE l 71 As the number of positions increased throughout the late 1970s, North Carolina also reduced the average salary of its public employees in relation to private sector compensation. In 1975 the total compensation per state or local employee was $1.23 per dollar of employee compensation in the private sector. This was much higher than in neighboring states, such as South Carolina, Tennessee and Virginia, which averaged $1.10-$1.11 in public sector compensation per $1 dollar in private sector compensation. As Figure 6 (on the next page) shows, by 1984 state and local governments in North Carolina had brought their employee compensation down to $1.12 per private sector dollar. This rate was identical to that in South Carolina and Tennessee, and two cents below Virginia. 72 l CIVITAS INSTITUTE l economic overview 1975-1984 Total NonfarmEmployment Growth: per DollarofPrivate Employee Sector Compensation Southeast States,Southeast 1975-1985 Fig. 6.State/Local Employee Compensation economic overview 1975-1984 l CIVITAS INSTITUTE l 73 Southeast States, 1975-1985 Southeast States, Southeast States, 1976-1984 Southeast States, State/Local Government Employment Growth: Employment Government State/Local Nominal Per Capita Personal Income Growth: Income Personal Capita Nominal Per 74 l CIVITAS INSTITUTE l economic overview 1975-1984 17 26% 2.11% 1977 2.68% 1976 18 29% 2.32% 2.24% 2.91% 2.14% 1984 2.86% 2.12% 1983 2.82% 2.13% 1982 2.86% 2.14% 1981 2.87% 2.21% 1980 2.83% 1979 2.71% 1978 STATE TAX ON PERSONS: percent ofpersonalincome U.S N.C. and By contrast, populationgrowth, plus .6 2.17% 2.66% state tax revenues doubled in North state taxrevenues doubledinNorth from $7.87 billionto $15.63billion. infl Table 2 Carolina –increasing 99percent Between FY1990 and FY2001, Between FY1990andFY2001, ation, grew by only67percent. DID YOU KNOW? DID YOU Source: Cato Institute 1985-1986 BIENNIUM 1985 session FY 1986: July 1, 1985 to June 30, 1986

General Assembly: House Dems: 82 House Reps: 38 Senate Dems: 38 Senate Reps: 12

Governor: James G. Martin (R)

The 1985 Long Session: Budget Bill SB1/S.L. 1985-479 Passed Senate: June 25, 1985 Passed House: June 25, 1985 Conference Version Ratified: June 27, 1985 Signed by Governor: June 27, 1985

n 1984, the Republican Party had an and instituting a merit-based career exceptional election year in North development salary scale. While Martin ICarolina. Ronald Reagan won the state succeeded in implementing his Career by a landslide. Jesse Helms won a third Development Pilot Program (“Career term – defeating two-term Governor Ladder”) in 16 public school systems, the James B. Hunt in the most expensive groundwork had already been laid in 1984 race to date in Senate history (more than for the Basic Education Program (BEP). In $26 million was spent). And James G. accord with a previous legislative mandate Martin, a member of the U.S. House of that the state implement a “rigorous Representatives, easily won election as academic course of study for the purpose governor, taking over the office vacated of ensuring a quality education,” the 1985 by Hunt. In spite of vigorous opposition General Assembly launched the eight-year, from the Democratic-controlled General $799 million Basic Education Program

Assembly, Martin fought hard to fulfill his (S.L. 1985-479). The stated purpose of 1985 session l CIVITAS INSTITUTE l 75 campaign promise to cut taxes by $489 the plan was to improve North Carolina’s million on groceries, business inventories flagging school system by increasing state and intangible property. Once the dust education funding by 34 percent and cleared, the 1985-1987 budget decreased establishing statewide standards for school taxes by $171.5 million. construction, class sizes, instruction and curriculum. Although the program was Not unlike his Democrat predecessor, ultimately superseded by other initiatives, Martin also ran on an education platform BEP set the stage for massive and ongoing that promised to improve North Carolina funding for the state public school system. schools by implementing a universal curriculum, hiring more teachers, January ➤ In a move to show the new ➤ Jim Martin is sworn in as governor, governor who is boss, the Senate becoming only the second passes a resolution attempting Republican to hold the office since to force Martin to deliver his 1901. supplemental budget to the General Assembly by February 28 ➤ Fulfilling one of his campaign (Res. 1985-1). promises, Governor Martin presides over the first Council of ➤ Like Speaker Ramsey, Senate State meeting that is open to the public. The Council is comprised of 1985 HEALTH & HUMAN SERVICES BUDGET the state’s top elected officials and Total Appropriations $703 million meets to discuss state matters and Major Items: exchange information. Medical Assistance (Medicaid): $203 million ➤ Speaking before a group of North Mental Health: $105 million Carolina Chamber of Commerce Hospitals & Centers: $144 million executives, Governor Martin Health Services: $72 million attempts to build support for his Social Services: $71 million campaign promise to lower taxes by cutting the business inventory Majority Leader Kenneth tax, the intangibles tax, and the Royall (D-Durham) attempts to state sales tax on food. outmaneuver Governor Martin ➤ Martin rejects demands from by filing a bill that repeals the legislators for a state lottery, calling intangibles tax and gives tax it a “tax on the weak” that “bleeds credits to low-income earners. money from a lot of people who Royall’s plan also raises the state need it.” sales tax one-half cent (SB 3). ➤ In an effort to co-opt Martin’s tax ➤ Governor Martin and the General break plan, Speaker of the House Assembly arrive at a compromise Liston Ramsey (D-Madison) offers in which the governor will outline his own proposal; but it only his budget in the State of the State includes partial cuts of the same address on February 28, but then taxes. submit the details at a later date, giving the governor time to finalize February his recommendations. ➤ Responding to General Assembly ➤ In his State of the State address, inquiries about his supplement Martin proposes: repealing to Governor Hunt’s transitional the state sales tax on food and budget proposal made in nonprescription drugs; repealing December 1984, Governor Martin the business inventory and says he will outline his own plan intangibles taxes; raising salaries in his State of the State address on for state workers and teachers by 5 February 19. The details, promises percent; and letting voters decide Martin, will be available by March. on whether to give the governor

l CIVITAS INSTITUTE l 1985 session 76 l CIVITAS veto power. 1985 session l CIVITAS INSTITUTE l 77 Security reports Commission that fell unemployment statewide in January 7.1 percent 6.7 to from in February. percent a introduces (R-Moore) 375). bill (HB veto gubernatorial (SB 68) of the Basic Education (BEP), which includes an Program positions and in teaching increase complete” “fundamentally a new curriculum that includes statewide and technical classes in vocational education, the arts, and other nontraditional courses. Martin Governor asks the Senate, tax his proposed consider House to House Minority Betsy cuts. Leader subsequently (R-Davie) Cochrane Relief Act of “Tax sponsors the (HB 520). 1985” their House Democrats consider tax package, is nearly which own that except Martin’s, identical to only half: by it cuts taxes $184 years. two million over “will that the General Assembly raise for a major pay provide year.” this teachers bill. veto gubernatorial the to Capitol out of the state businesses, and reimbursing reimbursing and businesses, tax inventory the for businesses counties. paid to North Carolina’s Employment Employment ➤ North Carolina’s James Craven ➤ Representative its version ➤ Senate approves The his tax plan stalled in the ➤ With request, ➤ the governor’s Ignoring announces Jordan ➤ Lt. Governor ➤ House rejects the The Martin ➤ his office Governor moves April for not being more supportive not being more of for Speaker House funding. education Ramsey that the governor remarks mention the Basic even “didn’t Education Plan.” budget which of his $9.96 billion in tax cuts, includes $328.4 million and a education $185 million for all for increase tuition 10 percent Lt. Governor students. UNC system his support professes (D) Jordan “will that it the plan and vows for get a fair hearing.” a lottery introduces bill (R-Forsyth) in the House (HB 232). expressing a resolution approves the proposed over their concern tuition increase. 10 percent bill tax Martin’s sponsors Governor (SB 148), which entails repealing sales tax on state the 3 percent the intangible repealing food, individuals and assets tax for Democrats assault Martin’s address address ➤ assault Martin’s Democrats Martin➤ details Governor releases Rhodes Frank ➤ Representative of Governors ➤ UNC Board The Redman (R-Iredell) William ➤ Senator March alcohol programs in mental health centers in mental health programs alcohol and 4.8% to 9.6% for teachers 9.6% for and 4.8% to CAPITAL COMPENSATION • improvements $29 million in capital • capital needs community college $21 million for OTHER • to dedicated beverages on mixed receipts Tax • markets farmers’ $5 million reserve for • employees Salary most state of 9.6% for increase • retirees state 4% cost-of-living for increase 1985 Other Changes Significant more modern Administration funding to cases of rape and incest Building in order to be closer to his and fetal deformity and when staff. “the woman’s health would be impaired by the pregnancy, as May determined in the sole discretion ➤ Senate Majority Leader Royall of a physician.” The new law brings tries to generate support for his about a 70 percent decrease in lottery bill (SB 532) and calls for 34 elective abortions performed percent of the profits to be spent on during the first four months of education. Reiterating a claim that fiscal year 1985-1986.1 will be heard frequently over the ➤ The Senate Ways and Means next 20 years, Royall says: “One thing Committee recommends the we don’t want to cut is education. lottery bill be brought to a vote. This will keep education No. 1.” Majority Leader Royall is optimistic: “I think it stands a fair chance in June the Senate.” ➤ Senate Democrats release their $212 million tax cut plan. It includes a partial repeal of the inventory Source of Budget Funds: 1985-86 tax, the intangible tax and the food sales tax; a reduction in the inheritance tax; and tax breaks for the elderly, farmers and parents. ➤ The House Education Committee sends to the House floor their version of the BEP (SB 68). ➤ On June 27, the General Assembly passes an $11.4 billion budget bill (S.L. 1985-479) that includes the $223 million BEP and a 5 percent raise for state employees. The capital budget bill is passed the July same day (S.L. 1985-480). ➤ An Act to Provide Broad-Based Tax Relief to North Carolina Citizens is ➤ Among other things, the new ratified on July 9 (S.L. 1985-656). In budget also fulfills Governor addition to providing a 20 percent Martin’s campaign promise to credit on the inventory tax and a cut the State Abortion Fund. The partial repeal of the intangibles budget reduces state funding tax, the law gives a $15 to $25 for elective abortions from $1.4 credit to persons who make less million to $924,500 annually for than $15,000 and rescinds the FY1986 and FY1987 – a 30 percent sales tax on food purchased with decrease. The new law also limits food stamps.2

1 Katherine White, “State-Paid Abortions Plunge in N.C. After Program Altered,” Charlotte Observer, December 14, 1985, Main News section. 2 Luebke, however, notes that federal legislation had already been passed requiring the state to repeal the sales tax on groceries pur- l CIVITAS INSTITUTE l 1985 session 78 l CIVITAS chased with food stamps. Paul Luebke, Tar Heel Politics: Myths and Realities (Chapel Hill, NC: University of North Carolina Press, 1990), 40. 1985 Significant Tax Changes

$171.5 million in tax cuts per the Tax Reduction Act [S.L. 1985-65]: ➔ Tax credits to people with low and moderate incomes ➔ 20% credit on inventory tax ➔ Partial repeal of the intangibles tax ➔ Repeal of sales tax on food purchased with food stamps

➤ The lottery referendum bill fails Jordan maintains his innocence, to pass, but is referred to a study claiming that he did not committee. “knowingly do anything illegal” but “realize that I was in error, for ➤ The General Assembly approves which I sincerely apologize.” $28.7 million in capital improvements to the UNC system (S.L. 1985-661). September ➤ In an effort to streamline his staff, August Governor Martin moves his office back to its traditional place at the ➤ Governor Martin says he will state Capitol building. Also, Martin support a half-percent increase in says he just “like[s] that old office.” either the state or local sales tax (bringing it to 5 percent) if the U.S. ➤ Hurricane Gloria strikes the Outer Congress ends a revenue sharing Banks. provision that annually brings in $120 million to North Carolina’s October cities and counties. ➤ NCDOT estimates that $5 billion of improvements are needed for ➤ Senator John Jordan (D-Alamance) North Carolina’s roads by 2000. is sentenced to a two-year suspended sentence with two years probation on charges of November ➤ bribery solicitation, extortion, Governor Martin’s Urban conspiracy and misconduct in Transportation Task Force 1985 session l CIVITAS INSTITUTE l 79 office. Despite pleading guilty, recommends various tax increases 80 l CIVITAS INSTITUTE l 1985 session Newfundingfor BasicEducation ° testing program begins End-of-course ° BasicEducationProgram enacted ° $14millionfor microcomputer labs ° $11millionfor apilotCareer ° $14millionfor dropout prevention ° $5millionfor remedial summer ° $34millionto reduce classsize in ° Nochangefor college community ° Average increase of4%for in-state and ° Public 3,411(0.3%)decrease Schools: ° P Development Program 1986-87 programs in1985-86;$10million grades 7through 9 and computer equipment) summer school, andscience, math, dropoutreduction, prevention, students 11% f community collegecommunity enrollment increases beginswith1995. onUNCenrollment increasesNote: Data beginswith1989;dataon 1985 EDUCATION FUNDING rogram ($74millionfor class-size OTHER EDUCATION CHANGES TUITION & FEE INCREASES ENROLLMENT CHANGES or out-of-state UNCstudents or out-of-state December Due to concerns that North Due to concerns➤ thatNorth The Legislature’s➤ Fiscal Research enact signifienact canttaxincreases during instituted.) the House, wasthisrulefinally Republicans gainedcontrol of session. (Only the in1995,after not meetonFridays whenin workweek by proposing it theGeneralAssembly’sshortening Lt. Governor Jordan considers is becoming too professional, Carolina’slegislature” “citizen fuel. 4.5 cent localandstate salestaxon increase inthegastaxandanew Fund. These includeaone-cent to raiserevenue for theHighway increasing stream ofrevenue. who canplanonasteadily bodes well for budgetplanners low-inflation pattern” –atrend that locked into astablelow-growth, Carolina’s economy “seems to be analyst David Crotts, North levels. According to seniorfiscal arecollections above anticipated thatGeneralFundDivision projects were theonlystates intheUnionto Alabama, Ohio and North Carolina Alabama, OhioandNorth Source: Center onBudgetandPolicy Priorities DID YOU KNOW? DID YOU the 2001recession. 1985-1986 BIENNIUM 1986 session FY 1987: July 1, 1986 to June 30, 1987

General Assembly: House Dems: 82 House Reps: 38 Senate Dems: 38 Senate Reps: 12

Governor: James G. Martin (R)

The 1986 Short Session: Budget Bill HB2055/S.L. 1986-1014 Passed Senate: July 10, 1986 Passed House: July 11, 1986 Conference Version Ratified: July 15, 1986 Signed by Governor: July 15, 1986

overnor Martin’s second year in General Fund and also raised the retail gas office would prove less contentious tax two cents and the wholesale gas tax Gthan 1985, although not without by 3 percent. Despite the back and forth of controversy. Unlike the previous year’s rhetorical barbs, as well as the regressive long session, debate over the budget nature of the gas tax, in general, Jordan’s was limited to additional spending for compromise won the day. existing programs. The major point of contention between the Republican In July, both parties left Raleigh to governor and Democratic General concentrate on the upcoming November Assembly concerned highway funding – elections. Although Governor Martin namely, Martin’s proposal to increase the campaigned hard for fellow Republicans, gas tax to fund new highway construction Democrats picked up two seats in each in the mountains and a request to shift chamber.

funding for certain highway programs 1986 session l CIVITAS INSTITUTE l 81 to the General Fund. Democrat leaders attacked Martin’s plan as a thinly veiled January attempt to take money from education in ➤ Governor Martin declares his intention order to build roads. Both Democrats and to fund his Career Ladder program Republicans alike wanted to avoid raising without raising taxes: “Raising teacher taxes during an election year. Nevertheless, pay ought to be our first priority… But Lt. Governor Jordan, who was preparing we should not have to raise taxes to pay for his own 1988 run at the Democrat for Career Ladder programs if we have gubernatorial nomination, took the lead in our priorities in the right order.” pushing through a counterproposal that ➤ Martin claims federal reductions in state permitted a limited transfer of highway funding may limit his ability to push funding (for driver education) to the through additional tax cuts in 1986. 82 l CIVITAS INSTITUTE l 1986 session April March February target for thesecond monthinarow. for December fallbelow theprojected the firsthalfofFY1985-86,collections Despite asurplusintaxrevenues for Lt. Governor➤ BobJordan and The SpecialCommittee➤ on With➤ thestate Highway Fund in After reviewing➤ the $10 millionperyear. program that would cost taxpayers Carolina “North Teaching Fellows” recruit more teachers through a educators andlegislators, to a coalition ofbusinessmen, by thePublic Forum, School applaudaproposal (D-Madison) House SpeakerListon Ramsey of upto 3percent. tax implement ahotel occupancy cent and local salestaxone-half allow counties to raisetheir recommends thattheLegislature Local Government Revenue costs. of paying for rising transportation asameans rules outastate lottery other fundingalternatives. Martin at the gastaxandbegins looking remains undecidedaboutraising infrastructure, Governor Martin tobusiness community buildnew and increasing pressure from the “increasingly desperate” shape Carolina MuseumofArt. North the state’s symphony andthe decidesagainstprivatizing Martin Study Commission, Governor recommendations ofhisEfficiency May Spending increases inthe ➤ Governor Martin submitshis Governor➤ Martin are to beoffset by a2 governor’s recommended budget session. approved duringthe1985long million to the$8.1billionbudget proposed budgetadds$533.6 workers andteachers. Martin’s a 3.2percent pay increase for state andcontains prison construction for a10-year plandevoted to new budget alsoallocates $51.4million education to theGeneralFund. The fundingforand shifting driver 2 Fund by increasing thegastax raise $134millionfor theHighway The budgetincludesaplanto revised budgetfor FY1986-87. unspent revenue from FY1985-86. state students, and $329millionin in tuitionfor in-state andout-of- increase inthefueltax,increases Average increase of4%for in-state and12% ° Public 1,765(0.1%)decrease Schools: ° Statewide promotion program implemented ° $14millionfor improvements inUNC ° $4millionincrease for Teacher Effectiveness ° $6millionto reduce theallotmentratioin ° of26%for Increase in-state and95%for out- ° 1 / f accounting systems Program g of-state college community students or out-of-state UNCstudents or out-of-state 2 rade 9,to 1teacher 26pupils for every cents from 12 1986 EDUCATION FUNDING OTHER EDUCATION CHANGES TUITION & FEE INCREASES ENROLLMENT CHANGES 1 / 2 to 15 cents, cents, 15 to 3 / 4 cent cent 1986 session l CIVITAS INSTITUTE l 83 support if even a gas tax increase is plan fund transfer his highway not personally “I would rejected. for 200 years.” Lt. Governor Jordan Jordan Lt. Governor 200 years.” for Speaker Ramseyand House also in-state proposed oppose the tuition increase. money in more for “need a despite will Democrats Fund,” the Highway not support unless a tax increase Martin Governor also convinces “But will do so. Republicans to (Democrats) be passing a we objections the of gas tax over “The asks Ramsey. Republicans?” born weren’t We is no. answer Ramsey also opposes yesterday.” revenue General Fund transferring Fund. the Highway to Governor Martin➤ Governor he will still states ➤ RamseyHouse Speaker that states June Total Days In Session Each Biennium Days Total member John Jordan: “It is not in member John Jordan: the tradition of public education in North It is a departure Carolina. of followed have we the philosophy Jordan declares that Martin’s 3.2 that Martin’s declares Jordan is workers state raise for percent enough.” “just not the proposed contests Governors per student $16 increase $10 to Asserts tuition. in-state board for Democratic Lt. Governor Bob ➤ Lt. Governor Democratic of the UNC Board ➤ Likewise, Medical Assistance (Medicaid): Medical Assistance Mental Health: Hospitals & Centers: Health Services: $218 million Social Services: $145 million $106 million $74 million $71 million 1986 HEALTH & HUMAN SERVICES BUDGET SERVICES & HUMAN 1986 HEALTH Total Appropriations Appropriations Total Major Items: $729 million 84 l CIVITAS INSTITUTE l 1986 session 1986 Significant Tax Changes 982] [S.L.1986- taxonhouseholdpersonalproperty Repeal oflocalgovernment property repeal in1988[S.L.1986-1031] insuranceRestructure premiums taxsystem withauniform rate; complete system (estimated revenue $198million)[S.L.1986-906] mostlydesignated for ontheuseofmoney; publicschoolcapitalneeds restrictions Authorize localgovernments to raisesalestaxanadditional0.5%withsome 172.2 millionin1986-87dueto “Roads to theFuture” Bill[S.L.1986-982]: Jordan proposes➤ analternative Following➤ Martin’s lead, Lt. After Governor rejecting ➤ Martin’s confessesHouse SpeakerRamsey ➤ ➔ ➔ ➔ of 2 includes thegovernor’s gastax plan for highway fundsthat Jordan acknowledges. more ofagastax,he’d getmore,” really believe ifhewere to askfor asksforGovernor one. Martin “I a taxincrease if but willsupport propose ahighergastaxhimself, Governor Jordan states hewillnot comments Martin. turn againstthat2 the Senate Financethe Senate Committee programs to theGeneralFund, plan to transfer Highway Fund vote for it.” won’tcertainly askDemocratsto thegovernor“If isopposedto it,I have seen.” But,cautionsRamsey, to getthemoneywe needthatI that Jordan’s planis “the bestway sales taxongas. increase inthewholesalestate Exempt DOT from state andlocalsalestax Raise PowellRaise Billdistributionfrom 1 Gas taxincreaseGas 2 3 / 4 cents, plusa3percent 3 / 4 cent tax,” ¢ pergallonplus3%salestaxonthewholesaleprice July The Houseversion➤ ofthehighway program costs to theGeneralFund. percent, driver education andshifts increases thewholesalegastax3 increases thegastax2cents, approves acompromise billthat request. driver educationfundingtransfer Governor Martin’s $27 million appropriations bill(HB968)drops 3 / 8 ¢ to 1 to Unquestionably, there isprogress. pays asmuchintaxes outtwice 3 / 4 as heformerly gotinwages. ¢ The average Americannow

H. L.Mencken 1986 session l CIVITAS INSTITUTE l 85 Source: The Tax Foundation Tax The Source: DID YOU YOU DID KNOW? highest in the United States. States. in the United highest highest state income tax rate income state highest In 2005, North the had Carolina (8.25%) in the South(8.25%) 8th and the of Transportation of Transportation approves safety $1.2 million in highway Transportation improvements. Secretary states, Harrington James of them have many “Plans for been sitting on the shelf awaiting the have that we Now funding. passes both chambers on July passes both chambers percent a 6.5 receive Teachers 15. what Governor double raise, Martin proposed. originally ➤ NorthThe Department Carolina ➤ budget bill (S.L. 1985-1014) The August Select 1985-2005 Southeast States, million budget bill and sends bill and sends million budget will Teachers the Senate. it to raise and a 6.5 percent receive a receive will workers most state $900 raise. option of raising the counties the sales tax one-half cent, 5 percent the sales tax to bringing also that the tax was (recall one-half by increased in 1983) cent (S.L.1985-906). bill appropriations the highway the bill increases The prevails. 11 tax from fuel excise motor of plus 3 percent 14 cents, to cents and wholesale price, the average the driver funding for transfers the General to education program (S.L. 1985-982). Fund The House approves a $435.9 ➤ House approves The gives ➤ General Assembly The of (SB 866) ➤ Senate version The Nominal Per Capita Personal Income Growth: Income Personal Capita Nominal Per 86 l CIVITAS INSTITUTE l 1986 session November October September Despite vigorous➤ campaigning by proposesGovernor a$60 ➤ Martin After receiving➤ asmallerraisethan work.” money, we’re goingto putitto two seatsinbothchambers. Republicanslose Governor Martin, with theirsalestaxearnings. counties would pay backtheloans sewer Citiesand plantproduction. million loanprogram for water and that theydon’t it.” deserve “Ten percent would betough, not Comments Lt.Governor Jordan, ask for a10percent raisein1987. teachers, state employees vow to December Governor Martin callsforGovernor full ➤ Martin 1986 Other Significant Changes 1986 Other $9millionfor mentalhealth • $8 millionfor corrections positions and • OTHER $157millionfor Highway Fund operationsand • Legislators andsubsistence getacost-of-living • increase of$75/month(average Salary of6%)for • Average increase of6.5%for teachers salary • HIGHWAYS COMPENSATION on how to spendfunds. boards begiven more autonomy but requests thatlocalschool state’s BasicEducationProgram funding –$800millionofthe programs; $12millionfor prisoncapital special appropriation for highways capital increases, including$30millionasa increase most state employees economic overview 1985-1989 l CIVITAS INSTITUTE l 87 1985-1989

Southeast States, 1985-1994 Southeast States,

Nominal Per Capita Personal Income Growth: Income Personal Capita Nominal Per General Economic Trends: 1985-1989 Trends: Economic General a period of experienced States the United half of the 1980s, During the latter right labor market also peaked at full employment The growth. economic strong 1990. in late began the recession before of the country. North gained on the rest In personal income, of Carolina terms of the 89 percent to 86 percent from rose personal income per capita state’s The meaning that the same, remained states in nearby Income levels average. U.S. the same At gained on or edged out its neighbors. economy North Carolina’s 2.9 to 2.6 percent going from also increased, taxes personal income state time, of personal income. percent GDP growth. state in strong originated gain in per capita personal income This that above was a whole 1 percent rate annual GDP growth North Carolina’s North as a whole, States Like the United Carolina’s of the national economy. with unemployment ‘80s, at the end of the employment full reached economy in 1989. 3.6 percent to in 1985 5.8 percent from dropping OVERVIEW 88 l CIVITAS INSTITUTE l economic overview 1985-1989 than intheprivate sector. state andlocalgovernment compensation thusincreased 4.8percent faster dollar.had increased private sector to $1.23perevery period, thefive-year Over dollarofemployeeevery compensation inthe private sector. By1989,thisshare Carolina state orlocalemployee wascompensated with,onaverage, $1.17for employee compensation inrelation to 1985,aNorth theprivate market.In private sector, state andlocalgovernments increased disproportionately their didnotincreaseAlthough thepublicsector employment faster thanthe employees to theirpayrolls in1985-1989. workforce. absolute numbers, In state andlocalgovernments added57,650 state andlocalemployees, whichhovered Carolina’s at11.4percent ofNorth growthprivate sector stabilized. Asimilartrend wasseenintheshare of steadily thelatter between 1975and1984.Over halfofthe1980s, however, As seenpreviously, Carolina theprivate employment share increased inNorth State/Local Taxes asShare ofPersonal Income: North Carolina, 1985-1994 North economic overview 1985-1989 l CIVITAS INSTITUTE l 89 current current Southeast States, 1985-1994 Southeast States, State/Local Taxes as Share of Personal Income: of Personal as Share Taxes State/Local State employees also received a 5 percent raise in 1985, plus a one-step in 1985, plus a raise 5 percent a also received employees State Over of one-step the increases or more. received likewise teachers increase; of at an average salaries increased and teacher both state next years, four 1985.) was launched in Program the Basic Education (Recall that 5.5 percent. rate sector public at a faster compensation increased also states Neighboring sector. than in the private an by sector in North private compensation increased Meanwhile, Carolina 1985 and 1989, while inflation between per year of 6.86 percent average up in public sector ramp The salaries reversed per year. 3.67 percent averaged employee government that brought 1970s the late from trend the positive sector. in line with the private more compensation taxes.” As such, it includes income taxes and taxes on personal property. and taxes taxes income such, it includes As taxes.” NOTE: This figure does not include sales tax, but is the standard measure used by the Bureau of Economic Analyis for “personal “personal Analyis for of Economic the Bureau used by measure does not include sales tax, but is the standard figure This NOTE: 90 l CIVITAS INSTITUTE l economic overview 1985-1989 State/Local Taxes asShare ofPersonal Income: North Carolina vs.North U.S. Average, 1985-1994 1987-1988 BIENNIUM 1987 session FY 1988: July 1, 1987 to June 30, 1988

General Assembly: House Dems: 84 House Reps: 36 Senate Dems: 40 Senate Reps: 10

Governor: James G. Martin (R)

The 1987 Long Session: Budget Bill HB1514/S.L. 1987-738 Passed House: August 5, 1987 Passed Senate: August 6, 1987 Conference Version Ratified: August 7, 1987 Signed by Governor: August 7, 1987

osturing for the 1988 gubernatorial January election, both parties ostensibly ➤ Changes in the federal tax code Punited under the banner of bipartisan eliminating certain deductions promise cooperation. In an effort to shed the to produce a windfall of $25 million to traditional Republican image of being $40 million for N.C. budget writers if the anti-education, Governor Martin began General Assembly votes to conform to the year by promoting educational the new federal guidelines. According programs: in particular, a controversial to Lt. Governor Bob Jordan, “Basic plan to fund new school construction education will be the first priority, then with a $1.5 billion local-option bond pay increases [to state employees].” program. While Democrats in the General Assembly opposed Martin’s plan because ➤ Governor Martin declares that his top

it burdened local districts with interest priorities for the session are his "Career 1987 session l CIVITAS INSTITUTE l 91 payments, the only alternative they Ladder Program" and full funding for proposed was to raise the corporate the “Basic Education Program” (BEP). income tax from 6 percent to 7 percent. As ➤ Even though he “hasn’t seen the news of North Carolina’s slumping national governor’s proposals,” Lt. Governor test scores reverberated throughout the Jordan has “some real problems” with state, Republicans and Democrats alike Martin’s new teacher development tried to outdo one another in increasing program. educational funding. In the end, most of Governor Martin’s education proposals ➤ A study by Citizens for Tax Justice finds were enacted, with the exception of the that low-income taxpayers in North bond project. Instead of passing the bond, Carolina pay the same taxes, measured Democrats raised taxes. as a percentage of income (7.0 percent), 92 l CIVITAS INSTITUTE l 1987 session March February Senator Ken Royall (D-Durham) Senator KenRoyall (D-Durham) ➤ proposesGovernor a$19.59 ➤ Martin Representative➤ Johnathan Rhyne proponentsLottery pointto ➤ The Public➤ Forum, School a hisState oftheState address,In ➤ BudgetCommission,The Advisory ➤ following us.” plan. …I’m glad he’s finally States Royall, “That’s oureducation Democratic educationagenda. the ofhijacking accuses Martin major taxincreases. budget withoutrelying onany balancesstate the workers. Martin increase for teacherssalary and Ladder Program, anda4.5percent of BEP, expansionoftheCareer twoexpansion –for years thenext funding –minussummerschool recommendationsHis includefull billion budgetfor FY1987-1989. share oftheirincome. tax burden, paying 7.1percent asa taxpayers shouldered theheaviest as wealthy taxpayers. Middle-class (R-Lincoln) proposes abill(HB will holdareferendum onalottery. Virginia, whoseNovember ballot needs. taxes inorder to fundeducation the GeneralAssembly to raise educators andlegislators, urges coalition ofbusinessmen, Carolina.”the goodofallNorth inorder bipartisanship “to unite for callsforGovernor Martin recommended budget. legislators, Martin’s rejects which isdominated by Democratic 1987 Other Significant Changes 1987 Other May April With➤ a projected surplus of$150 aspeechbeforeIn ➤ theHome $7millioninnewfundsfor specificlocal • $328millioninGeneralFund and$68 millionin • LOCAL FUNDS EstablishPublic BuildingCapital School Fund and • $165millionin1987-88and$146 • increase of5%for teachers Salary andmoststate • CAPITAL COMPENSATION legislative workweek to four days.) the shortening had supported else.” (Recallthatin1985,Jordan and we shouldlookatsomething then thissystem isnotworking we’re stillhere thisyear onJuly15, bill isnecessary, butalsostates “If Jordan questionswhetherthe Assembly sessions. Lt.Governor 148) to limitthelengthofGeneral the GeneralAssembly to cut urges million, Governor Martin inthebond. part thatchooseto take those districts pay for in newschoolconstruction $1.5 billionbondissuethatwould priorities andstresses hisplanfor a education isoneofhistop reiteratesGovernor that Martin Builders Association ofCharlotte, programs andnonprofit organizations Highway Fund state aidto non-state entities FacilityCritical School NeedsFund non-state libraries agencies, colleges, community universities, and 1988-89 for capitalimprovements to state employees 1987 session l CIVITAS INSTITUTE l 93 Charlotte Observer reports that legislators filed over 700 filed over that legislators bills during the 1987 session for appropriations barrel” “pork local than $100 million. more totaling controlled House approves a four- House approves controlled one-cent “temporary” increase year The sales tax. the 5 percent to school be used for is to revenue construction. rejects Governor Committee veto for request second Martin’s His was first request power. Martin, in 1985. Declares rejected “[It 211 years, is] shameful that for the only in North have Carolina – been – not once people never on our governor vote to allowed the veto.” having The ➤ The The Senate Constitution ➤ Senate Constitution The June taxes. “Whenever we have an “Whenever have we taxes. opportunitywith a very – nice cut taxes – to rate growth revenue handicap Norththat uniquely he do it,” ought to we Carolina, Martin Subsequently, advises. tax cut a 15 percent recommends of the next each for on intangibles cut a 30 percent for years, two overall. “The truth of the tax cut: Martin’s revenues the way with is, matter own see in my I don’t fluctuate, can make tax we way view any “To Jordan, Adds cuts at this time.” at this point in time may cut taxes go to have would mean the state money.” out and borrow the Democratic- bond proposal, Lt. Governor Jordan attacks Jordan ➤ Lt. Governor Martin’s ➤ In Governor opposition to Individual Income Tax Revenue Compared to Personal Income to Personal Compared Revenue Tax Individual Income 94 l CIVITAS INSTITUTE l 1987 session 1987 Significant Tax Changes 1987 Other Revenue1987 Other Sources &Actions The indefinitely Senate ➤ postpones • until the1988session. funding, thuspostponingdebate measure to continue current be resolved by passingastopgap disagreement over fundingcould claimsthatthe (D-Madison) House SpeakerListon Ramsey revenue withoutraisingtaxes. claims hecanfindtheneeded increase whileLt.Governor Jordan consideration oftheHousetax Enact newexciseEnact taxof5 Conform to Internal Revenue Code updates [S.L.1987-778] The Facilities School Finance of1987[S.L.1987-622,1987-813]: Act Tax credits businessinvestments for certain [S.L.1987-852] 2.25% ofwages[S.L.1987-17] Lower contribution employment (payroll security tax)rate for employers from 2.70% to [S.L. 1987-568] New income taxcredit for businessesthatcreate jobsin “severely distressed” counties gallon [S.L.1987-315] Increase thepergalloncredit for motor carriers’ purchases offuelsfrom 12 exciseIncrease taxonliquorfrom 22.5%to 28.0% [S.L.1982-832] 1987-1402] Hold localgovernments harmless for losses dueto Facilities School Finance Act ➔ ➔ ➔ ➔ ➔ full exemption inventories withafullexemption $500 ormore eachmonth Increase 20% property taxexemption for 20%property Increase wholesaleandretail inventories to Replace 40%income taxcredit taxes for paidonmanufacturing property Change remittance to monthlyfor from quarterly employers whowithhold Repeal provision allowing merchants to retain 3%ofretail salestaxcollected corporateIncrease income taxrate from 6%to 7% ¢ on each 30-dozen caseofeggssoldfor oneach30-dozen consumption [S.L. July With➤ theHouseandSenate (by promising thatthestate will but repeals thelocalinventory tax tax from 6percent to 7percent, plan raisesthecorporate income compromise. Essentially, Jordan’s Lt. Governor Jordan offers a to Martin’s bondproposal, through asanalternative to push Democrats are trying billthat a schoolconstruction unable to come to terms over ¢ to 14 to ¢ per 1987 session l CIVITAS INSTITUTE l 95 The law also effectively effectively also law The 1 to a 5 percent pay raise for state state raise for pay a 5 percent to includes a raise This employees. Martin, Governor who at for the highest $105,000 becomes States. in the United paid governor raises the sales tax by eliminating sales tax by raises the sales merchant the 3 percent many collected by tax discount retailers. Act of 1987” Finance Facilities July 16. As (S.L. 1987-622) on act the raises mentioned above, fund tax to income the corporate school construction. In addition to School Building the Public creating and the Critical Fund Capital the law Needs Fund, School Facility also establishes the Commission a five- Needs, on School Facility by appointed member board leadership of the the legislative General Assembly. a tax about having concerned raising the label hung on him for says: tax, Jordan income corporate like hanging “Some things you neck and some things your around with no problem I have don’t. you that one.” calls the Jordan Hecke Jr. Van much better much, “a compromise bond Martin’s plan [than Governor chief while Phil Kirk, Martin’s plan]” for the governor credits of staff, school construction on “getting the agenda.” years. The General Assembly agrees agrees ➤ General Assembly The The governor ratifies the “School ratifies the ➤ governor The ➤ whether he is In to response ➤ Democratic Chairman Jim State August , 46. Heel Politics Tar reimburse local governments for for local governments reimburse wins law The the loss in revenue). after the House concurs approval with a Senate amendment that urban municipalities reimburses the from that will lose revenue tax. of the local inventory repeal increase business taxes a result, As than $1 billion (over more by in 54 the first increase 10 years); Luebke, Luebke, ENROLLMENT CHANGES ENROLLMENT 1 TUITION & FEE INCREASES FEE & TUITION OTHER EDUCATION CHANGES EDUCATION OTHER 1987 EDUCATION FUNDING 1987 EDUCATION rogram ($125 million in 1987-88 and $260 ($125 million in 1987-88 and $260 rogram or out-of-state UNC students f of-state community college students community college of-state million in 1988-89) 1988- million in 1987-88 and $88 million in 89) ($21 million in 1987-88 and $41 teachers million in 1988-89) in 1988-89 clerical positions million in 1987-88 for clerical and and $42 million in 1988-89 for instructional support positions) Career a 16-pilot continue in 1988-89 to Program Development at UNC Piedmont training equipment at Central new and $3 million for College; Community expanding industry support P ° Schools: (0.1%) decrease 590 Public ° and 8% in-state of 5% for increase Average ° out- for and 39% in-state Increase of 12% for ° ($39 BEP with additional teachers Enhance ° education vocational Increase funding for ° summer programs remedial $17 million for ° non-faculty positions ($15 Additional ° $12 million in 1987-88 and $26 million ° medical education expansion $12 million for ° optical disk manufacturing $7.5 million for ° Basic Education Increase funding for 96 l CIVITAS INSTITUTE l 1987 session November October September Legislature➤ adjournsonAugust 14. Cobb Leader Larry Senate Minority ➤ The ratifiesthe$18.4billion Senate ➤ In aspeechbeforeIn ➤ school goesonretreatGovernor ➤ Martin Contemplating➤ hisown runfor the Martin presented.”Martin bill istheleanbudgetwhichGov. “by andlarge, whatwe have inthis comments that (R-Mecklenburg) pay raisefor state employees. Ladder program, anda5percent two years, fundingfor theCareer such asBEPfundingfor thenext most ofGovernor Martin’s requests, August 7. The finalbillincludes budget bill(S.L.1987-738)on $112,000. Spangler, is whoseannualsalary than UNC-system President C.D. however,Martin, stillmakesless same day. hold bondreferendums onthe counties agree toparticipating pledges to help “rally support” if Martin school construction. votes asanalternative for funding continues to promote localbond administrators, Governor Martin prepare for the1988election. with hisadvisorsinorder to care whatthereasons are.” being fiscallyresponsible. Idon’t of the[fiscal]year, thenyou’re not adopt abudgetby thebeginning Charges Renfrow: you don’t“When for theirhandlingofthe budget. andotherlegislative leaders Martin Renfrow (D) criticizes Governor governor’s office, State Auditor Ed December North Carolina becomes oneof North ➤ oa prpitos $651million Major Items: Total Appropriations to pickasite by July1988. isscheduled Energy Department budget of$270million. The U.S. in 3,000jobsandhave anannual Collider. The would project bring billion Superconducting Super eight finalistsbiddingfor the$4.4 as a share of the Department of Health ofHealth as ashare oftheDepartment 1987 HEALTH &HUMANSERVICES BUDGET Assistance –whichoperates Medicaid For outlays FY1985,Medicaid were 28 and Human Services (DHHS) budget. (DHHS)budget. and HumanServices etlHat: $11million $49million $73million $21 million $146million Health: Mental Vocational Rehabilitation: $255million Health Services: Services: Social Hospitals &Centers: AssistanceMedical (Medicaid): budget for the Division of Medical budget for the DivisionofMedical for FY2005,theywere 63percent. Over thelastfiOver ve years alone, the outlays have more thandoubled Over thelast20years,Over Medicaid – hasincreased by 59percent. percent oftheDHHSbudget; DID YOU KNOW? DID YOU Source: 1985-2005 BudgetBills 1987-1988 BIENNIUM 1988 session FY 1989: July 1, 1988 to June 30, 1989

General Assembly: House Dems: 84 House Reps: 36 Senate Dems: 40 Senate Reps: 10

Governor: James G. Martin (R)

The 1988 Short Session: Budget Bill HB2641/S.L. 1988-1086 Passed Senate: June 28, 1988 Passed House: June 29, 1988 Conference Version Ratified: July 7, 1988 Signed by Governor: July 8, 1988

ittle of the acrimony of previous legislators. The election represented a sessions pervaded this gubernatorial watershed in North Carolina politics by Lelection year as both chambers confirming the Republican party’s status as seemed determined to finish the short a viable statewide contender. session on time. Instead of squabbling with one another, legislators reserved their criticism for Governor Martin, who January was running for reelection. As in 1987, the ➤ Gubernatorial campaigns begin in governor and Legislature mostly wrangled earnest as Governor Martin and Lt. over how to fund transportation and Governor Jordan (D) hit the campaign education. Democrats again went along trail. with Martin’s education proposals, but they ➤ While running for Lt. Governor, Senator

likewise refused to act on his proposed Harold Hardison (D-Lenoir) promises to 1988 session l CIVITAS INSTITUTE l 97 bond referendum—this time to pay for push for a statewide lottery ostensibly road construction and repair. As in past dedicated to raising teacher salaries. years, Democrats also accused Martin of co-opting their own initiatives. By the end February of the year, projected revenue growth had ➤ Governor Martin supports a plan to slowed to almost half of the projected 6.3 alter the manufacturer income tax percent increase—due to slower growth in formula so as to bring new businesses tax revenue, but also declining investment and jobs to North Carolina. Lt. Governor returns and higher than anticipated bond Jordan criticizes the plan as too payments. In November, Governor Martin expensive for North Carolina because it easily defeated Jordan by a 12 percent would lower taxes by some $26 million. margin, bringing with him a Republican Lt. Governor and 13 new Republican 98 l CIVITAS INSTITUTE l 1988 session April March Lt. Governor➤ Jordan attacks aspeechbeforeIn theN.C.Division ➤ of The Department ➤ Transportation vehicleIncreased useandtravel➤ andLt. Both Governor➤ Martin Governor Martin’s BasicEducation necessary.”services and complete funding for allthe but “will innoway provide full Carolina,”our olderadultsinNorth of themostpressing concerns of will claims Martin, “address some a cost of$5million. The proposal, care programs for theelderly, at to expandeducationandhealth he willasktheGeneralAssembly of Aging, says Governor Martin going to buildfor them.” whattheincrease was they knew andpay forwould itif support Carolina the peopleofNorth argues,Basnight (D-Dare) “I think road Marc Senator construction, percent salestaxincrease to fund Noting that Virginia passeda0.5 Carolina’supgrade North roads. $11 billionwillberequired to stating that releases areport FY1987-1988. 4 percent for aheadofprojections $592 million,thefundisrunning license fees, andthegastax.At from vehicle registration fees, Highway Fund revenue derived lead to a$23.6millionjumpin treated asmeritincreases. state employee pay increases be budget willmandate thathalfof that his1988-1989recommended state promises employees. Martin merit-based raisesfor support Governor Jordan pledgeto May Democrats reject GovernorDemocrats reject ➤ Governor Martin proposesGovernor $558.7 ➤ Martin 1988 Other Significant Changes 1988 Other legislators willhave to dealwithit. his recommended budgetsothat says hewillincludetheplanin Health andEnvironment. Martin of under anewDepartment state environmental activities Martin’s initiative to consolidate deliver onthat.” that he anobligation…to “had 1984 onapledgeto cuttaxes” and governor responds thathe “ran in it mattered most,in1985.” The Basic EducationProgram when governor failedto “support …the Program (BEP),charging thatthe in 19counties. and thecreation of “senior centers” a healthandenvironment agency, state environmental into activities and state workers, aplanto merge 4.5 percent pay raisefor teachers recommended budgetincludea adjustments. ofhis Highlights million inbudgetspending $1.5millionfor chronically, mentallyillprograms • $3.5millionfor theNCZoo • $500,000to establishapilotprogram thatwill • OTHER $17millionfor prisonconstruction • Increaseof$85millionincapitalspending • 3.6%increase for state retirees • increase of4.5%for teachers Salary andmost • CAPITAL COMPENSATION develop aMicroenterprise Fund state employees ➤ Martin also proposes returning ➤ After RJR Reynolds announces the sales tax commission – which plans to build a bakery in Wake permits merchants to keep 3 County, Governor Martin puts percent of the sales taxes they forth a proposal recommended by the company that would alter the 1988 HEALTH & HUMAN SERVICES BUDGET state’s “four-factor” business tax Total Appropriations $689 million formula so as to allow companies to count sales tax twice. The tax Major Items: cut will reduce state revenues by Medical Assistance (Medicaid): $289 million an estimated $26 million annually. Hospitals & Centers: $146 million Social Services: $73 million ➤ Democrats staunchly oppose Health Services: $49 million Martin’s plan to place a $450 Vocational Rehabilitation: $21 million million road bond referendum on Mental Health: $11 million the November ballot. “I will not support it,” declares House Speaker Liston Ramsey (D-Madison). collect on the first $1.2 million in sales per year – to 90 percent ➤ The General Assembly’s Executive (i.e., small to medium) of retail and Legislative Salary Study merchants. The discount had been Commission, comprised of 14 abolished by the General Assembly legislative members, recommends the year before to pay for school a 111 percent pay raise for construction. legislators. Senator Ken Royall

State/Local Share of Total Nonfarm Employment: Select Southeast States, 1985-2005 16%

14% SC 12% NC US 10% FL 1988 session l CIVITAS INSTITUTE l 99

0% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 100 l CIVITAS INSTITUTE l 1988 session 1988 Significant Tax Changes June The GeneralAssembly➤ approves Lt. Governor➤ Jordan claims Because oflower➤ thanprojected living wage.” overto serve here andnothave a saying, “You can’t people expect defends thestudy (D-Durham) percent) for state legislators. of about$900(ratherthan111 workers, aswell asapay increase percent raisefor teachers andstate 1987-886), whichincludesa4.5 the FY88-89recurring budget(S.L. politics withthestate budget.” bad. Charges Jordan, played “They in order to makeDemocratslook have year to becutinanelection proposed abudgetthatwould intentionally Governor Martin cutting even more; $137million. Democratic leadersinsiston that cuts$60millioninspending. anamendedbudget he willdraft tax revenues, says Governor Martin [S.L. 1988-1063] entitled to anincome taxrefund oftherefund to to contribute theFund allorpart Carolina CandidatesEstablish theNorth Financing Fund, whichpermitstaxpayers for 25%ofthe amountofaninvestment insuchacorporation [S.L. 1988-882] CarolinaCreate EnterpriseCorporations North withincome andfranchisetaxcredits retirement paymilitary from $3,000to $4,000[S.L.1988-936] for retirement individualincomeIncrease federal taxdeduction civilservice pay and [S.L.1988-1096] or advertising purposefully orsystematically exploited themarketinN.C.through solicitationby mail salesandusetaxesto collect onmailorder salesto N.C.customers iftheretailer has Expand theState SalesandUse Tax thestate Act: may require retailers out-of-state credit [S.L.1988-1039] Close loopholesthatallow higherincome taxpayers to claimthelow-income tax July House passes ➤ “An to Act Limit In 1985, Carolina ranked 29thamongthe50states North to 17th. Interms ofabsolute numbers, Carolina North Fund.” to apubliclyfinanced “Candidates voluntarily contribute tax refunds in 1992,allows taxpayers to financing system, slated to start 1987-1063). The newcampaign of Political Campaigns” (S.L. to Strengthen Public Financing Campaign Expenditures and to theprivate sector. By2005, thisratio hadjumped state government employees inthenation in2004. in terms ofratio ofstate government employees had the sixth highestnumberof had thesixth DID YOU KNOW? DID YOU Source: Bureau ofLaborStatistics 1988 session l CIVITAS INSTITUTE l 101 freeze on 1,610 nonessential freeze than lower vacant positions due to governor in North historygovernor Carolina term, consecutive win a second to Jim Martin of 57 percent captures Robert defeat to Jordan. the vote election. the Lt. Governor’s Republicans also gain 13 seats in the General Assembly. win the $4.4 to and six other states Super billion Superconducting project. Collider Spangler Jr. laments the poor Spangler Jr. Predicts salaries. of teacher state will not be we “In time, Spangler, attractable to the best and most will not scholars and we promising our best teachers retain be able to and researchers.” 1988 August September 1987 to the slowest 4.6 percent, to slows the same period over rate growth 1973-74. Senator Royall since improve, don’t “If revenues asserts, cut the to have going to we’re growth Including October, budget.” 4.4 percent. to slows in television advertisingin television by election. Both the November run commercials campaigns being the as themselves touting education candidate. better Governor Martin➤ a hiring Governor orders ➤ the first Republican Becoming ➤ wins Republican Jim Gardner beats out North Carolina ➤ Texas UNC system President C.D. C.D. President ➤ UNC system from growth revenue ➤ Tax December November October Lt. Governor Jordan are expected are Jordan Lt. Governor than $4 million spend more to Martin’s environmental record, record, environmental Martin’s of North“the citizens stating that a lack from suffering are Carolina in the fight of leadership at the top against pollution.” appropriations bills, one for public one for bills, appropriations purpose funds (S.L. 1987-1085) and one (S.L. 1987-1086) authorizing the North local projects, funds for and relief, drought Zoo, Carolina grants. and sewer water die. bond proposal Martin’s ENROLLMENT CHANGES ENROLLMENT Governor Martin➤ Governor and challenger Lt. Governor Jordan attacks Jordan ➤ Lt. Governor ➤ passes two General Assembly lets Governor ➤ Legislature The September August TUITION & FEE INCREASES FEE & TUITION OTHER EDUCATION CHANGES EDUCATION OTHER 1988 EDUCATION FUNDING 1988 EDUCATION of-state UNC students of-state ers from $4.91 per hour to $6.10 per hour, $6.10 per hour, hour to $4.91 per ers from plus additional benefits System (Latchkey) after-school care for training and science-based and research development economic Instruction of Public Superintendent driv out- ° Education Reporting the Uniform $7 million for ° local school systems to $4 million in incentives ° UNC for a supercomputer $12 million for ° fiscal functions transfers to General Assembly ° students community college No change for ° adult bus wages for increase $19 million to ° Schools: 4,134 (0.4%) decrease Public ° and 8% for in-state of 4% for increase Average 102 l CIVITAS INSTITUTE l 1988 session 10% 12% 0% 2% 4% 6% 8% In referenceIn ➤ to theeconomic (D-Union), chairmanof theSenate (D-Union), slowdown, Aaron Senator Plyler revenue. than $4millionaheadofprojected more aretax collections actually payments thathave come due; investment returns andbond however, isdueto declining ofthelossinrevenue,Most presumed by theFY88-89budget. below the6.3percent rate almost three percentage points from Julythrough November is The 3.5percent rate ofgrowth growthexpected instate revenue. 1985 North Carolina 1987

1989 State/Local Tax Burden for N.C.andtheU.S.

1991 U.S. Average

1993 At theirbienniallegislative➤ corporate income taxes. surcharges onpersonaland such aslandtransfer taxes and Assembly to imposenewtaxes, fromauthority theGeneral Commissioners votes to request Carolina Association ofCounty conference, theNorth pay raises. That’s bad.” very stands now, there’s nomoneyfor fund alotofprograms. And, asit That meanswe won’t beableto “We won’t have alotofmoney. Finance Committee, complains:

1995

1997

1999

2001

2003

2005 1989-1990 BIENNIUM 1989 session FY 1990: July 1, 1989 to June 30, 1990

General Assembly: House Dems: 74 House Reps: 46 Senate Dems: 37 Senate Reps: 13

Governor: James G. Martin (R)

The 1989 Long Session: Budget Bill SB44/S.L. 1989-752 Passed Senate: June 28, 1989 Passed House: August 1, 1989 Conference Version Ratified: August 10, 1989 Signed by Governor: August 10, 1989

aking advantage of the previous (HTF) that Governor Martin put forth as a year’s election gains, Republicans solution to the state’s decaying highway Twielded more influence in the system. Education funding, especially Legislature during the 1989 long session. for teacher salary increases, was also a At the direction of Governor Martin, primary budget driver. Governor Martin Republican House members allied encountered major opposition to his plan with a group of Democrats intent on to delay teacher salary increases for 9 ending Representative Liston Ramsey’s months because of lower than projected (D-Madison) eight-year reign as Speaker. revenue collections. After teachers Ramsey’s tight control over the budget mobilized to protest, Martin was forced process, as well as the atmosphere of to compromise by reducing funding for secrecy under which he and his lieutenants the Basic Education Program (BEP) and operated, made him vulnerable to a revolt. increasing taxes. 1989 session l CIVITAS INSTITUTE l 103 In return for supporting Representative Joe Mavretic’s (D-Edgecombe) bid to unseat Gridlock between the House and the Ramsey, House Republicans were rewarded Senate over teacher raises and the with 40 percent of the cochairman Highway Trust Fund caused the session to positions on study commissions that met drift into August. The 214-day session set to prepare for the 1990 session. a record (broken in 2001) as the longest in North Carolina’s history. In spite of Republican gains, the 1989 session ended with the largest single tax January increase in half a century. The 5.25 cent ➤ Governor Martin recommends full gas tax increase was primarily used to funding of the next two-year phase of finance the $8.2 billion Highway Trust Fund the Basic Education Program. He also 104 l CIVITAS INSTITUTE l 1989 session February Representative➤ David Redwine renews hisappealfor a Martin ➤ hisState oftheState address,In ➤ House SpeakerListon Ramsey ➤ Lt. Governor➤ JimGardner becomes State Auditor➤ EdRenfrow criticizes In theface offierceIn ➤ opposition lottery bill(HB96). lottery introduces(D-Brunswick) astate their children would attend. permit parents to picktheschool school choice program thatwould Assembly to consider institutinga of EducationandtheGeneral power. HealsocallsontheBoard referendum onexecutive veto workers. a 4.5percent pay raisefor state percent pay raisefor teachers and but delays untilApril1990a5.7 BEP andmeritraisesfor teachers, phaseofthe funding for thenext billion budget,whichincludesfull outlineshis$22.8 Governor Martin forRamsey SpeakeroftheHouse. Mavretic defeats (D-Edgecombe) Ramsey. Representative Joe join withRepublicansinousting among fellow Democrats, who faces dissention (D-Madison) inmorethe Senate than80years. the firstRepublicanto preside over other department.” as farI’m concerned, thanany “Education isnomore sacrosanct, the proposed jobcuts, saying: education spending. jobs to free up$12.6millionfor proposes cutting505vacantstate proposes thatlegislators consider from teachers, Governor Martin March With➤ HouseDemocratsonthe callsfor asummitwith Martin ➤ enrollmentIncreased anda$1.5 ➤ Governor Martin proposesGovernor ➤ Martin 1989 Other Significant Changes 1989 Other $18millionto match federal assistance for • $22millionmore thanestimated for newsalary • increase 6.65%average for teachers salary • increase of4%plus2%meritfundsfor Salary • DISASTER ASSISTANCE COMPENSATION reached. own planunlessacompromise is threatens to pursuehis Martin distribution formula), Governor state (i.e., according to anequity funds beevenly dividedacross the billion inhighway construction Commission demandingthat$6.9 Legislative Highway Study teacher salaries. education leadersto discuss the state’s private schools. Carolina residents attending oneof $1,100 peryear ingrants for North The state program provides schools for thespringsemester. education grants for private offundsinhigher- a shortage causes million budgetshortfall raises. of theBEPinorder to fundteacher delaying implementationofparts eliminating thestate salestaxon fall ofHurricaneHugoandatornado inthe victims schedule for publicschoolteachers most state employees

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the pork barrel appropriation appropriation the pork barrel each House that gives system in discretionarymember $30,000 appropriations. an attempt Building in Legislative raise to legislators pressure to salaries. sales tax one cent raising the state while restructuring the personal a exempt so as to tax income makingfamily of four less than $13,000. … somebody with some political with some political … somebody savvy.”

Speaker Mavretic abolishes ➤ Speaker Mavretic on the ➤ march 2,000 teachers considers ➤ Assembly General The 1997-98 April May

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food in order to excuse raising excuse to in order food one cent. sales tax by the state for also pushes governor The of 5.25 tax increase a gasoline fund road per gallon to cents construction. the General that allows provision keep unspent funds, to Assembly million has a $9 the Legislature surplus. former hires (D-Lee) Wicker Jim Black as an Representative (Black served aide. administrative 1980, but was defeated from in 1990.) in 1984 and reelected “was looking he says Wicker somebody who had servedfor and in the General Assembly process the legislative understood

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It is discovered that due to a that due to ➤ It is discovered ➤ House Majority Dennis Leader 1987-88

Sales & Use Tax Revenue Compared to Personal Income to Personal Compared Revenue Tax Sales & Use

1986-87 1985-86 verage Taxes per $1,000 of Personal Income A $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 106 l CIVITAS INSTITUTE l 1989 session 1989 Significant Tax Changes A Houseappropriations ➤ until “we’ve exhausted theother taken from studentsandparents saying thatmoneyshouldnotbe opposestheplan, (D-Buncombe) Nesbitt Representative Martin percent students. for out-of-state for in-state studentsand15 for theUNCsystem: 20percent largest tuitionhikein20years subcommittee proposes the income tax liability andmakeotherchanges [S.L.1989-728]: income taxliability Tax Fairness basethestate Act: individualincome taxonapercentage offederal toS-Corps betaxed [S.L.1989-728] asiftheywere partnerships Tax savings of$85milliondueto achangeinthestate income taxstatutes allowing Change theindividualincome taxstatusofretirement benefits[S.L.1989-792] pay [S.L.1989-557] program taxamnesty andincreaseCreate criminalpenalties for aone-time failure to Repeal theinsurance premium taxsunset[S.L.1989-346] as amendedby -700,-770,-788,and-799] rental rate for theshort-term Increase motor vehicles from 2%to 8%[S.L.1989-692, 1989-692, asamendedby -700,-770,-788,and-799] threshold estimatedIncrease individualincome from taxreporting 80%to 90%[S.L. to $1,500[S.L.1989-692,asamendedby -700,-770,-788,and-799] railway thesalestaxcaponsaleofaboat,aircraft, car,Raise orlocomotive from $300 amended by -700,-770,-788,and-799]: Revenue sources for thenewlycreated Highway Trust Fund [S.L.1989-692,as ➔ ➔ ➔ ➔ ➔ income taxpayers andincreased for theremaining taxpayers) the Highway Trust Fund to theGeneralFund in1989-90 and1990-91 when certificate oftitleisissued when certificate the GeneralFund witha3%($1,000maximum) “highway use” tax payable Designed to berevenue neutral(taxes reduced for 65%oflow to moderate Transfer oftheincreased revenue part from thenewhighway usetaxfrom Replace the2%($300maximum)salestaxonmotor vehicles thatwent to oftitlefee certificate Increase from $5to $35;increase related fees to $10 Increase themotor fueltaxby 5 June Gridlock hitstheGeneralAssembly ➤ money.” possibilities, thenwe’ll gettheir highway funding. alsocannotagreethe Senate on are being debated. The Houseand late June, seven separate plans how to pay for teacher raises. By as legislators cannotagree on 1 / 4 ¢ agallon 1989 session l CIVITAS INSTITUTE l 107 budget (S.L. 1989-752) contains a 6 budget (S.L. 1989-752) contains teachers. raise for percent 1989-692) on July 27. The fund The on July 27. 1989-692) a 13.5- finance be used to is to billion, highway/road $8.2 year, fund’s The project.expansion is derived of income main source per gallon gas a 5.25 cent from 3 percent and a new tax increase levied on title use tax” “highway a sales tax on vehicle (i.e., transfers a 2 replace that is to purchases) The tax on vehicles. sales percent title vehicle also increases law $35 and increases $5 to from fees 2 from rentals the tax on vehicle a “There’s 8 percent. to percent here,” tax increase tremendous Bob Hunter Representative says of proud “But I’m (D-McDowell). Representative Adds this bill.” “This is Herman Gist (D-Guilford), about as much tax as the citizens of North can stand.” Carolina be used sales tax is to the vehicle pay teacher percent fund a 6 to the state how over Concern raise. increase will fund the recurring the HTF money runs out once vote Republicans to leads many Senator Charges against the bill. Larry (R-Mecklenburg), Cobb “This is fiscal irresponsibility.” bill MartinGovernor also opposes the – calling two-year HTF transfer robbery plan.” “the highway it Martin paying had recommended raises with a one- the teacher for In the end, sales tax instead. cent the bill passes primarily because down vote afraid to are legislators building projects in their new road districts. Passed on August 10, the new on August ➤ Passed For the first two years, however, however, years, the first two ➤ For August meets past June 30 costs taxpayers taxpayers meets past June 30 costs $39,000. for pay endorse a Senate plan to by years two over raises teacher sales if the on auto raising taxes that the Highway Senate agrees will be program Fund Trust of instead in 12 years, completed The of $8.6 billion. 15, at a cost raise the gas to House also agrees 20.95 per gallon to tax 5.25 cents sales tax the state but leave cents, untouched. (S.L. 1989- passed on July 15 are 649), extending July 28; to funding and again on July 27 (S.L. 1989- 689), extending August to funding 28. record session-length the previous set in 1983. of 192 days brings about the establishment (S.L. Fund Trust of the Highway General Assembly passes a passes General Assembly Authority Budget Continuing that extendsbill (S.L. 1989-547) July 15. funding until ➤ Every the General Assembly day to ➤ agree House negotiators budget authority➤ bills Continuing breaks ➤ On July 22 the Legislature “compromise” ➤ A new House-Senate With no budget in sight, the no budget in ➤ With July Medical Assistance (Medicaid): Medical Assistance Hospitals & Centers: Social Services: Health Services: million $384 $174 million $78 million $55 million 1989 HEALTH & HUMAN SERVICES BUDGET SERVICES & HUMAN 1989 HEALTH Total Appropriations Appropriations Total Major Items: million $818 108 l CIVITAS INSTITUTE l 1989 session November October September The Council➤ ofState decidesto use recommendsGovernor ➤ Martin House SpeakerJoeMavretic➤ makes On September 22HurricaneHugo ➤ Governor➤ Martin’s attempt to Although Governor➤ Martin’s instead ofMartin’s proposal. vacancies) for hurricanerelief (i.e., cost-savings created by job $21.1 millionfrom lapsedsalaries help fundhurricanerelief efforts. worker health care cost to reserve using $21millionfrom astate session. meet to prepare for the1990short of thestudycommissions that Republicans to cochair 40percent good onhispromise andappoints estimated $1billionindamage. Carolina, causingan strikes North Redwine’s bill. lottery also fails, as doesRepresentative acquire executive veto power pay scale. performance-based develop theirown differentiated, permits localschoolsystems to Accountability Program,” which with the “Performance-based 778) replaces Career Ladder (S.L.1989- thenewact effect, Accountability of1989.” Act In Improvement School and “The 12, theGeneralAssembly passes Ladder program fails, onAugust proposal to expandhisCareer December To➤ meetovercrowding demandsin At 12.7deathsper1,000births, ➤ in bonds. expansion through $490.5million proposes financingthe Martin education andtransportation, relatedwith similarprojects to prison system by 53percent. As proposes expandingthe Martin the state prisonsystem, Governor 1988. rates for theyear infant mortality ofColumbia in only theDistrict among thestates andaheadof Carolina rankslast that North medical journalPediatrics reveal statistics from the preliminary ° Public 3,401(0.3%)decrease Schools: ° ° School Improvement School andAccountability Act ° $5millionin1989-90and$10 ° ofthe Through UNC,fundaportion ° fundingfor Increase BasicEducationProgram ° of18%for Increase in-state and19%for out-of- ° Average increase of12%for in-state and14% ° approved by GeneralAssembly program needsatamore sufficientlevel 1990-91 for a “Restoration Fund” to helpfund Nursing recommendations oftheStudyCommission on positions by 1988-89) 1988-89 f ($69 millionin1987-88and$181 state college community students f UNC: 4,802(3.5%)decrease or out-of-state UNCstudents or out-of-state 1989 EDUCATION FUNDING OTHER EDUCATION CHANGES TUITION & FEE INCREASES or 6,343 teachers, support, and clerical or 6,343teachers, support, ENROLLMENT CHANGES

public sector employment growth in north carolina l CIVITAS INSTITUTE l 109

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In North 1985, 29th among ranked Carolina of state of the ratio in terms the 50 states the private to employees government jumped to 2005, this ratio had By sector. 17th. to employees the ratio of public Today, is at an all-time high. employees private 4.9 were in 2005 there 1 shows, Figure As employee. per public employees private every for means that public one This and local – there federal – state, employee in the employed than five fewer were does (This however, ratio, sector. private in the those employees for not account indirectly paid by market who are private farmers who example, – for the government and medical professionals subsidies receive Medicaid). by reimbursed understand what this trend In to order that the realize need to we indicates, 1997

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Fig. 1. Private Employees per Government Employee per Government Employees 1. Private Fig.

1991 1990 Public Public Sector Employment in Growth North Carolina The size of the state government is arguably is arguably government the state of size The tracking by best measured the number of People, the state. workingfor employees the actualwhat comprise are after all, single the largest Similarly, government. of budget consists state in the expenditure By tracking the employees. state salaries for can we employees private ratio of public to of on whether the size thus get a good read is actually increasing government the state we What sector. the private to in relation find is that it is. 0.0 1.0 2.0 3.0 4.0 5.0 6.0

recovery from the recession – a recovery Though the hiring freeze instituted by Gov. Mike Easley delayed by the 2001 tax increases (see Q early this year has caused some hardships among & A: 11) – by 2006 the private sector had state agencies, it hasn’t really resulted in recreated the jobs lost during the recession. any significant drop in the number of state workers. There were 112,317 employees on the The real cause of the surge in public sector state payroll as of Nov. 1, compared to 112,333 hires is the refusal to make the politically who were on the payroll a year ago, difficult decision to cut the overall number according to the Office of State Budget and of state jobs during economic downturns. Management. Those figures do not include From 2000 to 2003, for instance, employers teachers and other employees in the in the private sector eliminated 163,000 secondary and elementary school systems. positions. Meanwhile, the public sector – again, federal, state, and local – added News & Observer, Nov. 13, 2001 some 19,200 people in North Carolina. Thus, even in spite of a hiring freeze instituted increase in public sector employment by Governor Easley in February 2001, the cannot primarily be attributed to ailing state added jobs – in part, because the fortunes in the private sector. While freeze did not apply to “essential” and employment in the private sector declined “critical” positions. Moreover, although during the 2001-2003 recession, in 2004 the 2001 budget cut about 400 state and 2005 the private sector added 100,000 jobs, state employees received an across- people to the payrolls. Unemployment the-board raise of $625. The budget also in 2005 was 5.2 percent, down from 6.6 provided for the hiring of more teachers percent in 2003. Despite the state’s late in conjunction with the state’s initiative to

Fig. 2. Private vs. Other Employment

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it occurred during a period when the during a period when it occurred sectorprivate was cutting jobs – and tax thus during a period when per capita was declining. revenue only 6 out of 10 working-ageIn summary, hold a (aged 18-64) North now Carolinians it is the lowest rate This sectorprivate job. means that 40 percent This been. has ever the is either working for of the workforce the or outside unemployed government, and students, early retirees, – i.e., workforce 2). no longer looking (Figure unemployed on our analysis concentrate Indeed, if we (a statistically defined the active labor force rather than just the workforce- group), more even are aged population, the results people startling. In out of four 2005, three were force of the active work (75 percent) is This sector. in the private employed in peak reached an 80 percent from down of Governor the course over Thus, 1998-99. the number of persons tenure, Easley’s or outside of the state by either employed in relation – measured the active workforce – has labor force employed the privately to 2). (Figure 25 percent by increased

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Fig. 3. Percent Change in Private vs. Government Employment Government vs. in Private Change 3. Percent Fig. 1991 reduce class sizes. Teachers and university and university Teachers class sizes. reduce a 2.86 percent likewise received professors in 2002, the Similarly, raise. pay average and budget cut some 814 filled state 1,050 but then hired unfilled positions, a teachers and also gave new teachers Indeed, increase. pay average 1.84 percent the by provided numbers to according Division of the General Research Fiscal increased employment state total Assembly, 2005. 2001 to from 26,195.5 positions by over increase 9.3 percent a represents This (282,135) count employee state the total sector as the private even Thus, 2001. for part during the latter was downsizing of the expanded government the state recession, almost 10 percent. by expansion of public sector continuous The in the a drop has led to employment per public employees number of private 1 in North Figure As employee Carolina. in 1990, 1995 and 2000 there indicates, per public employees 5.3 private were had By 2004 this figure sector employee. per employees 4.9 private to dropped 7.5 percent This public sector employee. important is all the more decrease because 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Between FY1990andFY2001,state Carolina taxrevenues doubledinNorth

112 l CIVITAS INSTITUTE l spending & revenue changes – increasing 99percent from $7.87billionto $15.63billion.Bycontrast, population growth, plusinfl Spending &Revenue Changes DID YOU KNOW? DID YOU Source: Cato Institute ation, grew by only67percent. economic overview 1990-1994 l CIVITAS INSTITUTE l 113 1990-1994 Southeast States, 1985-1994 Southeast States,

General Economic Trends: 1990-94 Trends: Economic General the during economy outperformed U.S. the economy NorthOverall, Carolina’s as personal income, in per capita increases by was reflected growth This 1990s. sector as private job growth. well of the was 88.5 percent per capita personal income In 1990 North Carolina’s of the 91.5 percent to it had grown the decade, the end of by national average; national average. losing some During the first part sector the private weakened, of the 1990s, the job market in 1992, however, Beginning 1991. 1990 to 39,000 jobs from the private 1992 and 1994. Overall, adding 285,000 jobs between rebounded, 83.2 percent in 1990 to 81.9 percent from increased share nonfarm employment in 1999. 1990 and between per year percent 4.2 by sectorEarnings per private job grew jump a 7 percent to can be attributed 1994, although much of this increase OVERVIEW Nonfarm Employment: Total of Share Government State/Local 114 l CIVITAS INSTITUTE l economic overview 1990-1994 10% 15% 20% 25% 30% 0% 5% the period. grew steadily, remaining atfour cents perdollarabove thenational average for growth tapered that.Similarly, offafter Virginia’s percapitapersonal income growth rate was5.4percent peryear from 1990to 1994,although itsstunning Tennessee and Virginia, however, the outperformed Tar Heel state. Tennessee’s compared Carolina, andSouth behind. to Both whofell Kentucky farther Carolinaneighboring states, increased North itspercapitapersonal income average in1990;to 90.4percent in1992;to 92percent relation to in1994.In the country. Per capitapersonalincome rose from 88.5percent ofthenational termsCarolina ofpersonalincome,In continued to North gain ontherest of $1.23 peakof1989. was $1.12per$1.00ofcompensation for job, aprivate sector down from the emerged between 1985-1989.By1994,compensation for job apublicsector with earningsinstate andlocalgovernment jobs, areversal ofthetrend that percent annually. As aresult, beganto earningsintheprivate catch sector up percent peryear for theperiod. Earningsperstate andlocalpositiongrew at3.2 and localgovernment employment increased steadily atanaverage of2.3 inGeneralFund spite offluctuations In taxrevenue from 1990to 1994,state Carolina. as inNorth economy, whichledto arapidriseinthedemandfor labornationwide, aswell in 1992. This jumpwasprobably causedby anormalrebound inthenational SF AN CT VA TN SC NC GA FL US State/Local Government Employment Growth: Southeast States,Southeast 1985-1995

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GA 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 US FL 0% 70% 60% 50% 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 116 l CIVITAS INSTITUTE l economic overview 1990-1994 10% 15% 20% 25% 30% 35% 40% 0% 5% SF AN CT VA TN SC NC GA FL US Total Private Employment Growth: Southeast States,Southeast 1985-1995 1989-1990 BIENNIUM 1990 session FY 1991: July 1, 1990 to June 30, 1991

General Assembly: House Dems: 74 House Reps: 46 Senate Dems: 37 Senate Reps: 13

Governor: James G. Martin (R)

The 1990 Short Session: Budget Bill SB1426/S.L. 1990-1066 Passed Senate: June 18, 1990 Passed House: June 10, 1990 Conference Version Ratified: July 28, 1990 Signed by Governor: July 28, 1990

ith the state still recovering from in education, primarily to the UNC system Hurricane Hugo, North Carolina’s budget; although the teacher and state Weconomy began to slow down, worker raises passed in the previous year’s foreshadowing the 1991 recession. The budget were left untouched. subsequent decline in revenue collections caused a budget deficit for FY1990-1991. Responding to the news that North In response to the shortfall, Governor Carolina has the highest infant mortality Martin called for across-the-board cuts in rates in the country, Governor Martin also every department. Predictably, Martin’s made prenatal and neonatal care a priority. recommendation was met with opposition Finally, in November’s statewide elections, from Democrats in the General Assembly. Republicans picked up two seats in the Hesitant to arouse the election-year ire of Senate but lost nine seats in the House.

voters, the Democrats failed, however, to Voters also endorsed a less ambitious 1990 session l CIVITAS INSTITUTE l 117 pass a counterproposal that would increase version ($200 million instead of $490 taxes. Instead, the final budget enacted cuts million) of Martin’s prison construction bond. The year ended with reports of a further decline in revenue collections, 1990 HEALTH & HUMAN SERVICES BUDGET thus setting the stage for a contentious Total Appropriations $883 million legislative session in 1991. Major Items: Medical Assistance (Medicaid): $448 million January Hospitals & Centers: $173 million ➤ Acting quickly on the December 1989 Social Services: $80 million news that North Carolina’s infant Health Services: $55 million mortality rate is highest in the nation, Governor Martin creates the 118 l CIVITAS INSTITUTE l 1990 session e aiaIcm:17,295 Top 10PrivateEmployers 6,632,448 Per CapitaIncome: 3,471,000 Civilian LaborForce: Population: .IMCroain9 USAir,Inc. RJRNabisco,Inc. Harris Teeter,Inc. 9. DukePowerCompany 8. 10. 7. Fieldcrest Cannon,Inc. 6. BurlingtonIndustries 5. IBMCorporation 4. DukeUniversity 3. FoodLion,Inc. 2. SaraLeeCorp. 1. March February A revenue shortfall of$285million A revenue➤ shortfall Health Director RonaldLevine➤ announces he Governor➤ Martin With➤ thebudgetshortfall cut spending. to forceis expected legislators to living withtheirparents. medical care ofpregnant teens for $4.5millionto assistwiththe alsoasks the commission, Martin proposed by $10 millionpackage additionto a In Mortality. Infant of Commission onReduction projects designedprojects to increase spending oninfantmortality recommends $3.5millionin political office.” he has interest“lost in any other has faced asgovernor, says Martin fromthe hostility Democratshe will retire from politicallife. Citing march onRaleigh. oftheir anniversary the one-year vigil inCharlotte to commemorate approximately 40teachers holda received inthe1989-90budget, the 6percent raiseteachers threatening to eliminate orreduce Economic Snapshot:1990 ieYa ouainGot:5.9% 88.3% Pct.ofU.S.PerCapitaIncome: Five-YearPopulationGrowth: $ Unemployment 3.8% Rate: April Legislators➤ ignore Governor Martin’s The isnow revenue ➤ shortfall The isnow revenue ➤ shortfall ➤ A offenders for alongertime.” can lockupthemore-dangerous want to buildmore prisonsissowe proposal saying, reason we “The criticizes the Governor Martin based programs likehousearrest. fewer cells andrely oncommunity- for atwo-year planthatwould add instead opting prison construction, $490 millionbondproposal for change inthetaxcode.” increases inayear withamajor to the inability “forecast revenue cuts are notto blame, butrather states thattax Governor Martin to reachexpected $205million. coordinators throughout thestate. carethe numberofmaternity educationand pregnancy projected at$419million. and roads. split onraisingtaxes for prisons in taxes for schools, butvoters are anincreasepercent alsosupport astate lottery. support Sixty-six shows that62percent ofvoters /WSOC poll Charlotte Observer

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1999-00 Governor Martin delayingGovernor proposes from paychecks of state the issue July 2. Monday, June 29 to Friday, the recommendation He defends explaining, conference in a news “There no attractive options, are ones.” just available a 5 percent for proposal governor’s next the across-the-board for cut agency give that would fiscal year heads the flexibilitytheir make to cuts. own if it is rule out a tax increase budget. the balance needed to budget reform his own releases plan that includes the creation that would fund day” “rainy of a for pay use budget surpluses to 1998-99

The General Assembly rejects➤ the General Assembly The they won’t leaders say ➤ Legislative (R) Jim Gardner ➤ Lt. Governor

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1990-91 1989-90 million, Governor Martinmillion, Governor issues an spending freezing order executive Martinon nonessential items. he is the public that reassures that will “working on proposals temporaryavoid or permanent increases reductions of pay layoffs, or disruptions of workers state for the normally summer school or of the regular hectic closing days school year.” reportsColleges that a 6.3% rise in with budget coupled enrollment, 70 a 50 to lead to could cuts, in tuition at North increase percent community colleges. Carolina the nextexpenses to fiscal year,

As the revenue shortfall➤ the revenue $504 hits As of Community ➤ N.C. Board The ➤ In an effort shift to in $201 million May 1988-89 1987-88

Total Income Tax Revenue Compared to Personal Income to Personal Compared Revenue Tax Income Total

1986-87 1985-86 verage Taxes per $1,000 of Personal Income $0 $2 $4 $6 $8 A $10 $12 120 l CIVITAS INSTITUTE l 1990 session 1990 Other Revenue1990 Other Sources &Actions 1990 Significant Tax Changes

• June Representative ➤ AlexHall(D-New Senate Republicanspropose an ➤ Nosignificant taxchanges probably needmore thanthat.” drinks. Warns Hall, “We’re goingto manufacturers, andtaxes onsoft income taxes, taxes oncigarette 91. The billwillraise personal $141 millioninrevenue for 1990- (HB 2232)thataimsto generate Hanover) introduces ataxbill instead ofprojected values. revenue from theprevious year provision to basethebudgeton veto for thegovernor, aswell asa proposal alsoincludesaline-item hurricane cleanup. Gardner’s costs,sudden emergency like … Becauseofthat,we’re goingto got usinto thiswasoverspending. Republicans feel theproblem that (R-Caldwell) comments, “We 4 percent. DonKincaid Senator state government budget cuts to cut,whichwould bring the-board additional onepercent across- financial assistance to local government units outstatestabilize programs theannualfunding availability for andproviding carrying to ofState provide Budget andManagement within theOffice amechanismto $141 milliontakenfrom theGeneralFund to establishaBudgetStabilizationReserve Fund, $17millionto theHighway Fund, andanother$75millionto theGeneralFund) $356 milliontransferred from theHighway Trust Fund ($264millionto theGeneral Special Revenue Fund accounts to theGeneral Fund Move allproceeds from salesandusetaxonmailorder fundsheldinstate andlocal Just days➤ before meetingwith Carolina’sJeopardizing North ➤ AAA Despite callsfrom➤ Senate “politically unwise.” “trick” andRepublicanscallingit Democrats referring to itasa condemned by legislators, with suggestionisroundlyelection-year the state’s bondrating. Martin’s claims theincrease could helpsave annually to state coffers. Martin approximately $500 million tax increase thatwould add sales for aone-cent his support Poor’s, announces Governor Martin representatives from Standard & budget shortfall. costs andaprojected $360million list becauseofconcerns over rising Carolina onitsCreditWatchNorth bond rating, Standard &Poor’s puts taxes year. inanelection neither chamberiswillingto raise Democrats to increase taxes, have to findsomemore money.” ➤ On July 28 the General Assembly passes the current and capital 1990 EDUCATION FUNDING budget bills (S.L. 1989 -1066 and ENROLLMENT CHANGES S.L. 1989-1074). ° Public Schools: 4,898 (0.5%) increase ➤ In the $7.2 billion operating ° UNC: 3,775 (2.6%) increase budget, education spending is cut TUITION & FEE INCREASES by $100 million. Teachers and state ° Average increase of 9% for in-state and 5% for workers, however, still receive their out-of-state UNC students 6 percent pay raises. ° Increase of 16% for in-state and 17% for out-of- state community college students ➤ The new budget also includes $10.3 million to combat infant OTHER EDUCATION CHANGES mortality. ° Defer some portions of the Basic Education Program ($72 million reduction) ➤ Bills on the lottery and governor ° Defer school bus replacement ($20 million veto referendums fail again. reduction) ° $45 million management flexibility reduction August ° $39 million to fully fund the School ➤ Iraq invades Kuwait on August Improvement and Accountability Act 2, claiming that Kuwait was slant ° Eliminate 207 teaching faculty, 52 non- drilling Iraqi oil. teaching faculty, and 241 other positions in the UNC system ➤ North Carolina retains its AAA ° $17 million management flexibility reduction in bond rating as Standard & Poor’s UNC removes the state from the ° $12 million management flexibility reduction in CreditWatch list. Governor Martin community colleges applauds the good news, but ° $6 million to community colleges to partially warns “there is more work for us restore $7.5 million reserve for equipment and to do in the next session of the books reverted during 1989-90 to help balance General Assembly.” the budget ➤ According to the 1990 U.S. Census July report, North Carolina’s population ➤ North Carolina’s infant mortality rose from 5,882,000 in 1980 to rate drops to a record-low 11.5 6,552,927 for 1990. The population increase is enough to give the deaths per 1,000 births for 1989. 1990 session l CIVITAS INSTITUTE l 121 While the state lowered its rate state an 11th seat in the U.S. House almost 9 percent since 1988, of Representatives. Governor Martin cautions: “The battle to lower North Carolina’s September infant mortality rate is not over. ➤ Governor Martin turns his Far from it. … Other states are still attention to the upcoming ahead of us.” elections and campaigns for Republican candidates. ➤ The General Assembly and the governor compromise on the ➤ State officials begin looking for prison bond issue. The General sites to build the new prisons to be Assembly will issue $75 million in constructed under the $75 million bonds for new construction with bond. a public referendum in November on the remaining $200 million. 122 l CIVITAS INSTITUTE l 1990 session Novem ber October House SpeakerJoeMavretic➤ Voters➤ endorsea$200million theNovember In elections ➤ David Crotts,➤ aseniorfiscalanalyst asksstate agency Governor➤ Martin With➤ deepeducationcuts 1,500 studentsatUNCChapelHill ➤ General Assembly since 1933.” the mostdifficultsessionof the “get ready for whatappearsto be warns hisfellow legislators to by theendof year. Mavretic million andcould reach $1billion isnow inexcessshortfall of$700 thatthestate’sreports revenue votes outofalmost1.4millioncast. referendum by onlyabout600 bond prison construction House. butlosenineinthe the Senate Republicans pickuptwo seatsin million ifoilprices continue to rise. million, butcould reach $900 willincrease to $658 shortfall forecasts thatthe1991-92fiscal for theN.C.GeneralAssembly, budget. the General Assembly incrafting fourfor years thenext to aidthe goals heads to submittheiragency the rightthingto do.” Claims Spangler, “I justfelt itwas each oftheUNCsystem schools. own money, to give $10,000to of $142,520,plus$17,480his Spangler donates hisannualsalary on thestate’s payroll. response, In for beingthehighestpaidperson C. D. SpanglerJr. comes underfire underway, UNCsystem President for highereducation. protest the5percent budgetcuts December Reporting thattherevenue Reporting ➤ A survey by theNationalSchool A survey ➤ Lt. Governor➤ Gardner callsthe 1990 Other Significant Changes 1990 Other OnJune8,Standard &Poor’s putN.C.state bonds • CREDIT RATING $69 millionfor capitalprojects • CAPITAL Save $40millionby notfillingpersonnel • Create theEconomic Future Commission to • Changelocalgovernment taxreimbursements • increase 6.15%average for teachers salary • increase of4%plus2%meritfundsfor Salary • OVERALL BUDGET & TAXES COMPENSATION balance the1991-92budget. spending cutsandnewtaxes to he willpropose acombination of declaresmillion, Governor Martin isnow projection at$850 shortfall teachers inthestate. and anincrease inthenumberof change isattributed to theBEP ratios since themid-1980s. The improvements inteacher-pupil Carolina hasmade that North Boards Association reports oftheGeneralAssembly.”part of legislative overspending onthe lays theblameon “a classiccase a revenue shortfall “myth” and and shifted moneyaroundand shifted to avoid adowngrade on CreditWatch list;thestate changedduedates vacancies the state andlocaltaxstructure review therevenue and andbudgetstructure appropriation and shared revenues to direct from earmarking most state employees 1991-1992 BIENNIUM 1991 session FY 1992: July 1, 1991 to June 30, 1992

General Assembly: House Dems: 81 House Reps: 39 Senate Dems: 36 Senate Reps: 14

Governor: James G. Martin (R)

The 1991 Long Session: Budget Bill HB83/S.L. 1991-689 Passed House: June 7, 1991 Passed Senate: June 13, 1991 Conference Version Ratified: July 13, 1991 Signed by Governor: July 13, 1991

s the state slipped into a recession, other than UNC Chapel Hill and NC State declining revenue created one of University. When the plan was rejected, Athe largest budget shortfalls in state the UNC system could not avoid major history. With less money to go around, cuts in personnel and increases in tuition. Governor Martin’s budget proposals were Taxpayers were also pinched during the met with greater opposition than usual recession as the state raised income taxes by the Democratic General Assembly. and taxes on cigarettes. As the year ended, Throughout the budget process Martin Governor Martin asked state agencies fought to balance the budget by cutting to restrain spending in preparation for spending rather than raising taxes. another revenue shortfall in 1992. Again, the debate centered on education spending. Martin’s proposal to allow

UNC system administrators the power January 1991 session l CIVITAS INSTITUTE l 123 to set tuition was opposed by almost ➤ A further $100 million projected every college or university in the system, increase to an already anticipated $850 million to $1 billion revenue shortfall spurs Governor Martin to freeze 1991 HEALTH & HUMAN SERVICES BUDGET hiring for all state agencies, including education and teachers. Total Appropriations $1.14 billion Future Speaker of the House Daniel T. Major Items: Medical Assistance (Medicaid): $523 million Blue (D-Raleigh) declares tough times Mental Health/D.D./Subst. Abuse: $185 million are ahead, saying that “not since the Hospitals & Centers: $154 million Great Depression ... has North Carolina Social Services: $130 million gone through the kind of experiences it’s going through now with budget deficits and projected deficits.” 124 l CIVITAS INSTITUTE l 1991 session Governor➤ Martin’s $7.8billion Senator KennethC.Royall Jr.➤ Terrorism➤ fears stemming from PresidentSenate ➤ Pro Tempore Storm begins on Operation Desert ➤ elsewhere intheirbudgets.” the salestax–orfindmoney take thepoliticalheatfor raising local governments would have to lawmakers approve Martin’s plan, abouttheplan, Observer “If per dollar. Noted theCharlotte cent salestaxone-half local-option allow localentitiesto raisethe will return,Q &A:12).In Martin repeal oftheintangibles tax(See inventory taxandthepartial the 1987repeal ofthebusiness of to localgovernments aspart annual taxreimbursements owed holding back$242millionin budget proposes temporarily state’s budgetproblems. would helpsolve someofthe saying thatit on astate lottery callsfor areferendum(D-Durham) the GeneralAssembly. measuresheightened security at the First Persian Gulf War leadto highways andschools.” how muchprogress you makeare road. The two roads thatdetermine progress andismoving onthat in 1991hasfound theroad to Barnes states: Carolina “North legislators to stay thecourse, Carolina. Urgingin North fellow the foundation for future progress the Highway Trust Fund hasset to publicschoolsandenacting claims giving greater autonomy Henson P. Barnes(D-Goldsboro) 17. January February In hisState oftheState address,In ➤ Kuwait is liberated as Desert Storm Kuwait isliberated➤ asDesert Lt. Governor➤ JamesC.Gardner (R) council members Durham city ➤ Educators atsmallercampuses ➤ executive veto power. own tuitionandrenews hiscallfor campuses beallowed to settheir proposes thatUNC Martin 27. ends withacease fire onFebruary sales taxoption. Martin’s local proposed half-cent increase, includingGovernor and urges oppositionto any tax meets withRepublicanlegislators tax reimbursement funds. to withhold$242millioninlocal resist Governor Martin’s proposal urge theGeneralAssembly to schools. a financialadvantageto thelarger feel thattheproposal would give over tuitionrates becausethey proposal to give colleges control in theUNCsystem resist Martin’s Source ofBudgetFunds: 1990-91 1991 session l CIVITAS INSTITUTE l 125 opposition to Governor Martin’s Martin’s Governor to opposition campuses give to proposal own set their to the power “It not is Blue, tuition. Declares let individual to intention my while tuition increase universities its goes of the system the rest merry and perishes.” way ➤ his Speaker Blue declares House to be divided equally between the be divided equally between to ¢ and levy on a 2% tax of wholesale price ¢ per pack to 5 per pack to ¢ increase scheduled to expire January expire scheduled to 1, 1995, and other increase ¢ million “rainy day” or Savings or Savings day” “rainy million help overcome to Reserve Fund revenue $695 million the projected use “My is to intention shortfall. the fund unless day the rainy he blocks me,” General Assembly says. ➤ Martin $141 he will use the says March Raise insurance tax from 1.750% of gross premiums to 1.875% for 1991 and to 1991 and to 1.875% for to premiums of gross 1.750% Raise tax from insurance HMOs tax liability (except premiums against gross Establish a 6.5% charge 1.900% beginning with 1992 1.900% beginning support for General Fund eliminate to a special trust designed and BCBS) for Department tax for against premium a 20% credit of Insurance and allow assessments Guaranty Fund ➔ ➔ set to expire January expire set to 1, 1999) [S.L. 1991-538] ¢ Repeal certain inheritance tax exemptions [S.L. 1991-454] Repeal certain tax exemptions inheritance and ABC permit fees some liquor surcharges Increase other tobacco products other tobacco $2.00 per $1.00 per $1,000 to from transfers estate Increase deed stamp tax on real Fund Trust and Natural Heritage Recreation for increase $1,000 and earmark 15% of the tax changes 1990 federal to tax conformity income state Update Taxes: Health Insurance of 1/2 tax increase fuel motor Fund: Highway Increase sales tax rate from 3% to 4% 3% to from Increase sales tax rate levy 7.75% and 7.00% to surtax a scaled tax from income Increase corporate from 1.00% in 1994 4.00% in 1991 to $100,000 above income for tax rate personal income a 7.75% Add 2 tax from Increase cigarette 1/4 Commercial Leaking Petroleum Underground Storage Tank Fund and the Groundwater and the Groundwater Fund Tank Storage Underground Leaking Petroleum Commercial (1/4 Fund Loan Protection Total tax increase and budget transfer from 1991 revenue changes: 1991 revenue from and budget transfer tax increase Total 1991-92: $637.5 million 1992-93: $738.8 million 1993-94: $786.4 million 1994-95: $836.6 million 1991 Significant Tax Changes (Budget Bill Unless Noted) Changes (Budget Bill Tax 1991 Significant 126 l CIVITAS INSTITUTE l 1991 session April Education administrators from➤ putsatemporary Governor Martin ➤ Appropriations committees➤ in After budgetanalysts project ➤ anattempt toIn backthegovernor➤ states hewill Governor➤ Martin the education budget. In response,the educationbudget.In in order to stave offmore cutsto salestax increase for aone-cent colleges andpublicschoolscall the state universities, community I cantakeduringthepastyear.” alltheprecautions that been taking gap widens. ExplainsMartin, “I’ve retirement fundincasethebudget to theteacher andstate employee hold ona$56.7millionpayment million from theUNCbudget. recommendations to cut$59.2 andHousemake the Senate school positions. eliminating thousandsofpublic to discuss budget, legislators start million incutsto balance the legislators willhave to make$400 and have noincome coming in.” like to belaidofffor three weeks like to askSpeakerBluehow he’d Governor Gardner responds, “I’d the budgetshortfall. To whichLt. for state workers inorder to meet now atthequestionoffurloughs,” seriously have looking to start “[Governor is]goingto Martin into acorner, Speaker Bluecharges, Martin. economy takesadownturn,” says justincasethe a littlereserve municipalities. “I needto hold to transfer backto counties and reimbursement fundsthestate is only holdback$30millionofthe 1991 Other Significant Changes 1991 Other Student protesters➤ march onthe The press➤ discovers astrategy • Clean Air Act implemented CleanAirAct withagraduated fee • Create Authority, AirCargo Airport whichislater • OTHER Account $400,000 to implementSavings Reserve • STATEWIDE Appropriate $103millionoftheprisonbond • CAPITAL • theState Direct Board ofEducationto develop a • Restore paidChristmasholiday thatwas 3-day • Nolegislative increases • MENTAL HEALTH COMPENSATION proposed cutsto theUNCsystem. Legislative Buildingto protest in thefirstplace getusoutofit.” Democrats whogotusinthismess cuts. Says thememo, “Let the the Democratsto makethebudget Republicans to sitbackandallow fellow(R-Lincolnton) instructing Leader JohnathanL.Rhyne Jr. memo from HouseMinority where itis.” proposal onthetable, and that’s increase: a half-cent “I have my againpushes Governor Martin 552] schedule for majorsource emitters [S.L.1991- 749] renamed Global TransPark Authority [S.L.1991- (Rainy Day Fund) youth facilities funds for correctional facilitiesand$9millionfor clients instate psychiatric hospitals;$7.7million) Thomas S.v. Morrow and otheradministrators schedulefor superintendents,salary principals, fell ona Tuesday-Thursday holidaychanged in1988to ifChristmas a2-day (developmentally disabled ➤ Approximately 2,000 teachers May march in Raleigh to protest ➤ Democratic legislative leaders proposed education cuts. announce that the revenue ➤ Along with several Republican shortfall could reach $700 million. legislators, Lt. Governor Gardner Senator Basnight threatens that if claims the proposed education the revenue shortfall worsens, “it cuts are irresponsible and a ploy eliminates any conversation of no by Democrats to prepare the tax increase from any sector. We public for more tax increases. don’t have many options.” ➤ In reaction to news that the Total Private Employment Growth: current year’s revenue shortfall is Southeast States, 1985-2005 now $729 million, the governor shifts $100 million in spending 40% to the FY1992 budget. “The 35% alternative,” claims Martin, “would 30% be to furlough all employees for

25% five days.”

20% ➤ Governor Martin offers a supplemental budget proposal 15% that includes $276 million in 10% spending cuts to Medicaid and 5% Aid to Families with Dependent

0% Children; the elimination of US FL GA NC SC TN VA 1,827 vacant state jobs; court fee increases; and early retirement programs for state employees and House Majority Leader Dennis A. teachers with 28 years of service. Wicker (D-Sanford) calls the Lt. Governor’s actions “a slick Madison ➤ Martin also says that in order for Avenue campaign for governor.” him to support any recommended tax increase he will have to see Despite a Republican effort to cut legislative support for executive administrative offices and support veto power. “I think that’s the 1991 session l CIVITAS INSTITUTE l 127 staff instead of teachers, the House necessity for getting bipartisan Appropriations Committee cuts support for the kind of tax increase 180 UNC teaching positions. that might be needed.” Senate and House Appropriation ➤ Governor Martin proposes committees draft similar proposals another $36.9 million in cuts and to save teaching positions increased revenue collections. by shifting the cost of driver He proposes lowering salaries education back to the Highway for new employees who replace Fund. Driver education was moved departing state workers, reducing to the General Fund in 1986 (see service time bonus pay for judicial 1986 Timeline). and legislative employees, and improving tax collection methods. 128 l CIVITAS INSTITUTE l 1991 session 1991 Other Revenue1991 Other Sources &Actions June Senate proposesSenate $613milliontax ➤ • • • • • • $100,000 annually. for thosewhomakemore than reduces income taxdeductions companies. The planalso Senate premium taxes paidby insurance two years, andanincrease in in thecorporate income taxfor excise tax,a1.25percent increase cent increase inthecigarette increase inthesalestax,athree- thatincludesaone-cent package Department ofAgricultureDepartment fees increase: Highway Fund fee increases: Fund to theGeneralfund Transfer anamountequalto salestaxexemption for DOT purchases from theHighway 1991-742] [S.L. fees orsuperiorcourt $4 increase for indistrict incourt criminalandcivilactions $20 to $40increase inmarriagelicense fee [S.L.1991-693] under eachstatute inthe1990-91fiscalyear (result isanincrease instate revenues) amount willbeequalto thedollaramountthatshouldhave beendistributed to localities sharing andreimbursement statutes; ratherthanafixed percentage oftaxrevenues, the Freeze theamountofrevenue distributed to localgovernments underexistingrevenue- ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ amounts annual permit Assessment of 5 Feed sampletesting fee of$75[S.L.1991-649] Tobacco assessmentof10 Bee andhoneypermitfor $25[S.L.1991-349] feesSeed [S.L.1991-588] [S.L.1991-442] Plant pestcertification $4 to $20for of late transfer submissionoftitleafter penalty vehicleMotor license dealerandmanufacturer fees increased by varying $5 to $10for oversize/overweight vehicle permitfees or$25to $50for an $5 to $10for driver’s licenses, learner’s permits, andICcards $1 to obtainmotor vehicle records ¢ perpigfor porkpromotion [S.L.1991-605] House proposes a similar $698.7 House proposes asimilar$698.7 ➤ ¢ per100lbs. marketed [S.L.1991-592] cuts inthestate’s history.” thebiggestbudget making after remember, we proposed itonly Blue, “It’s fairandit’s balanced and, percent to 8percent. ClaimsSpeaker corporate income taxfrom 7 $100,000, andincreasing the on couples earningmore than tax from 7percent to 8percent cents, raisingthepersonalincome raising thecigarette taxby 5 thatincludes million taxpackage 1991 session l CIVITAS INSTITUTE l 129 country’s leading bond-rating country’s agencies reports that North its AAA rating, will retain Carolina outlook will but that the state rating due to a negative receive passed budget. the recently Martin Governor than projected, reduce agencies to asks state $150 million. spending by the problems we have faced.” Lt. faced.” have we the problems “The responds, Gardner Governor tax packageentire is one of the in the historydarkest days of North Carolina.” with the budget, claiming dismay ignored the General Assembly “If I had the veto,” his proposals. used have “I would Martin,declares try to it in order clean up the to defects.” until the hiring freeze continue to is exception An at least October. and university college made for positions (public school teaching exempt). already positions were Standard & Poor’s, one of the ➤ & Poor’s, Standard $29 million less July revenues ➤ With Governor Martin➤ Governor his expresses Martin➤ Governor plans announces August budget resolution that expires on expires that budget resolution July 6. a permanent its opposition to on tax increase income corporate 7.75 to 7 percent business from Chairman Senate Finance percent. Daniel (D-Caswell) states, B. George that right you tell like it, I’ll “I didn’t player.” a team But I’m now. allowing emergency resolution until July operate to agencies state 13. 689) passes on July 13. It includes a one-cent in the state increase sales tax, a three-cent increase tax on cigarettes, in the excise in the increase a 0.75 percent of tax, and the creation corporate bracket tax income a 7.75 percent The $100,000. above on income 3,398 state budget also eliminates 290 teacher in addition to jobs, as well aides and clerical workers, as 180 assistant principal positions. budget given this is a tremendous Legislators pass a continuing pass a continuing ➤ Legislators drops Committee ➤ Senate Finance pass another ➤ Legislators ➤ $7.7 billion budget (S.L. 1991- “I think that ➤ Blue, Speaker States July *Bracket 4 was added for the 2001 tax year as a two-year “temporary tax” and continued through through “temporary tax” and continued for the 2001 tax year as a two-year *Bracket 4 was added Jan. 1, 2008. effective was dropped 2008. The bracket 130 l CIVITAS INSTITUTE l 1991 session December November October September ➤ As theGeneralAssembly meetsin Tax➤ rebound collections from the According➤ to theBoard of Democratic legislative➤ leaders taxes thatwaspassedin1987. onpayrollto alsorepeal asurtax callsonthem Governor Martin a specialsessiononredistricting, unpredictable. corporate taxpayments, whichare derived from estimated quarterly that $32millionofthissurplusis budget analysts caution,however, first four monthsofFY1992.State more through thanexpected the July deficitandare now $40million enrollment. ofopen their longtimepolicy collegescommunity to abandon and increased enrollment willforce Community Colleges, budgetcuts allocated by theGeneralAssembly. spend $150millioninfunds ordering state agenciesnotto his constitutional powers by exceededallege Governor Martin ° Public 9,926(0.9%)increase Schools: ° administrator colleges ratiosinthecommunity andstudent/ student/faculty Increase ° Eliminate 336vacantUNCpositions, reduce ° summerschoolfrom 6to 4weeks Shorten ($13 ° Reduce driver’s educationfundsandtransfer ° Phaseoutfundsfor energy costs to local ° Defer schoolbusreplacement ($15million ° Eliminate fundsfor Improvement School and ° Restore 250local teaching positions ° $10millionincrease for low-wealth andsmall ° 3-and4-year-old $15millionto serve ° BasicEducationProgram ($29millionin1992- ° of50%for Increase in-state and53%for out-of- ° Average increase of10%for in-state and14% ° increase ratio student/faculty non-teaching exempt positionsby 5%,and million reduction) million reduction) to Highwayremaining Fund support ($29 and $36millionin1992-93) of$18millionin1991-92 schools (reduction reduction) Accountability in1992($39million) Act school systems handicapped children 93 f state college community students f UNC: 3,628(2.4%)increase or out-of-state UNCstudents or out-of-state or more teachers) 1991 EDUCATION FUNDING OTHER EDUCATION CHANGES TUITION & FEE INCREASES ENROLLMENT CHANGES 1991-1992 BIENNIUM 1992 session FY 1993: July 1, 1992 to June 30, 1993

General Assembly: House Dems: 81 House Reps: 39 Senate Dems: 36 Senate Reps: 14

Governor: James G. Martin (R)

The 1992 Short Session: Budget Bill HB1340/S.L. 1992-900 Passed House: June 12, 1992 Passed Senate: June 20, 1992 Conference Version Ratified: July 8, 1992 Signed by Governor: July 8, 1992

ith a nationwide recession tarnish Hunt’s reputation. (Beverly Smith, underway, neither party wanted to a Democratic political operative, was Wincrease spending nor raise taxes, subsequently convicted for intercepting especially in an election year. While the and monitoring Gardner’s cell phone calls). usual friction between Governor Martin and the General Assembly appeared to Hunt won a third term as governor, recede, the main issues that dominated defeating Gardner 53 percent to 43 the outgoing governor’s eight-year tenure percent. By the end of the year the continued as Martin faced opposition economy began to show signs of recovery. to his plans for education reform. The Democrat-led General Assembly also January lambasted Martin’s proposed 2 percent ➤ The House Finance Committee raise for teachers and state workers. With approves a business tax break that 1992 session l CIVITAS INSTITUTE l 131 both sides wishing to avoid appearing suspends a 20 percent surcharge on partisan, the governor and the Legislature unemployment taxes. compromised without much vitriol on ➤ most issues. The gubernatorial campaign Lt. Governor Gardner enters the race between former Governor Jim Hunt (D) for governor pledging to fight the tax and current Lt. Governor Jim Gardner increases (e.g., personal income tax, (R) turned into a smear campaign with cigarette tax, corporate tax, and sales Gardner being attacked for his personal tax) passed in 1991. “I want us to go business failings. This limited Gardner’s back and revisit those taxes,” Gardner ability to highlight Hunt’s previous record declares. “Get those high personal as governor. Even a last minute accusation income taxes off the backs of the that Hunt had illegally placed wiretaps hardworking people of this state. We on the Gardner campaign was unable to are the only state in this nation that 132 l CIVITAS INSTITUTE l 1992 session April March February In an effort to curtail Governor to curtail aneffort In ➤ announces Governor➤ Martin adebate withotherDemocratic In ➤ As therecession➤ continues, the made achangeinthatdirection.” taxes food andIthinkit’s timewe legislation diesincommittee. unspent appropriated funds. The and requiring agenciesto report specified by the GeneralAssembly use offundsfor purposesnot particular, by prohibiting the expendituresover –in agency exercising greater oversight Democrat legislators propose budgetpolicies, agency directing Martin’s useofexecutive orders in Charlotte. Carolinas Center Medical in Development Board atthe as chairmanoftheResearch that hehasaccepted aposition tough thingsto fixthisbudget.” to bite thebulletto dosomevery the GeneralAssembly for having of theDemocraticleadership cuts. proud“We oughtto bevery budget raising taxes andmaking balance thebudgetin1991by the Legislature for itsdecisionto A. Wicker (D-Sanford) praises Governor, Representative Dennis candidates runningfor Lt. spending orraisetaxes. pressure onbudget writers to cut surgeThis unexpected puts will become eligible for Medicaid. join thewelfare rolls and100,000 that40,000peoplewill projects Services state DivisionofSocial May Martin alsorecommends thatBasic Martin ➤ submitshis Governor➤ Martin A Harrispollfindsthat69percent➤ ° Public 13,460(1.2%)increase Schools: ° Complete implementationofend-of-course/ ° $6millionfor low-wealth andsmall schools ° $30millionincrease for differentiated ° $19millionincrease for BasicEducation ° of14%for Increase in-state and0%for out-of- ° Average increase of3%for in-state and10%for ° development,” raisesupto 2 award teacher merit,or “career permits localschoolsystems to Accountability of1989,” Act which Improvement School and “The the year bespentinaccord with Education Plan(BEP)fundsfor bond.construction remaining $87.5millionprison improvements; andissuingthe bond referendum for UNCcapital state employees; a$300million 2 percent raisefor teachers and budget, whichrecommends: a system campuses. for onUNC buildingconstruction borrowing $300millioninbonds Carolina votersof North favor school face tougher graduation requirements tests; 9thgraders enteringend-of-grade high Accountability isalsorevised theAct Act; pay Improvement undertheSchool and P state college community students out- UNC: 4,249(2.8%)increase rogram of-state UNCstudents 1992 EDUCATION FUNDING OTHER EDUCATION CHANGES TUITION & FEE INCREASES ENROLLMENT CHANGES

1992 session l CIVITAS INSTITUTE l 133

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00 1998-99

Issue Area

Committee proposes giving all giving proposes Committee raise a $522 pay employees state the year. for (HB 1340) which of the budget bill teacher includes a 2 percent and a raise based on experience Over workers. state $522 raise for BEP is Republican opposition, refunded. the Senate budget spending, the House plan, mostly mirrors but the Senate also cuts the salary from the next for governor $91,938 – a reduction $123,822 to however, Senate, The of $31,884. cut for endorse a pay to refuses legislators. y 1997-98

The House Appropriations ➤ House Appropriations The their version ➤ House approves The salary to raises and regard ➤ With negotiations, ➤ During conference

1996-97

1995-96

1994-95

1993-94

1992-93

1991-92

1990-91 1989-90 General Fund Authorizations by Issue Area by Authorizations Fund General

General Fund Authorizations b General Fund Authorizations Legislative Building demanding a Legislative raise. higher pay percent for 1990-1991 (to reach reach (to 1990-1991 for percent in 1993- of 7 percent a maximum thereafter). 1994 and Mansion protest to the Executive across-theproposed Martin’s raise. 2 percent board 1988-89

State employees hold a rally at the ➤ employees State Teachers hold rallies and march to to and march hold rallies ➤ Teachers June

1987-88

All Other Health & Human Svcs. Universities Community Colleges Public Schools 1986-87 1985-86 Medical Assistance (Medicaid): Medical Assistance Abuse: Mental Health/D.D./Subst. Hospitals & Centers: Social Services: $602 million $186 million $169 million $138 million 1992 HEALTH & HUMAN SERVICES BUDGET SERVICES & HUMAN 1992 HEALTH Major Items: Total Appropriations Appropriations Total $1.41 billion $8 $6 $4 $2 $0 $18 $16 $14 $12 $10 billions of dollars 134 l CIVITAS INSTITUTE l 1992 session 1992 Other Revenue1992 Other Sources 1992 Significant Tax Changes

• • July The GeneralAssembly➤ passesa The Houseproposes➤ anincrease in The $8.3 billion budget bill (S.L. The $8.3billionbudgetbill(S.L. ➤ andHousenegotiatorsSenate ➤ Justice andpublicsafety fees costs by ($8million):increaseby $4,localcourt court In 1990,themethod offundinglocaltaxreimbursements waschangedfrom In an Nosignificant taxlaw changes • July 8. fundinguntil 1991-812) extending continuing budgetresolution (S.L. pay raise. approximate theproposed teacher to $600inorder to more closely state worker pay from aflat$522 collegecommunity students. increases for UNCstudentsand legislators agree to tuition continued fundingfor BEP. and teachers, tuitionincreases and includes pay raisesfor state workers 1991-900) isratifiedonJuly8.It (D-Wake). declares HouseSpeakerDanBlue a pay raise...thenwe willrecede,” doesnotwanttoSenate give them increase for state workers. the “If agree to forgo theadditional$78 $1, andestate fees by $5 $237 millionsavings) purchases, account receivables intangibles tax,moneyondeposit, andcertain (projected taxonbusinessinventories,for property homestead exemption, salestaxonfood stamp to anappropriation; in1992themethodwaschangedbacktoearmarking anearmarking August The capitalspendingbudget(S.L. ➤ The GeneralAssembly➤ approves ➤ Democratic gubernatorial 1992 Other Significant Changes 1992 Other $95millionfor capitalimprovements for state • CAPITAL 122newjudicialbranchpositions • $3millionincreasePersons’ inIndigent Attorney • 2%average increase for teachers • increase for moststate $522salary employees • CRIMINAL JUSTICE AGENCIES COMPENSATION 1991-1044) isratifiedonJuly25. 1036). funds, $87.5million(S.L.1991- the remainder oftheprisonbond candidate JimHuntannounces a agencies andUNC “Little Rascals” Day Care case representation, andexpensesarisingfrom the indigent defendants, increases inthecost of Fee Fund dueto increased for projected shortfall State/Local Taxes as Share of Personal Income: North Carolina, 1985-2005 4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

“Republicans for Jim Hunt” group October whose chairman, Bill Burkhardt, ➤ Due to budget cuts and shifts in had previously contributed to spending priorities, the university Republican nominee Jim Gardner’s library at UNC Chapel Hill reports campaign for Lt. Governor. that it has canceled more than 170 ➤ Lt. Governor Gardner announces journals and passed up buying he will create a Governor’s more than 220,000 books over Teachers Advisory Council that the last 7 years, causing it to drop will enable teachers to have more in the Association of Research input in educational decisions. Libraries ranking of university book buying from 10th to 48th. 1992 session l CIVITAS INSTITUTE l 135 September ➤ In a sign of easing recession woes, November Governor Martin announces ➤ The FBI investigates allegations that state revenue has exceeded that Hunt operatives illegally projections by $10 million to $15 wiretapped the Gardner campaign. million. ➤ Governor Bill Clinton (D-Arkansas) ➤ Representative Doris Huffman defeats incumbent George Bush (R-Catawba), a minor Republican (R) and independent candidate figure who lost in the May Ross Perot (I) to become the 42nd primary for Lt. Governor, endorses President of the United States. Democrat Jim Hunt. ➤ Jim Hunt (D) defeats Jim Gardner (R) 53 percent to 43 percent to 136 l CIVITAS INSTITUTE l 1992 session $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 $200 $400 $600 $800 December The 1992 election bringsin12 The 1992election ➤ Representative➤ DanielBlue MarcSenator Basnight(D-Dare) ➤ Huntmakesearly Governor-elect ➤ $0 three intheSenate. three seats intheHousebutlose members. Republicanspickup and43newHouse new Senators the third time. return to thegovernor’s office for speaker. nominated for asecond term as isunanimously (D-Raleigh) position ofpresident pro tempore. is nominated for themajority piece.” child development his “signature

1985

1986

1987

1988

1989 State Tax Revenue perCapita: 1985-2005

1990

1991

1992 and localtaxes were $3,526whereas per North Carolina. 2005,percapitastate In North capita taxes were $2,330in1995.North Southeast (N.C.,Fla.,Southeast S.C., Ga., Tenn., Va.) Over thepast10years,Over percapitataxes burden for 2006alsoranked fi 1993 have increased by more than$1,000in Carolina’s overall state andlocaltax 1994

1995 KNOW? DID YOU and 23rd nationally. 1996 Source: The TaxFoundation

1997

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2000

2001

2002 rst inthe

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2005 why bonds? l CIVITAS INSTITUTE l 137 $250 $200 $150 $100 $50 $0 Per Capita Debt G.O. Debt per Capita appropriations for new construction from construction new from for appropriations the spend break he could the budget and tax cycle North that has dominated years. the past 100 politics for Carolina the from removed Ifspending were new Martin,budget, reasoned be would there spending and of increasing less chance cover to taxes increase to thus being forced Martin Second, spending. the recurring the people fair to thought it was more of North for let them choose to Carolina new implement whether to themselves local lead to spending projects that would assailed regularly Democrats tax increases. being more as bond proposals Martin’s interest of the resulting (because expensive often plans, than their own payments) without actually knowing what the final (Thebe. of a project would cost Highway a classic example). being Fund Trust G.O. Bonds Outstanding General Obligation Debt Per Capita: 1988-1997 Capita: Debt Per Obligation General 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Why Bonds? $0 Throughout his eight-year tenure, Governor Governor tenure, eight-year his Throughout James Martin proponent was an ardent various finance to of using public bonds infrastructure projects– in particular, school and prison construction. By highway, preferred lawmakers Democratic contrast, with the such projects, for raise taxes to was tax income that the corporate result in 7 percent to 6 percent from increased new school construction; finance 1987 to and the gas tax and sales tax on new raised in 1989 to were purchases vehicle construction. fund highway two for taxes bonds over Martin preferred removing he thought that by First, reasons. $800 $600 $400 $200 $1,600 $1,400 $1,200 $1,000 Total Debt - Million $ original meansdevoured by interest, and next no one left to borrow nooneleft from and next to live by borrowing, soonfi – somustitbewithagovernment. 138 l CIVITAS INSTITUTE l why bonds? As anindividualwhoundertakes another bondissue–thistimefor $450 proposed 1988,Governor In Martin new bondissues. from continuing to promotedeter Martin too early. Butthisinitialsetbackdidnot “punt[ing] onsecond down” by giving up failed. The governor accused Jordan of opposition. As aresult, Martin’s proposal intheface ofDemocratic backpedaled the recommendation, butJordan quickly At first, Lt.Governor Jordan supported for school construction. bond package formally requested a$1.5billion Martin on thesize ofthebondissue. 1987 In $50 millionto $100milliondepending to thegovernor, savings would rangefrom Carolina’s individualcounties. According the moneyatalower rate thanNorth would insure thatthestate could borrow construction. The state’s AAAbondrating counties could borrow from for school plan for upto $2.2billioninfundsthat proposed abond thefallof1986,Martin In Abraham Lincoln nds his system in2000(S.L. 2000-3). andrepairsconstruction for theUNC $3.1 billionfor building and grounds in1996(S.L.1995-631)and construction for $1.8billioninschool repairs and the GeneralAssembly alsopassedbonds Throughout Hunt’s tenure asgovernor, that year inNovember. businesses. Voters approved thebondslater improvements new designed to attract state parks, aswell aswater andsewer to colleges, community universities and soughtto fundimprovementspackage and Parks of1993.” BondAct The bond the $740million “Education, Clean Water, Assembly suddenlyreversed itself, passing Jim Hunttook office in1993,theGeneral Ironically, once DemocraticGovernor tuition. Legislature, whichopted instead to raise recommendationHis wasdeniedby the in bondsfor UNCsystem construction. a publicreferendum on$300million year asgovernor, alsoaskedfor Martin bond referendum passed.hisfinal In of margins –lessthan600votes –the the November ballot.Bytheslimmest additional $200millionreferendum on sessionandplacingan during theshort acquiesce to allocating$75millioninbonds in1990,butwould only million package The GeneralAssembly took uphis$490 third bondissue–for prisonconstruction. beganpushinga December 1989,Martin Again, Democratslettheproposal die. In million for newhighway construction. 1993-1994 BIENNIUM 1993 session FY 1994: July 1, 1993 to June 30, 1994

General Assembly: House Dems: 78 House Reps: 42 Senate Dems: 39 Senate Reps: 11

Governor: Jim Hunt (D)

The 1993 Long Session: Budget Bill SB27/S.L. 1993-321 Passed Senate: May 13, 1993 Passed House: May 28, 1993 Conference Version Ratified: July 9, 1993 Signed by Governor: July 9, 1993

n Jim Hunt’s first year back as governor for the Governor’s Industrial Recruitment he found that the Legislature had Competitive Fund, a personal negotiation Ibecome more powerful in controlling fund used by the governor to close the state purse strings than he had business deals. In September, Mercedes remembered.1 The difficult economic announced that it was passing over North times of the 1980s and early 1990s, as Carolina and choosing Alabama instead. well as opposition to Governor Martin, As the year came to a close, increased had taught the General Assembly how violence in schools and issues related to to craft a budget that reflected its own prison overcrowding led Hunt to call for a priorities rather than just the governor’s special session of the General Assembly. recommendations. Because Governor In a reversal from the anti-bond rhetoric Hunt was legally constrained by outgoing that dominated the Martin era, the General Governor Martin’s budget, Hunt was only Assembly passed the “Education, Clean able to propose limited adjustments to Water, and Parks Bond Act of 1993” to fund 1993 session l CIVITAS INSTITUTE l 139 the budget. One of Hunt’s main objectives improvements to community colleges, for 1993 was to create an atmosphere universities and state parks, as well as that would attract new business to water and sewer projects designed to North Carolina. As part of this initiative, attract businesses. Voters approved the Hunt set his sights on bringing the first $740 million bond package in November. Mercedes-Benz plant in the United States to North Carolina. Hunt also received $35 million from the General Assembly for a January technology training center and $5 million ➤ Anticipating slowing revenue growth for the next eight years, a report by

1 For example, in 1985 the General Assembly had created an Office of Administrative Hearings to review agency rulemaking procedures and to investigate civil rights complaints on behalf of state and local employees. 140 l CIVITAS INSTITUTE l 1993 session February GPAC➤ approves two According➤ to Virginia lottery The GeneralAssembly’s➤ In responseIn to thescandal,➤ House ➤ The Raleigh Public Safety. ofCrimeControl and Department tuition andshuttingdown the raisinguniversity KPMG report: recommendations from the annual ticketsales. percent –orsome$87millionof contribute from 5percent to 10 Carolinaanalysts, residents North pay.performance state replace pay with longevity Committee recommends the Government Audit Performance the state. private colleges anduniversities in Carolina studentswhoattend schools andhaltsubsidiesto North the state increase tuitionatUNC Committee (GPAC) recommends Government Performance Audit LLPto the KPMG Peat Marwick, all we canasaGeneralAssembly However, Ibelieve we needto do increases. … about thesesalary remarks: “I understandtheconcern Speaker DanBlue(D-Raleigh) branches ofstate government.” standards for itselfthanfor other Assembly settingdifferent fiscal latest exampleoftheGeneral the workers received in1992.Remarks $522pay raiseallstate the-board 5 percent, alongwiththeacross- raises ranging from 4percent to received additionalmeritpay thatlegislativereports employees , Observer raisesare the “The News &Observer House Minority Leader DavidHouse Minority ➤ hisState oftheState address,In ➤ 1993 Other Significant Changes 1993 Other government programs.” more government, withmore solve people’s problems with ways inwhichheisgoing to “Basically, hisspeech outlined governor’s address by observing, criticizes the Balmer (R-Charlotte) care and childprotective services. for Children,” thatwillincrease day the Carolina Partnership “North childhood development program, earmarks $40millionfor anearly revenue projections. Hunt through budgetcutsandincreased two years,the next financed of $570millioninspendingover Governor Huntcallsfor anincrease policies ofthisstate.” set thebudgetanddetermine the to keepthebestpeopleto helpus • Extend for Extend 5years therequirement thataportion • Authorize additionaleconomic development • bonusfor increase plus1%one-time 2%salary • • Establish structured sentencing Establishstructured [S.L.1993-538] • CRIMINAL JUSTICE $740millionbond:Education,Clean Water, and • $226millionfor capital improvements • CAPITAL LOCAL GOVERNMENTS COMPENSATION of localgovernments’ two 1/2 industrial site preparation [S.L.1993-536] tools, includingtheuseofpublicmoneyfor teachers most state employees; 3%average increase for Parks of1993[S.L.1993-542] BondAct can meetthoseneeds[S.L.1993-255] dedicated to schoolbuildingsunlessotherfunds ¢ sales taxes be

1993 session l CIVITAS INSTITUTE l 141

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Committee declines to fully fund declines to Committee early childhood Hunt’s Governor cutting his $28 million program, two-thirds. by request cities and counties be allowed allowed be counties cities and in” “moving float bonds for to such infrastructure improvements, and water. as sewage General Assembly the from “kitty” close business that he can use to deals. early proposed Hunt’s Governor are many childhood program, about the expected $28 concerned tag. million price 1998-99

The Senate Appropriations ➤ Senate Appropriations The ➤ Senate and House consider The ➤ a $15 million Hunt also requests generally support➤ While legislators May

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incentives for businesses to to businesses for incentives North to relocate Carolina, that Hunt proposes Governor care reform a top priority for the priority a top for reform care tackle to going are “We session. claims this session,” this problem take care going to are “We Blue. We in this state. of the sick people our help for provide going to are do going to are and we businesses, put a lid on out-of- can to all we costs.” health care control the legislative pay raises by by raises pay the legislative 10,000 than that more showing employees and judicial executive raises. additional also received

➤ In increase a plan that would 1989-90 ➤ Blue makes health House Speaker Speaker Blue attempts to defend defend ➤ to Blue attempts Speaker April March Total Income Tax Revenues Personal Income 1988-89

Personal Income and Income Tax Revenue Annual Growth Annual Revenue Tax and Income Income Personal 1987-88 1986-87 0% 5% -5% 10% 15% 20% 142 l CIVITAS INSTITUTE l 1993 session 1993 Significant Tax Changes

June The passtheir HouseandSenate ➤ his$197millioncapitalbudget, In ➤ The budgetconference➤ committee The debate HouseandSenate ➤ • Repeal reduction andsunset of1/2 Repealreduction to negotiate thedifferences. them into conference committee versions ofthebudgetandsend colleges.community and to upgrade equipmentin to putcomputers inpublicschools Governor Huntasksfor $36million $10 million. that would save localtaxpayers taxes,from localproperty achange would exempt computer software bills (SB658andHB911)that cost to the next budget). cost to thenext pushed to Julyinorder the to shift paycheck ofthefiscalyear was years agothefinalstate employee payday for state employees. (Two teacher salariesandrestore aJune thatwould beusedtoHill fund State University andUNCChapel over a$200tuitionsurcharge atNC is unableto come to anagreement park improvements. sewer andwater systems, andstate improvementsinfrastructure to new buildingconstruction, collegecommunity improvements, to bondsfor university and pertain (HB 664andSB14). The bills over theirrespective bondbills storage andrelated cleanup[S.L.1993-400] July In an effort to lure aneffort Mercedes In to ➤ On July9,theGeneralAssembly ➤ A compromise➤ isreached on A continuing budgetresolution➤ is ¢ excise tax ongasolineusedfor underground tank the Executive where Mansion holds an “ice cream social” at Carolina, GovernorNorth Hunt budget bill(S.L.1993-321). passes the$8.8billioncurrent of June. state employee payday to theend to theSenate’s planto restore the conference committee alsoagrees students.for out-of-state The in-state studentsand6.5percent increase by atleast3percent for tuition atalluniversities will salaries atalluniversities. return, In earmark $7millionfor teacher surcharge, theHouseagrees to paychecks. ofatuition Instead the tuitionsurcharge andJuly operations untilAugust 1. funding for government passed (S.L.1993-253)extending oa prpitos $1.70billion Major Items: Total Appropriations 1993 HEALTH &HUMANSERVICES BUDGET ot evcs $53million $75million $184million $24million Vocational Rehabilitation: Youth Services: $441million $860million Facilities Services: Services: Social Health/D.D./Subst.Mental Abuse: AssistanceMedical (Medicaid): others call it, “Mercedes University” 1993 EDUCATION FUNDING – is fully funded at $35 million. ENROLLMENT CHANGES ➤ The “Education, Clean Water, and ° Public Schools: 14,942 (1.4%) increase Parks Bond Act of 1993” is passed ° UNC: 920 (0.6%) increase (S.L. 1993-542). Voters will decide on the bonds in November. TUITION & FEE INCREASES ° Average increase of 11% for in-state and 8% for ➤ The 1993 session ends with no out-of-state UNC students lottery and no executive veto. ° Decrease of 0.2% for in-state and 0.0% for out- of-state community college students August OTHER EDUCATION CHANGES ➤ A News & Observer poll finds that ° $13 million increase for low-wealth and small 53 percent of voters support school systems bonds for community colleges ° Basic Education Program funding ($10 million and 56 percent support bonds for instructional support positions) for water and sewer projects. A ° $39 million increase for differentiated pay majority of voters surveyed (53 ° $24 million one-time increase for school bus percent) do not support bonds for purchases to make up for previous cuts state parks and universities. ° $8 million reduction to the Career Development Program in 1994-95 ° New end-of-grade testing program begins in September grades 3 through 8 ➤ Mercedes-Benz announces ° $8 million for community college books and that the finalists for its first U.S. equipment plant are North Carolina, South ° Reorganize Department of Public Instruction Carolina, Georgia and Alabama. and cut 86 positions But in a blow to Governor Hunt’s dealmaker image, Mercedes he announces a plan to build a decides to locate the plant in $35 million training center for Tuscaloosa, Alabama. In response, automotive technology workers. Governor Hunt explains to the Hunt defends his proposal as press, “You win some and you lose follows: “This isn’t a pipe dream. If some.” we build this, it is going to create tens of thousands of new jobs and October 1993 session l CIVITAS INSTITUTE l 143 add millions of dollars in new tax ➤ UNC system President C. D. revenues.” Spangler Jr. urges voters to pass the UNC bond referendum, ➤ The bill for a property tax claiming that if it fails, enrollment exemption on computer software for qualified students could be is ratified on July 23 (S.L. 1993-459). restricted. ➤ The $226 million capital ➤ Beverly Smith, a former Nash improvement budget bill (S.L. County Democratic Party 1993-561) passes on July 24. chairman, pleads guilty to Governor Hunt’s automotive intentionally intercepting and technology training center – or as monitoring the cellular phone 144 l CIVITAS INSTITUTE l 1993 session November Phil Carlton➤ andCharlieLane, two Voters➤ approve $740million and community service. and community fined andsentenced to probation gubernatorial campaign. Smithis Jim Gardner duringthe1992 conversations ofLt.Governor probation service. andcommunity Lane are finedandsentenced to Smith. LikeSmith,Carlton and notes andatapemadeby Beverly to reviewingJim Hunt,pleadguilty ofGovernorformer law partners colleges anduniversities. and sewer projects, community in bondissuesfor parks, water December Hunt callsontheGeneral ➤ Governor➤ Huntproposes to highest combined state andlocalsales “crime session.” Assembly to convene for aspecial thereafter. $1 millionprovided annually with additionalfundsofatleast cost $10.7millionover two years The controversial planwillinitially to accommodate parents. working children clinichours andextend provide free immunizationsfor all counties, North Carolina counties, hasthe17th North With arate of6.75percent inmost Source: The Sales TaxSource:Clearinghouse The DID YOU KNOW? DID YOU tax rate inthecountry. 1993-1994 BIENNIUM 1994 session FY 1995: July 1, 1994 to June 30, 1995

General Assembly: House Dems: 78 House Reps: 42 Senate Dems: 39 Senate Reps: 11

Governor: Jim Hunt (D)

The 1994 Short Session: Budget Bill SB1505/S.L. 1994-769 Passed Senate: June 2, 1994 Passed House: June 21, 1994 Conference Version Ratified: July 16, 1994 Signed by Governor: July 16, 1994

ith the recession of the early of Representatives after 40 years in the 1990s coming to an end, state minority, Republicans won a majority in Wbudget writers reaped the benefits the state House and came two seats shy of of previous tax increases by taking in a winning a majority in the Senate. $1.2 billion surplus. Instead of returning the money to taxpayers, the governor and the General Assembly increased January spending. Governor Hunt began the ➤ Governor Hunt unveils his crime plan, year by proposing a new crime package estimated to cost between $118 in a special session of the General million and $123 million for FY1994- Assembly. During the short session, 95. The plan includes $27 million in legislative priorities focused again on construction costs for new prisons and

crime prevention and prison construction, $96 million in annual “administrative” session l CIVITAS INSTITUTE l 145 1994 as well as education. In the end, the costs that cover a variety of initiatives General Assembly increased spending ranging from after-school programs for $1 billion during the 1994 session. As in kids to substance-abuse programs for previous years, much of the money was inmates. Hunt defends the increased spent on raises for teachers and state spending saying, “Some people have employees. As Election Day approached, called this a whopping big package. But an energized Republican Party channeled it is nothing compared to the cost of its resources into clearly articulating its crime.” message for the next session by providing ➤ In spite of, or as some argue, because of, voters with a “New Contract” for North the multimillion dollar Basic Education Carolina. In a landmark election year that Plan, a state education report shows saw Republicans retake the U.S. House that only 40 percent of North Carolina 146 l CIVITAS INSTITUTE l 1994 session March February While briefinglegislators➤ on Allocating fundsfor➤ FY1994-95and The UNCBoard➤ ofGovernors asks that report State inspectors ➤ Governor➤ Huntmakesapledgeto The GeneralAssembly➤ convenes standards are settoo high. officials begin to complain that score standards, localschool eventual decisionto lower test thestageforSetting thestate’s andbiology.English, history proficient incore courses like high schoolstudentsare million over five years. thenext willcost $563 crime package Hunt now estimates thathis Governorhis crimepackage, renting prisonspace. new prisons, staffingneeds, and funds willgotowards constructing ofthe bill (SB150).Amajority Senate passesa$192millioncrime the remainder ofFY1993-94,the percent. salariesby anaveragefaculty of6 million to increase university the GeneralAssembly for $43.9 replacement. are “intolerable” andinneedof timbers. Another1800bridges rusted steel beamsandrotted – e.g., pillars, crackedsupport have flaws seriousstructural Carolina 273 bridgesinNorth million crimeplan. to helppay for whatisnow a$118 million from thebudgetinorder the GeneralAssembly to cut$45 for aspecial “crime session.” According Carolina Budget to theNorth & Tax Center, “Families earninglessthan $15,000 pay aneff Carolinians, whoseeff tax rate of10.6percent compared to the wealthiest one percent of North the wealthiest onepercent ofNorth April The GeneralAssembly➤ passesthe theend, andthe theSenate In ➤ The HouseamendstheSenate ➤ The Public➤ Forum School (PSF) of 1994-24es). the FY1994-1995budgetbill(S.L. subsequently incorporated into $257 millioncrimebill, whichis million to “low wealth schools.” to hire newcounselors and$10 bill to give $18millionto schools House agree to usethecrime proposal. committees canexaminethe the educationandappropriations session when scheduled short funding thenewhires untilthe The wantsto Senate postpone counselors for thepublicschools. psychologists andguidance proposal to hire more than700 bill includesa$28.8million prevention programs. The House local entitiesandfundingcrime and “renting” prisonspace from of thefundingappliedto building million anticrimebill, withmost bill andpassesitsown $271 month studythatclaimscosts to Carolina releasesNorth anine- local taxrate is6.1percent.” DID YOU KNOW? DID YOU Source: BTC May 2004 Reports, ective state and local stateective andlocal ective state and stateective and 1994 session l CIVITAS INSTITUTE l 147 Projected phone charges for Internet access access Internet for phone charges The the state. by for will be paid is extended without funding offer the General of the approval Assembly. gain access schools to for costs highway the information to per month $3,400 from increases per month in $4,000 in 1993 to startup a result, 1994. As for costs $30 skyrocket from the program $135 million. million to Telephone/ South, and Carolina regulatorySprint, state officials do the study data on cost not release and redact highway information from information related any public documents. The governor’s estimated monthly estimated ➤ governor’s The GTE of Southern Bell, ➤ the urging At Trends in Personal Income: 1985-2011 Income: in Personal Trends have been made, Jane Patterson, Jane Patterson, been made, have technology Hunt’s Governor president vice aide and former of ITT and Itt- Systems Network NA, drafts a and Alcatel, Alcatel school districtsmemorandum to of assuring them that the first year outfit schools with computers and and with computers outfit schools $1.5 reach could access Internet times more three billion – almost $514 million estimated than the Departmentin a state of Public PSF reportThe Instruction report. to capital costs for accounts technology, new accommodate of teacher as the expense as well The training on new equipment. report only for state accounts equipment costs. ➤ Although no appropriations May 148 l CIVITAS INSTITUTE l 1994 session State Comptroller➤ EdRenfrow isrevealedIt thatastudyusedby ➤ Governor➤ Huntoffers his ➤ Hunt introduces Transportation they passiton.” give to ourclientand thereport Carolina. the state ofNorth We just relationshipworking atallwith … Idon’t thatwe have know any is along-standingclientofours. president at WEFA says: “BellSouth a seniorvice Raimondi Mike commissioned study. response, In about the WEFA study, it’s astate- saying: report, “As farasIknow defends theuseof WEFA Group for BellSouth. originally created by the WEFA information highway planwas ofhis Governor Huntinsupport recruitment fund. and $10millionfor hisindustrial to theinformation highway; million for schoolsto connect lastyear; $5.3 program started early childhoodintervention expansion ofhis Start”“Smart professors; $27.2millionfor 1.5 percent raisefor university anadditional college instructors; 4 percent raisefor community 1 percent bonus;anadditional and teachers, withaone-time, percent raisefor state employees recommendations include:a4 for FY1994-95. The governor’s budget adjustmentpackage ofhighways.sections upfront andleadsto halffinished which pays for phasesofprojects instead ofthecurrent system continuously fundconstruction to a “cash flow” modelthatwill road funding by projects shifting that aimsto of reduce thebacklog 2001, anewhighway proposal Governor➤ Hunttells N.C.Citizens the country.” program in Start the bestSmart schools we are aboutto have, and we have, ofbetter andthekind colleges ofcommunity the kind universities thatwe have, and tax state andhave of thekind governor, “You can’t bethe lowest business taxcuts. But,addsthe income to taxstructure lookinto he intends to review thestate’s that for BusinessandIndustry ° Public 22,465(2.0%)increase Schools: ° Eliminate 185vacantpositions ° $17millionfor items, UNCpriority suchas ° $13millionfor college community booksand ° $120millionto restore teachers’ 12thpay ° $42millionSchool Technology to Reserve ° BasicEducationProgram funding($26million ° Additional $10millionfor low-wealth andsmall ° $40millionincrease duringSpecialCrime ° of0.2%for Increase in-state and0.0%for out- ° Average increase of5%for in-state and7%for ° and newdegree programs network andacquisitions, computing,library education and literacy support equipment; $8millionfor instructional period from July 1to June30 by the1995GeneralAssemblyenacted be expendedinaccordance withlegislation textbooks) and$10millionfor support, for instructional to $10 million reduce classsize inkindergarten, school systems prevention grants programs for at-riskchildren, andintervention/ S of-state college community students out- UNC: 796(0.5%)decrease ession for low-wealth schoolsystems, local of-state UNCstudents 1994 EDUCATION FUNDING OTHER EDUCATION CHANGES TUITION & FEE INCREASES ENROLLMENT CHANGES June ➤ A continuing budget resolution ➤ The Senate sends the House a passes on June 30 (S.L. 1993-591). budget plan that includes $1 billion in new spending. The July Senate budget includes: a 4 ➤ After reviewing the state’s percent raise, plus a one-time 1 drug prevention program, the percent bonus for state workers Governor’s Crime Commission and teachers; an additional $51 declines to renew grants for million for the university system enforcement, thus closing what are construction account; and $220 reported to be 11 “extraordinarily million that is to be saved for effective” drug task forces. The future needs. commission recommends that the state focus on education 1994 HEALTH & HUMAN SERVICES BUDGET programs, instead of actual drug Total Appropriations $1.90 billion enforcement. Major Items: ➤ The $1.2 billion current and capital Medical Assistance (Medicaid): $1,010 million budget bill (S.L. 1993-769) passes Mental Health/D.D./Subst. Abuse: $449 million on July 16. The budget includes Social Services: $193 million the $257 million crime package Facilities Services: $99 million passed during the earlier special Youth Services: $54 million session; a 4 percent raise, plus a 1 Vocational Rehabilitation: $24 million percent nonrecurring bonus, for state workers; a 5 to 7 percent raise for teachers; an 8 percent raise for ➤ The House budget differs from the community college instructors; Senate budget in several ways: a and a 6 percent raise for university 4 percent raise, plus an additional professors. one-time bonus of $480, for ➤ The General Assembly also state workers; a 5 to 8 percent approves a number of Governor raise for teachers, depending Hunt’s other recommendations, on experience; $10 million to including $19.1 million in hire school workers to identify additional funding for Smart Start at-risk children; $20 million for a and $7 million for the Industrial 1994 session l CIVITAS INSTITUTE l 149 school technology fund; and the Recruitment Competitive Fund. elimination of the proposed $51 Skepticism over Governor Hunt’s million for university building information highway program construction. prompts the Legislature to allocate ➤ The month ends with two separate only $7 million in funding for budget bills and no agreement. school Internet programs.

1994 Significant Tax Changes

• No significant tax law changes 150 l CIVITAS INSTITUTE l 1994 session October September August As thecampaign➤ seasonenters With ➤ newprisonconstruction retaliation againstlegislatorsIn ➤ Exuberant over➤ winningnew candidates vow to cutpersonal its lastmonth,Republican 1987 (S.L.1987-7). is derived from alaw passedin forand authority Freeman’s actions ineligible for parole. Justification release of347nonviolent offenders Franklin Freeman to order the forces State Correction Secretary (see 1990),prisonovercrowding unable to keeppace withdemand “We’re stillmadaboutpay raises.” defends thedecision,saying: Executive Director BobBerlam SEANC Marc Basnight(D-Dare). PresidentSenate Pro Tempore and Nesbitt (D-Buncombe), Representative Martin Co-chair Appropriations Committee (D-Durham), George Miller Representative Co-chair Dan Blue, Finance Committee HouseSpeaker upcoming election: following legislative leadersfor the doesnotendorsethe (SEANC) Carolina Association ofNorth workers, theState Employees larger pay increase thanstate who voted to give teachers a to addnewones,” declares Hunt. can cutsometaxes andnothave going to bestrong enoughthatwe growth oftheeconomy“The is far asto promise ataxreduction. Carolina “is onaroll,” even goingso the governor declares thatNorth funding for hispetprograms, December November Responding to theantitax ➤ onthecoattails ofthe Riding ➤ we willgetitdone.” Republicans down here inRaleigh, promising, we “If cangetenough Contract” Carolina, for North (R-Guilford) promotes the “New Leader BobShawSenate Minority give thegovernor veto power. cap onprisonpopulations, and build more prisons, eliminate the income taxes, term limits, enact tax cutwillprovide relief to Carolina’s history. The $483million the largest taxcutin North victories, Governor Huntproposes Republicans to state andnational sentiment thathelpedcarry toughest nightofmy life.” Marc Basnightclaims, wasthe “It President26). Senate Pro Tempore (24- theSenate two seatsoftaking for thefirsttimeandcome within intheHouse(67-53) win amajority Carolina Republicans ’94, North national RepublicanRevolution of deserve onebecausethere isalot deserve spent unnecessarily, andwe’re all of money in Raleigh that is being thatisbeing of moneyinRaleigh — Pilot resident Mountain Annie Ward, I wantataxcut.thinkwe footing thebillfor it. December 1994 1994 session l CIVITAS INSTITUTE l 151 working and the elderly families tax personal income increasing by and the deductions, child credits repealing exemption; homestead reducing tax; and the intangibles 7.75 tax from income the corporate Claims Hunt, 7 percent. to percent “North need all families Carolina get.” the help they can panel a consultant Commission, and of lawmakers comprised make to he will have citizens, for pay to cuts in order program an eye With tax cut. the proposed bloated cutting the state’s toward bureaucracy (which Hunt himself the governor helped create), suggests “flattening management should go we is one of the ways about that.” ➤ the AdvisoryHunt tells Budget prisoners out-of-state or in county jails punishments Programs More prison beds and money to house money to prison beds and More and non-active abuse programs Substance DHHS and education through Prevention Partnership Criminal Justice Local officers 500 new probation/parole ➔ ➔ ➔ ➔ ➔ capital projects increase General Fund operating budget by $193 operating budget by General Fund increase NR), including: million ($25 million most state employees most state SPECIAL CRIME SESSION CRIME SPECIAL COMPENSATION • construction prison other and $66 million for • Structured implement Sentencing; to Funds • 4% salary plus 1% one-time increase bonus for • teachers for 5% - 7% increase 1994 Other Changes Significant A New Contract The contract was successful, at both the federal and the state level, for several reasons: 1) It was unanimously supported with the People by every candidate; 2) It provided a clear direction and a specific agenda for the of North Carolina party; 3) It helped convince the people of North Carolina (and the United States) that “The New Contract with the People of Republicans were ready to govern. North Carolina” was a fiscally conservative platform signed on October 4, 1994, by Like the “Contract with America,” the every Republican candidate running for “Contract with the People of North Carolina” the General Assembly during the 1994 emphasized fiscal, institutional, and welfare election. The contract was inspired by the reform, leaving in the background more similarly named “Contract with America” controversial social issues, such as those that helped Republicans capture the U.S. related to abortion. House of Representatives that same year.

A NEW CONTRACT WITH THE PEOPLE OF NORTH CAROLINA

✓No new taxes of any kind ✓An income tax cut of at least $200 million Taxpayer Protection Act

Legislation prohibiting “unfunded state mandates”

✓Legislation that removes the cap on the prison population Legislation denying welfare benefits to unwed parents who fail to cooperate in establishing paternity of children born out of wedlock

Legislation granting effective control of public schools to local boards of education ✓Reduction in the size and responsibilities of the Department of Public Instruction ✓ Legislation extending Workfare programs to cover all able-bodied adult recipients of social services benefits and providing for a Learnfare program to encourage youthful welfare dependents to take advantage of educational opportunities (partial reform passed in 1997 and expanded in 1998) ✓A change in the rules of the House and Senate permitting a majority of the members to force legislation being held in committee to be brought to a vote on the floor of the body

A constitutional amendment establishing term limits for members of the General Assembly and an amendment or legislation doing the same for the state’s Congressional delegation ✓A constitutional amendment granting the governor the power to veto legislation (sent to voters) A constitutional amendment enabling citizens to propose constitutional amendments through an initiative process

(Checked boxes signify contract goals that were at least partially accomplished)

Source: UNC Institute of Government, North Carolina Legislation 1995: A Summary of Legislation in the 1995 General

a new contract with the people of north contract INSTITUTE l a new carolina 152 l CIVITAS Assembly of Interest to North Carolina Public Officials (Chapel Hill: Institute of Government, 1996), 1-1. economic overview 1995-1999 l CIVITAS INSTITUTE l 153 1995-1999 Southeast States, 1995-2005 Southeast States,

Nominal Per Capita Personal Income Growth: Personal Capita Nominal Per General Economic Trends: 1995-1999 Trends: Economic General of the the rest throughout in 1992 continued that began growth economic The between 3.1 percent North in averaged job growth Carolina Private decade. sector. the private to year of 114,000 jobs per an average 1995 and 1999, adding per year. of 4 percent at an average Earnings per job grew with pace basically kept taxes income from revenue state the same time, At tax income the state’s year, That of 1998. with the exception personal income, in of growth times the rate three a stunning 21 percent, by increased revenues nominal personal income. in 20 percent personal property and local also jumped by State revenues tax in 1997. 19 percent 1998 and by with the largest coincided increases that these revenue note It to is interesting Republicans held a majority passed when the history, state tax cuts in recent the across-the-board to on the (both Thanks 1998. 1995 to in the House from OVERVIEW 154 l CIVITAS INSTITUTE l economic overview 1995-1999 Georgia stayed steady at94cents to thenationalaverage dollarfor theperiod. earned 98cents to thenationalaverage dollarin1995butonly96cents in1999. averaged 0.6percent below thenationalaverage peryear. As aresult, Floridians From 1995-1999,Florida’s percapitapersonalincome growth rate actually Carolina, andSouth itremainedKentucky behindFlorida, Georgia and Virginia. Carolina marginallyNorth outperformed Tennessee andalsostayed aheadof remained at92percent ofthenationalaverage from 1995to late 1999. While the nationalaverage duringthelatter halfofthe1990s. fell short The state termsCarolina’s ofpercapitapersonal income,In North gainsinrelation to earnings,private sector growing at3.6percent annually. average peryear. Earningsinthepublicsector, though,almostkeptpace with Carolina grewThe inNorth state/local sector at2.5percent, or12,600 jobs, on State andlocaljobgrowth didnotincrease quite asfastintheprivate sector. tax revenues. The economic boomthataccompanied thetaxcutsledto asharpincrease in 1 billion (between 1995and2000),wasfreed upfor private useandinvestment. demand andthesupplyside)cumulative ofthetaxcuts, effect some$3.43 growth in thestate economy (cf. Q&A:11). That growth, inturn,created more revenues atlower tax rates for thestate. counteredis smallerbecausethetaxcutswere by partly othertaxincreases, butalsobecause thetaxcutsboosted This amountisthetotal value, over theperiod1995-1999,of1994and1998state taxcuts. The state’s revenue loss State/Local Taxes asShare ofPersonal Income: North Carolina, 1995-2005 North 1

economic overview 1995-1999 l CIVITAS INSTITUTE l 155 current current Southeast States, 1995-2005 Southeast States, State/Local Taxes as Share of Personal Income: of Personal as Share Taxes State/Local Virginia, however, continued to outpace the rest of the Southeast. of Between the rest outpace to continued however, Virginia, percent at 104 steady held capita personal income per Virginia’s 1999 1995 and average. of the U.S. NOTE: This figure does not include sales tax, but is the standard measure used by the Bureau of Economic Analyis for “personal “personal Analyis for of Economic the Bureau used by measure does not include sales tax, but is the standard figure This NOTE: taxes.” As such, it includes income taxes and taxes on personal property. and taxes taxes income such, it includes As taxes.” 156 l CIVITAS INSTITUTE l economic overview 1995-1999 State/Local Taxes asShare ofPersonal Income: North Carolina vs.North U.S. Average, 1995-2005 1995-1996 BIENNIUM 1995 session FY 1996: July 1, 1995 to June 30, 1996

General Assembly: House Dems: 52 House Reps: 68 Senate Dems: 26 Senate Reps: 24

Governor: Jim Hunt (D)

The 1995 Long Session: Budget Bill HB229/S.L. 1995-324 Passed House: May 3, 1995 Passed Senate: May 18, 1995 Conference Version Ratified: June 26, 1995 Signed by Governor: June 26, 1995

he new Republican majority in the House Republicans likewise passed a House acted quickly to fulfill its “Taxpayer Bill of Rights” (see Box Insert) Tcampaign promises, passing various that sought to limit General Fund tax cuts, as well as a bill calling for a expenditures (and thus tax increases) gubernatorial veto referendum. The Senate to a rate equal to the state’s increase in followed the House’s lead in approving population, plus inflation. In addition to the veto referendum, which subsequently prohibiting unfunded state mandates, passed in the November 1996 election. In such as county payments for the state a concerted effort to share credit for the portion of Medicaid, the bill also required tax cuts with the House, both the Senate that 25 percent of any remaining General and the governor readily acquiesced to Fund credit balances be transferred to an many of the cuts, making for a surprisingly Emergency Reserve Trust Fund. After the uneventful session. The end result was that Senate amended the bill, however, the 1995 session l CIVITAS INSTITUTE l 157 the 1995-1996 biennium brought about two chambers were unable to reconcile the largest tax cuts in recent state history. their respective versions in conference 1995 HEALTH & HUMAN SERVICES BUDGET committee. Total Appropriations $2.02 billion Finally, as predicted by the Public Major Items: School Forum of North Carolina Medical Assistance (Medicaid): $1,045 million during the 1994 short session, Mental Health/D.D./Subst. Abuse: $474 million Governor Hunt’s information highway Social Services: $197 million program far outpaced original cost Youth Services: $71 million estimates. Two separate studies, Deaf and Hard of Hearing: $26 million one by the state auditor and one by Vocational Rehabilitation: $26 million Telecommunications Consulting Group, voters believe future state spending Sixty-one percent of North Carolina percent ofNorth Sixty-one population growth plusinfl

158 l CIVITAS INSTITUTE l 1995 session increases shouldbelimited to DID YOU KNOW? DID YOU Source: August 2006Civitas Decision Maker PollDecision Maker January and vague. governor’s estimates were unrealistic the billions, concluding thatthe firm, predicted costs would runinto anindependentconsultingInc., The Republicans likewiseseekto➤ to strengthen aneffort theslim In ➤ Republican legislators➤ begin SpeakeroftheHouse Incoming ➤ actions. actions. Republicans protest Basnight’s strengthen itspositionofpower.” you slimmajority saw avery the power grab, saying: “Today membership. Basnightdefends and alsodetermine committee power committee to sitonevery soastoSenate give himselfthe changestherulesin the (D-Dare) President Pro Tem Marc Basnight intheSenate,Democrat majority gubernatorial veto. amendment thatwould permita abillfordrafting aconstitutional taxpayers.” Carolinaand giving relief to North to restraining government growth iscommittedRepublican majority 3). States Brubaker, new “The “Taxpayer Protection Act” (HB urges theHouseto passthe Harold Brubaker(R-Randolph) ation. ation. February Hunt proposes an$18 billion ➤ Governor ➤ Huntcallsfor bipartisan The Houseapproves➤ theSenate The Senate Judiciary Committee The Judiciary Senate ➤ teachers, expands Smart Start by Start teachers, expands Smart workers anda5percent raisefor for a2percent raisefor state budget thatcutstaxes, provides counties over two years. Start”“Smart program to 24more by $100millionandexpandinghis spending onprisonconstruction time, heproposes increasing the intangibles tax.At thesame income, corporate taxes, and $483 milliontaxcutonpersonal State address. Huntproposes a cooperation inhisState ofthe gubernatorial veto bill. gubernatorial veto. approves abill(SB3)onthe Democrats protest thechanges. committee andsubcommittee. tempore voting rightsonevery leaderandspeakerpromajority can introduce andalsogive the the numberofbillsamember House withrulechangesthatlimit strengthen inthe theirmajority Source ofBudgetFunds: 1995-96 1995 session l CIVITAS INSTITUTE l 159 2007 2006 Slowdown 2005 2004 2003 2002 Recession 2001 2000 1999 $364 million tax cut (S.L. 1995- personal income 42) that reduces personal increasing by taxes 1995 and $2,250 for to exemptions single filers 1996 for $2,500 for $60,000 or less and with incomes with incomes married couples In the wake of a $100,000 or less. in likely decision against the state Court Supreme challenge, the U.S. state report card that would be report that would state card Board” “Progress a new issued by of government citizens inform to performance and on initiatives programs. Hunt’s Governor that estimates will program highway information nine $1 billion over taxpayers cost $111 million annual The years. dwarfs cost Governor average of recommendation own Hunt’s 1995. $8.3 million for The General Assembly passes a ➤ General Assembly The The state auditor releases a study releases auditor ➤ state The April 1998 1997 1996 Slowdown 1995 1994 1993 1992 Adjusted For Tax Law Changes For Tax Law Adjusted FISCAL YEAR ENDING JUNE 30 1991 Recession General Fund Revenue Growth: 1984-2007 Fund Revenue General 1990 1989 bill (S.L. 1995-5) permitting voters bill (S.L. 1995-5) permitting voters 1996 the November decide in to veto election give whether to the governor. to power sales tax, a of the food repeal $300 a save reduction that would family of four. average an for year of North a group Carolina, business and academic, by leaders created government a Hunt, recommends Governor $21 million, and eliminates 2,000 2,000 $21 million, and eliminates jobs. government the tax cut to a 23 percent employers tax for unemployment (S.L. 1995-4). It that is estimated employers this reduction will save the next two $106 million over years. 1988 The General Assembly approves a approves ➤ General Assembly The a ➤ House Republicans push for Competitive a for ➤ Commission The The General Assembly approves approves ➤ Assembly General The March 1987 1986 Slowdown 1985 The 2007 amount represents the budget estimate. The 2007 amount % Change From Prior Year % Change 1984 5 0 -5 15 10 NOTE: -10 160 l CIVITAS INSTITUTE l 1995 session 1995 Significant Tax Changes Republican lawmakers callfor➤ Hill Students atUNC-Chapel ➤ intangibles tax. the Legislature also repeals the Fulton Corp. v. Faulkner future fundinguntilthe Republicans vowing to withhold a public-private partnership. With his promise to fundtheprogram as Governor Huntfollow through on demandingthat Start, Smart more accountability regarding students over three years. thenext and 30percent for out-of-state percent for in-state students positions andraisetuition3.1 that willeliminate 392teaching protest proposed budgetcuts Reallocate real estate conveyance taxfrom GeneralFund [S.L.1995-456] Repeal intangibles taxandreimburse localgovernments [S.L.1995-41] Reduce unemployment taxfor employers by 23%[S.L.1995-4] drinksbyReduce 25%[S.L.1995-474] taxonsoft Establish taxcredit of$60 for eachdependentchild[S.L.1995-42] for 1996[S.L.1995-42] incomeIncrease taxpersonalexemption from $2,000to $2,250 for 1995andto $2,500 (1996), May House Republicanleaders ➤ public-private fundingratio Governor➤ Huntproposes usingan Several hundred➤ studentsand increases. salary teachers shouldnotexpect announce thatstate workers and vows notto compromise. reaches 5to 1,Governor Hunt for graduate students. position cutsandtuitionincreases surplus to reduce teaching unanticipated $35millionrevenue the Housebudgetbill. protest educationcutsapproved in system holdarallyattheCapitol to fromfaculty across theUNC June over 600 vacant state jobs and ➤ Governor Hunt offers a repeals the prison population cap “compromise” on his Smart Start in order to prevent the premature program that retains funding release of prisoners to make room at the same levels for existing for new inmates. programs and expands Smart Start into 12 additional counties. The July proposal requires a 20 percent ➤ In its capital and expansion match – half in cash and half in budget, the House saves $1 million by freezing pay for judges, court 1995 Other Significant Changes clerks, district attorneys and other elected and appointed state COMPENSATION workers. The budget includes a • 2% salary increase for most state employees and 2 percent raise for teachers and teachers other state workers, $65 million GOVERNMENT for state prison construction costs, and $48.5 million for community • Direct Office of State Budget & Management to review and analyze administrative span of colleges. control of state agencies ➤ Telecommunications Consulting CAPITAL Group, Inc., a Washington- • $34 million in 1995 and $41 million in 1996 for based firm hired by House 2,048 new prison beds Republicans to study Governor • $49 million in 1995 and $97 million in 1996 for Hunt’s information highway plan, UNC capital projects advises the governor’s program • $31 million in 1995 and $19 million in 1996 for be overhauled, with particular other state capital projects attention paid to conducting a thorough cost-benefit analysis, renegotiating rates with providers, in-kind contributions – of private and requiring performance reports funding. Frustration with Hunt’s from providers. refusal to permit greater legislative oversight over the program ➤ The General Assembly passes the leads House Speaker Brubaker expansion and capital budget (S.L.

and House Majority Leader Leo 1995-507). The budget includes a 2 1995 session l CIVITAS INSTITUTE l 161 Daughtry (R-Johnston) to declare percent raise for teachers and state that they will cease negotiating workers; a $75 tuition increase for with the governor and turn to the most in-state students; a 6 to 7 Senate instead. percent tuition increase for out-of- state students; and $75.6 million ➤ Senate and House leaders agree for prison construction: $34.6 to fully fund existing Smart Start million for FY1996 and $41 million programs at $58.1 million, but the for FY1997. expansion into new counties will receive planning funds only. August ➤ The General Assembly passes the ➤ It is discovered that R.W. Wilkins, $9.8 billion continuation budget a former agricultural advisor to (S.L. 1995-324). The budget cuts Governor Hunt on voluntary leave 162 l CIVITAS INSTITUTE l 1995 session ° Public 25,795(2.3%)increase Schools: ° Revisepowers anddutiesofstate ° Nochangefor college community students ° ° Increase UNCtuition9%for Increase in-state students ° UNC:969(0.6%)increase ° ° Repeal public school outcome-based education Repealpublicschooloutcome-based ° Increaseschooltechnology funds ° grade 2classsize in1996-97 reduction Grade1classsize ($19million); reduction ° Approve schoollegislation charter ° superint increases inthefollowing year and 7%f Community Colleges: 21,244(2.8%)increase program to implementbudgetreduction develop planto reorganize publiceducation 10% 20% 30% 40% 50% 60% 70% 0% 1995 EDUCATION FUNDING OTHER EDUCATION CHANGES endent; State Board ofEducationto TUITION & FEE INCREASES or out-of-state students;additional or out-of-state ENROLLMENT CHANGES SF AN CT VA TN SC NC GA FL US State/Local Government Employment Growth: Southeast States,Southeast 1985-2005 With thepermissionof ➤ September ‘leave withoutsalary.’” thewholeintent of really skirts comments: isunreal. … “That That scandal, HouseSpeakerBrubaker contributions.” response In to the state workers for campaign accusations thathewas “squeezing his leave started. over left Wilkins without pay, received $38,000after teacher salariesandstudentaid. increases are neededto pay for $1,000 to $3,000peryear. The students willseeincreases from graduate $400. Out-of-state undergraduate studenttuition trustees voteHill to raiseall General Assembly, UNC-Chapel 1995 session l CIVITAS INSTITUTE l 163 First” program, which directs program, First” for jobs, into recipients welfare than 10 percent more by lowering receiving the number of families aid. state applied towards the library, with library, the applied towards financial applied to the remainder aid. Governor Hunt credits his “Work “Work his Hunt credits ➤ Governor December fth; Virginia, 13th; Virginia, fth; South Carolina, 26th. South Carolina, DID YOU DID YOU KNOW? to raise tuition $400 per year to to raise tuition $400 per year to library raise money for spending. will be than half of the funds More university to raise tuition but to but to raise tuition to university on spending for use the revenue library purchases. According to two separate studies two separate to According Entrepreneurship Council and The and Council Entrepreneurship conducted by the Small Business & the Small Business conducted by Tennessee, 18th; Georgia, 19th; and Georgia, 18th; Tennessee, Florida is ranked fi Florida NC State University trustees vote vote ➤ trustees University NC State NC State professors urge the urge ➤ professors NC State November October Source: Fortune Small Business; The Tax Foundation Tax The Small Business; Fortune Source: Tax Foundation, North Carolina’s state North Carolina’s Foundation, Tax (ranked 40th) in the nation. By contrast,(ranked 40th) in the nation. business tax climate is among the worst is among business tax climate Declaration of (3) To have the fiscal affairs of the State managed in the same prudent, responsible way in which the people of the State Taxpayer Rights manage their fiscal affairs, in accordance with G.S. 143-2.1 through G.S. 143-2.4. As promised in “The New Contract with the People of North Carolina,” Republican (4) To have a constitutional limit on the legislators sponsored a bill in 1995 aimed State income tax rate, in accordance with at reforming the budget process. Article V, Section 2 of the North Carolina In particular, the bill prohibited unfunded Constitution. mandates and instituted General Fund spending limits tied to population (5) To have the power to determine by growth, plus inflation. vote whether the State or a unit of local government can issue bonds payable by Popularly known as the “Taxpayer Protection Act” tax revenue and, in order to ensure a good (HB 3), the bill passed the House by a vote of credit rating when bonds are issued, to 94 to 22 in March 1995. The Senate also passed have repayment of the bonds be the first a drastically amended version of the bill funding priority of the State or local unit, in that July by a vote of 28 to 21. The two chambers, accordance with Article V, Sections 3, 4, and however, were unable to reach a compromise 6 of the North Carolina Constitution. in committee. (6) To be told the truth in taxation, in The final Senate version of the bill accordance with G.S. 120-36.7, 159-50, included a Declaration of Taxpayer Rights 160A-20, and 105-286. that read as follows: (7) To know the costs of proposed § 105-1.1. Declaration of taxpayer rights. legislation and proposed administrative rules, in accordance with G.S. 120-36.7, 143- By means of the United States Constitution 3.5, 150B-21.4, 96-4, 97-80, 105-262, and and the North Carolina Constitution, the 143-138. people have bestowed upon the General Assembly the power to obtain a regular (8) To be treated fairly and promptly in and adequate supply of revenue to serve any questions regarding tax liability, in the public good. In exercising this power, accordance with G.S. 105-241.1, 105-241.2, the General Assembly pledges to be 105-258.1, and 105-267. ever mindful that the Assembly is the embodiment of the people and guarantees (9) To have the people’s investment in to the people the following rights: State buildings and other State facilities protected through adequate funding for (1) To have a balanced State budget, in maintenance and repairs, in accordance accordance with Article III, Section 5 of the with G.S. 143-2.3. North Carolina Constitution. (10) To be informed on how revenue is (2) To be protected from uncontrolled used, pursuant to G.S. 20-66(j), 105-248, growth in State government by limiting 105-321.1, 143-10.3, 143-10.4, and 143-10.5. increases in State spending and in the number of State employees, in accordance declaration of taxpayer rights of taxpayer INSTITUTE l declaration 164 l CIVITAS with G.S. 143-2.1 and G.S. 143-10.2. 1995-1996 BIENNIUM 1996 session FY 1997: July 1, 1996 to June 30, 1997

General Assembly: House Dems: 52 House Reps: 68 Senate Dems: 26 Senate Reps: 24

Governor: Jim Hunt (D)

The 1996 Short Session: Budget Bill HB53/S.L. 1996-18es2 Passed House: June 10, 1996 Passed Senate: June 16, 1996 Conference Version Ratified: August 3, 1996 Signed by Governor: August 3, 1996

ith the state enjoying a revenue resulting $10.6 billion budget was then surplus of $700 million, Governor passed, with additional tax cuts enacted. WHunt began his reelection Despite winning the battle over the campaign by calling for a special session surplus, the House’s strategy backfired of the General Assembly to temporarily cut with the electorate. In the November the business unemployment tax for one election, voters increased the Democrat year. Joining in on the early campaigning, majority in the Senate and almost – just the General Assembly returned to Raleigh short of two seats – elected a Democrat in February and passed the legislation in majority in the House. Governor Hunt less than 3 hours. easily won reelection, taking advantage of his popularity to finally acquire Once the short session began in May, gubernatorial veto power. however, the House and the Senate could 1996 session l CIVITAS INSTITUTE l 165 not agree on what to do with the budget January surplus. House Republicans wanted ➤ Speaker of the House Harold Brubaker to use half of the surplus to cut taxes (R-Randolph) asks Governor Hunt to and save for emergencies while Senate call a special session of the General Democrats wanted to spend most of Assembly to approve a reduction in the $700 million on environmental and business unemployment taxes. education programs. The House vowed to – and actually did – leave Raleigh at ➤ Governor Hunt expresses his desire the end of June when the Senate refused to reduce unemployment taxes on to compromise. In early July, the General business but cautions that “there may Assembly reconvened for a second special be several ways to skin the cat” instead session called by Governor Hunt. The of calling for a special session that would cost taxpayers money. 166 l CIVITAS INSTITUTE l 1996 session ° Public 26,450(2.3%)increase Schools: ° Appropriate $18millionto enhance the ° safety andviolence School prevention ° increase ofschooltechnology funds One-time ° ° Approve ABCsofPublic Education ° Nochangefor college community students ° UNCtuition8%for Increase in-state students ° UNC:874(0.6%)decrease ° at thesesamecampuses) campuses (1995budgetalsoincreased tuition competitiveness of “Research University I” UNC Grade 2classsize ($19million) reduction the 1995BudgetBill) and 6%f Community Colleges: 15,469(1.9%)increase 1996 EDUCATION FUNDING OTHER EDUCATION CHANGES TUITION & FEE INCREASES or out-of-state students(increases in or out-of-state March February ➤ Governor➤ Huntsays he will “go to On February 21,theGeneral ➤ Hunt callsfor➤ aspecialsession ENROLLMENT CHANGES The Executive Revision Budget Act change budgetary items between change budgetary ofthegovernorthe ability to devises aplanthatwould limit to studythegubernatorial veto, created by theGeneralAssembly Study Commission, specially the nationalaverage by 2000. Carolina teacher salariesequalto the mat” inorder to makeNorth hours and39minutes. 1es). The specialsession lasts2 businesses for oneyear (S.L.1996- the unemployment taxpaidby Assembly votes to suspend million. unemployment taxes by $140 of theGeneralAssembly to cut April May Governor➤ Huntassailsthe Approximately➤ 100graduate and Governor➤ Huntreleases his Despite endorsementsfrom➤ funds asheseesfit. allowing himto manageallocated and recruit industriesby not to respondability to emergencies bureaucracy” andalsohindershis that itadds “another layer of commission’s plan,claiming gubernatorial veto isapproved. over thebudgetprocess ifthe and Housefear losingcontrol Legislature. oftheSenate Members sessions withoutapproval from the more tuitionassistance. ask for ahealthinsurance planand in graduate programs, aswell as to protest Hill cuts at UNC-Chapel professional studentshold arally percent. tax rate from 7.75percent to 6.75 decrease inthecorporate income from 4percent to 3percent; anda ofthefooda reduction salestax Start; million expansionofSmart bonus for state employees; a$21.2 pay raise, and2percent one-time college professors; a4percent bonus, for teachersone-time and percent pay raise, witha1percent of 1,000government jobs;a6 which callsfor: theelimination proposed budget, election-year in November’s election. primary. Hayes willface JimHunt (R-Concord) inthegubernatorial state Representative RobinHayes Richard Vinroot isdefeated by business groups, Charlotte Mayor prominent Republicansand

1996 session l CIVITAS INSTITUTE l 167

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1998 1997 raise for public school teachers. teachers. public school raise for “There in the budget to is money Hunt. says do it,” School Bond Building “Public the bond a $1.8 billion Act of 1996,” school repairs for referendum and construction (S.L. 1995-631). passes in bond ultimately The November. a Senate bill that would approves each North to a $100 rebate give in who paid taxes citizen Carolina amended bill, The 1995 (SB981). conference goes to never however, ratified. and so is not committee 22 with the House and the Senate on budget agree unable to

The General Assembly approves approves ➤ General Assembly The ➤ House amends and then The ➤ shortThe session ends on June 1996

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Private Share of Total Nonfarm Employment: Total of Share Private Board Association, Governor Hunt Governor Association, Board pay a 7 percent his call for repeats 1988 surplus to work with, Senate with, Senate work surplus to Marc Tempore Pro President he does (D-Dare)Basnight says tax cuts Hunt’s Governor not think can we believe “I don’t viable: are do it at this time.” to afford – inmates “hot bunking” of failure sleeping in sharing beds and prison crowding shifts alleviate to the House – in Alabama prisons, Committee Appropriations support $687,000 to allocates a Governor made by similar proposal NorthHunt for Carolina.

➤ the N.C. School Speaking before Despite having a $700 million ➤ having Despite ➤ Overlooking the overwhelming June

1987

1986 1985 90% 85% 80% 75% 70% 65% 60% 55% 168 l CIVITAS INSTITUTE l 1996 session 1996 Other Revenue1996 Other Sources &Actions 1996 Significant Tax Changes The obstaclesto➤ afinalagreement • • • • •

spending spree.” what isbeingcalleda “Democratic Republicans refuse to acquiesce to House million surplus. short, In ofthe$700 vs. spendingpart ($20 millionvs. $0);andsaving creating more prisonbeds ($0vs. $21million); Start Smart percent vs. 5percent); expanding raising state employee salaries(4 salaries (4percent vs. 6percent); following items: raisingteacher onthe the HouseandSenate include disagreements between budget thusremains inplace. adjustments. The previous biennial Repeal state privilegelicense taxes (lossof$11million)[S.L.1996-14es2] drinktaxoverPhase outsoft 3years [S.L.1996-13es2] Expand jobstaxcredit; create newcredits [S.L.1996-13es2] 1996-13es2] Reduce corporate income taxrate from 7.75%to 6.90%over 4years [S.L. [S.L. 1996-13es2] Reduce state salestaxonfood from 1,1997) 4%to 3%(effective January Refund taxes paidonpensionsby federal retirees [S.L.1996-19es2] 14es2) Reform unconstitutional taxprovisions (Gain $19million)[S.L.1996- Transfer $26millionto for reserve refunds for federal retirees $85millionfor andfederal taxreductions Reserve retiree refunds/credits Transfer $47millionto Clean Water Reserve Management Transfer $40millionto capitalimprovement fund fees byIncrease criminalcourt $5(equalto a$4millionrevenue increase) Governor➤ Huntorders theGeneral Comments➤ HouseSpeakerHarold we’ve gotanobligationto fixit.” state ofcrisis,” declares Hunt. “And negotiations. Carolina isina “North session inorder to resume budget on July8for anotherspecial Assembly to return to Raleigh and spending.” believe inspendingand spending. LiberalDemocrats Republicans believe incontrolling believe inlessgovernment. Republicans the two parties. witnessed thedifferences between stalemate: Carolinians have“North Brubaker aboutthebudget July ➤ On July 12, Hurricane Bertha ➤ House Republicans begin the makes landfall near Wrightsville second special session by Beach causing more than $200 proposing to cut taxes by $700 million in damage. million by 2001. The plan (HB18) includes phasing out over four August years the regressive and unpopular ➤ Prior to passing a new budget, state sales tax on food, cutting the General Assembly also passes the corporate income tax rate by the “Tax Reduction Act of 1996” 1 percent, and eliminating state (S.L. 1996-13es2). The law reduces inheritance taxes. the state sales tax on food from 4 percent to 3 percent; cuts the corporate income tax from 7.75 1996 HEALTH & HUMAN SERVICES BUDGET percent to 6.9 percent over the Total Appropriations $2.15 billion next four years; and reduces Major Items: inheritance and gift taxes. In Medical Assistance (Medicaid): $1,170 million addition, the act implements Mental Health/D.D./Subst. Abuse: $471 million the “William S. Lee Quality Jobs Social Services: $200 million and Business Expansion Act.” Child Development: $120 million The act institutes a five-tier tax Youth Services: $69 million credit ranging from $12,500 (tier 1) to $500 (tier 5) for businesses that create new full-time jobs, ➤ The House budget also allocates especially in underdeveloped $398 million of the $700 million parts of the state. Explains House surplus to environmental clean- Majority Leader Leo Daughtry up and hog farm waste lagoon (R-Johnston), “Taxes first, and then oversight; $3.5 million for Smart we do the budget.” Start; and 4 percent pay raises for teachers and state workers. The ➤ State lawmakers agree to a $10.6 budget also funds a program that billion budget (S.L. 1996-18es2). rewards exceptional teachers with ➤ The budget includes the following bonuses up to 10 percent. A total provisions: $415.4 million of the of $402 million would be set aside surplus is used to fund 4.5 percent 1996 session l CIVITAS INSTITUTE l 169 to pay for the tax cuts and other raises for state workers and 5.5 future expenses. percent raises for teachers; $10.1 ➤ An alternative Senate plan million is used to further expand proposes cutting taxes by $185 Smart Start. The budget also million by 2001. The plan includes funds hog farm regulation and reductions of the sales tax on environmental pollution control food (SB20) and corporate income programs. Approximately $199 taxes (SB14). The Senate budget million of the $700 million surplus also allocates $10.2 million for is set aside as savings. Smart Start and $70 million for the cleanup of state rivers and hog farm waste. the total numberofreturns, but North Carolina earned$15,000 North income taxrevenue. Taxpayers only 5.5percent ofthestate’s

170 l CIVITAS INSTITUTE l 1996 session paid 28.5percent ofthetotal earning more than$200,000 earners were responsible for More than half of those who More thanhalfofthosewho accounted for 1.4percent of share ofincome taxliability. or less. This bottom halfof fi led income taxreturns in Source: N.C.Comprehensive Annual DID YOU KNOW? DID YOU Financial (FY2006) Report November October September Governor➤ JimHuntwinsarecord A pollby FGIResearch➤ ofChapel Hurricane Fran➤ makeslandfallnear 56 percent to 43percent. Republican challengerRobinHayes term asgovernor,fourth defeating percent, with7percent undecided. Robin Hayes 68percent to 25 showsHill Governor Hunt leading damage. an estimated $4.5to $5billionin Cape Fear onSeptember6causing December President➤ BillClinton (D) defeats Referendums➤ onthegubernatorial Boosted by➤ Hunt’s popularity, David Crotts,➤ aneconomist for the White House. the White Senator BobDole(R)to return to bondpass.construction veto andthe$1.8billionschool a tenuous 61-59majority. in theHouse, leaving theGOPwith andgainsevenin theSenate seats Democrats increase theirmajority spanned the1980s. 8 percent annualgrowth that percent peryear, down from the are to grow expected around 6 state’s GeneralFund revenues Carolinafor andthatthe North that revenue growth isslowing the GeneralAssembly, reports 1996 Other Significant Changes 1996 Other EstablishesClean Water Management Trust • increases $38millioninone-time • NATURAL &ECONOMIC RESOURCES Creates theCriminalJustice Information Network • 148newjudicialbranchpositions • prison invariousprisonreserves; Reductions • $17 millionincapitalfundsfor prisons • 5.5%increase for teachers • increase for moststate 4.5%salary employees • CRIMINAL JUSTICE AGENCIES COMPENSATION balance) Fund (funded by credit 6.5%oftheunreserved technology projects Governing Board to planandcoordinate major closures 1997-1998 BIENNIUM 1997 session FY 1998: July 1, 1997 to June 30, 1998

General Assembly: House Dems: 59 House Reps: 61 Senate Dems: 30 Senate Reps: 20

Governor: Jim Hunt (D)

The 1997 Long Session: Budget Bill SB352/S.L. 1997-443 Passed House: April 23, 1997 Passed Senate: June 5, 1997 Conference Version Ratified: August 28, 1997 Signed by Governor: August 28, 1997

ith Republicans maintaining a pass welfare reform in North Carolina. very slim majority in the House, With the state Senate having ignored Wthe 1997 long session began with similar legislation in the past, the House Governor Hunt proposing a major new leadership inserted its welfare reform education initiative. Designed to improve initiative into the $11.4 billion biennial schools by raising teacher salaries and budget. In particular, the House proposed implementing new measures of student that individual counties be permitted to progress, the $1 billion, four-year “Excellent create their own system for determining Schools Act” was passed in June with welfare requirements and benefits for little resistance from House Republicans. recipients. The Senate refused to return In fact, most of the session seemed to this power to local communities, with the be characterized by a spirit of bipartisan result that budget negotiations extended cordiality that led to the relatively easy well into August. Eventually a House- passage of several important bills, Senate compromise led to an agreement 1997 session l CIVITAS INSTITUTE l 171 including a measure to reduce the state that allowed counties with less than 15.5 sales tax and a law that increased the percent total state welfare recipients to inheritance tax threshold by $150,000. By join the program. The session ended at 212 June, however, pent up tensions rose to days, just two days shy of the 1989 record the surface, leading legislators to abandon of 214 days. any pretext that the biennial budget would be passed by the June 30 deadline. January ➤ Governor Hunt meets with the Budget Emboldened by efforts in the U.S. House Advisory Commission, a bipartisan to reform America’s ailing welfare system, group of legislators, to outline his plan House Republicans were anxious to for increasing teacher salaries, again 172 l CIVITAS INSTITUTE l 1997 session March February Eager to fulfilltheircampaign➤ Hunt’s➤ “Excellent Act” Schools calls Governor➤ Huntreleases his Despite facingaslowing➤ economy next four years.next million instate spendingover the andcut$700 Start, expand Smart sales tax to school districts and sales taxto schooldistricts inheritance tax,refunding the plan includes:phasingout the slashing $30millionintaxes. Their House Republicanspropose promise to cutadditionaltaxes, year 2000. $1 billionto thebudgetby the forecast thattheprogram willadd national average. Earlyestimates to raiseteacher salariesto the delineates anaggressive schedule remove badteachers. also The act streamlining procedures to improving teacher training and measuring studentprogress, for raisingacademicstandards, million. expansion alonewillcost $295 Start increases andSmart salary over two years. thenext Teacher into all100counties Start Smart employees; andanexpansionof teachers; a3percent raisefor state an average 8percent raisefor recommendations include: Among otheritems, hisbudget $654.4 millioninnewspending. budget proposal whichincludes says Basnight. increases for teachers isimportant,” “Finding away to commit to salary salaries needto beraisedagain. feelsBasnight (D-Dare) teacher Marcand atighter budget,Sen. The GeneralAssembly➤ raisesthe The approves Senate ➤ Hunt’s 1997 Other Significant Changes 1997 Other $148millionincapitalexpenditures • CAPITAL Annual legislative requirement reporting for the • increases $70 millioninone-time • NATURAL &ECONOMIC RESOURCES 358 newjudicialbranchpositions • inprisonclosures, Reductions aswell asvarious • of$17millionin2001and$21 Reduction • adjustmentsfor equity SBI $2.7millionfor salary • 4%to 9%increase for teachers • increase for moststate 4%salary employees • CRIMINAL JUSTICE AGENCIES COMPENSATION $600,000 (S.L.1997-6). tax return from $450,000to threshold for filinganinheritance year.their fourth automatically earntenure after inaddition,teachers will certified; degrees andbecome nationally to teachers whoearnmasters gives raisesof10to 12percent $25,000. The proposal Senate also almost $4,000over 4years to pay beingincreased with starting percent eachyear for four years, Teacher pay raisesaverage 6.5 “Excellent Act” Schools (SB272). non-itemizing taxpayers. introducing acharitablecredit for from 5percent to 10percent, and the corporate charitablededuction colleges,community increasing Clean Water Management Trust Fund prison reserves housing for out-of-state in 2002becausenewprisonbedseliminate need agents

1997 session l CIVITAS INSTITUTE l 173

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00 1998-99

p 1997-98 collections provides a surplus collections provides of $219 million. revenue that he Hunt states Governor sign not in good conscience “could the House plan raises teacher the House plan raises teacher but adds requirements salaries, after the fourth review tenure for is not and dismissal if tenure year House The after six years. achieved competency plan also requires in low- teachers for tests performing Raises schools. of 8 be awarded would and 10 percent who earn masters teachers to nationally and become degrees certified.

➤ An unexpected jump in April tax muscle, his new veto ➤ Flexing May 1996-97

1995-96

1994-95

1993-94

1992-93

1991-92

1990-91 General Fund Revenues and Expenditures Revenues Fund General 1989-90

he will not sign a lotteryhe will not sign bill unless some of the lottery are profits Smartapplied towards Start. (D-Cumberland) a introduces lottery bill that earmarks a fraction Smart for of lottery Start revenue (SB867). budget that includes a 6.5 percent raise a 3 percent teachers, raise for $22.2 million and workers state for Smartfor Start. Schools Excellent Hunt’s Governor Act (HB351). Like the Senate bill,

1988-89

Governor Hunt tells Senate leaders Senate Hunt tells ➤ Governor Rand Tony ➤ Senator $11.4 billion ➤ Senate approves of ➤ House passes their version The April

1987-88 1986-87

Total G.F. Operations Spending Total G.F. Operations Total G.F. Budget: Shaded area includes capital, savings, etc.; Lower line is total operating budget etc.; Lower line includes capital, savings, Budget: Shaded area Total G.F. Tax Revenue special funds, etc.) revenue, transfers from (includes federal Other Revenue 1985-86 8 6 4 2 0 20 18 16 14 12 10 billions of dollars billions 174 l CIVITAS INSTITUTE l 1997 session 1997 Other Revenue1997 Other Sources &Actions 1997 Significant Tax Changes(BudgetBillUnlessNoted) • • • • • • • • House Majority Leader LeoHouse Majority ➤

our chance to reduce itagain.” have themoneyavailable. This is percent. ExplainsDaughtry: “We tax onfood from 3percent to 2 a billto reduce thestate sales (R-Johnston)Daughtry introduces million lessthanHunt’s request. $21.9million–only$1 Start Smart subcommittee later votes to give aHousebudget Nevertheless, at Hunt’s $22.9millionrequest. his petprogram, theHousebalks of thefundingHuntwantsfor hasvotedthe Senate to give most Start.”full fundingfor Smart While a budgetthatdoesnotprovide Local transitrevenue options, including1/2 fees byIncrease court $15($13millionrevenue increase) Share, insurance, transfers from Highway Trust Fund andHighway Fund sources ofG.F.Other revenue: investment income, judicialfees, Disproportionate Medicaid Earmark $36millionfor refunds for federal retirees Place for $156millioninreserve intangibles taxrefunds Transfer supplemental$39million to Repairs&Renovations Account annual transfer from dropping below $30million Earmark $49millionfor Clean Water Management Trust Fund; revise statute to prevent Transfer $115millionto Disaster ReliefReserve Internal Revenue Code update [S.L.1997-55] Reduce state salestaxonfood from 3%to 2%(effective July1,1998) Non-resident withholdingtax[S.L.1997-109] June The GeneralAssembly➤ passes “The House memberspassan$11.4 ➤ degrees andtenure. Alsoincluded and/ormaster’scertification teacher raisesfor national provisionsthe Senate regarding 221). The finallegislation includes Excellent Act” Schools (S.L.1997- andbenefits.eligibility to settheirown rulesregarding would give counties theability and welfare reform provisions that percent) cutinthefood salestax; expansion; a1cent (3percent to 2 Start $21.9 millionfor Smart 4 percent raisefor state workers; a 6.5percent raisefor teachers; a billion budgetbillthatincludes: ¢ sales tax for Mecklenburg County sales taxfor Mecklenburg is the House provision for teacher to, although not legislating, a competency tests in failing schools. spending cap for the FY1998 budget. Welfare reform, however, remains the main point of 1997 HEALTH & HUMAN SERVICES BUDGET contention. Total Appropriations $2.28 billion ➤ House negotiators agree to Major Items: limit their proposed reform to a Medical Assistance (Medicaid): $1,171 million 34-county pilot program. Mental Health/D.D./Subst. Abuse: $529 million Social Services: $179 million ➤ A third continuing budget Child Development: $169 million resolution is passed, extending Youth Services: $88 million funding until August 22 (S.L. 1997- Office of the Secretary: $37 million 401). ➤ A fourth continuing budget ➤ The Legislature passes a resolution is passed, extending continuing budget resolution funding until August 29 (S.L. 1997- extending funding for government 418). operations until July 31 (S.L. 1997- ➤ Lawmakers pass the $11.4 billion 256). budget on August 28 (S.L. 1997- July 443). The budget contains the following items: a 6.5 percent ➤ Budget negotiations come to a average (4 percent to 9 percent) standstill over the following issues: raise for teachers; a 4 percent raise a House-sponsored spending cap for state workers; $22.9 million tied to population growth and for Smart Start and expansion inflation; a state employee salary planning; and the welfare reform raise of 4 percent vs. 3 percent that package. also entails cutting $40 million from the state retirement fund ➤ The budget also includes the first to pay for the raise; a 3 percent intangibles tax refund of $156 increase to in-state student UNC million, which is taken from the system tuition; and welfare reform. unreserved credit balance of the General Fund. ➤ As the month drags on, a Senate 1997 session l CIVITAS INSTITUTE l 175 panel recommends that the ➤ The reform package allows proposed House welfare reforms participating counties to develop be tested in only three counties, their own program requirements instead of implemented in all 100 and benefits. Any county can counties. participate, but the final group of participating counties must ➤ A second continuing budget contain a cumulative total of no resolution extends funding until more than 15.5 percent of the August 15 (S.L. 1997-347). state’s families on welfare. August ➤ The food sales tax is cut from 3 ➤ Budget negotiators compromise percent to 2 percent (S.L. 1997- in other areas, including adhering 475). 176 l CIVITAS INSTITUTE l 1997 session November October September Six more counties➤ volunteer After acquiescing to➤ varioustax 23 counties sign➤ upfor theHouse Governor➤ Huntconsiders requiring Apparently distraughtover➤ the the overwhelming response,the overwhelming the General Assembly. As aresult of the 15.5percent capsetby the receiving households –more than home to 22percent ofwelfare- The combined 29counties are for thenewwelfare program. Economy. on BusinessLaws andthe taxes,” Hunt tells theCommission that we don’t gotoo farincutting block future cuts. “Let’s becareful Governor Huntsuggestshewill cuts over thepastfew years, welfare families. comprise 16percent ofthestate’s welfare reform plan. The counties from thestate. per week before receiving acheck service 35 hoursofcommunity work or engageinaminimumof welfaretwo-parent familiesto probation. instead ofbeingplaced on weektwo-to-four bootcamp, juvenile offenders besentto a governor recommends first-time at reducing juvenile crime. The a possiblespecialsessionaimed 1996 specialsession,Hunthintsat the success hehadduringthe and Crime. Wanting to replicate Commission onJuvenile Justice crime, Governor Huntappointsa riseinjuvenile decade-long December Hunt continues to➤ highlight The Commission➤ onJuvenile we can.” as with it,to dealwithitasquickly specialsessiontohave deal ashort like to have thisready sowe could juvenile crime, saying, “I would program. inthe counties may participate what sessionto select the next General Assembly willwaituntil finishing thereport. unlikely becauseofthedelay in is “still areal option,” itappears special sessiononjuvenile crime deadline. Although Huntsays a 5 by theJanuary finish itsreport Justice andCrimerushesto ° Public 20,577(1.7%)increase Schools: ° State decides Supreme Court ° Excellent approved Act Schools ° EstablishCivilPenalty &Forfeiture Fund to ° with Allow UNCsamebudgetflexibility ° ° $72millionfor projected ABCbonuses ° of0.7%for Increase in-state and1.1%for out- ° Average increase of4%for in-state and1%for ° UNC:2,500(1.6%)increase ° Technology Fund instead going to Fund theCounty School to theSchool transfer civilfinesandforfeitures thatwere codes overhead receipts aswithGeneralFund budget collegesin thecommunity $10 millionincrease for occupational education of-state college community students out- Community Colleges: 84,744(10.6%)decrease of-state UNCstudents 1997 EDUCATION FUNDING OTHER EDUCATION CHANGES TUITION & FEE INCREASES ENROLLMENT CHANGES Leandro 1997-1998 BIENNIUM 1998 session FY 1999: July 1, 1998 to June 30, 1999

General Assembly: House Dems: 59 House Reps: 61 Senate Dems: 30 Senate Reps: 20

Governor: Jim Hunt (D)

The 1998 Short Session: Budget Bill SB1366/S.L. 1998-212 Passed Senate: July 1, 1998 Passed House: July 22, 1998 Conference Version Ratified: October 28, 1998 Signed by Governor: October 28, 1998

nstead of declaring a special session for The Senate refused to send over its juvenile crime, Governor Hunt called budget to the House until the end of Ithe General Assembly back to Raleigh in June, with the apparent intent of using March to discuss his new vision for health the delay to smear Republicans during care for children. In the end, the Legislature the upcoming election. After the House agreed to extend taxpayer subsidized amended the Senate bill to include the health care coverage to uninsured children sales and inheritance tax cuts, the Senate in a program that would cost state and refused to compromise. In an election- federal taxpayers $108 million per year, year gamble, however, House leadership with North Carolina taxpayers contributing insisted the cuts be made. In October, the $28 million annually. At a cost to taxpayers Senate finally agreed to reduce taxes, and of over $2 million, the extended session both chambers agreed to further welfare

lasted six weeks – an omen of things to reforms. Despite delivering tax cuts to 1998 session l CIVITAS INSTITUTE l 177 come during the summer short session. the people of North Carolina for three consecutive years, Republicans lost their With the tax cuts of the past few years majority in the House. fueling an economic boom in North Carolina, Republican legislators proposed returning a $1.2 billion revenue windfall January ➤ In an effort to better investigate back to the people. Specifically, the House ethics conflicts for state board and demanded the repeal of the regressive commission appointees, Governor 2 percent sales tax on food, along with a Hunt proposes allowing the N.C. Board repeal of the inheritance tax. As the end of of Ethics to prescreen appointees, the fiscal year approached, the House and as well as establish requirements for Senate were unable to agree on the tax property, business and gift disclosure. cuts. The initiative was prompted by the 178 l CIVITAS INSTITUTE l 1998 session March February ➤ Commission member The governor’s➤ Commission on Governor➤ Huntannounces he House SpeakerHarold Brubaker ➤ commission. major barowner regulated by the has significant businesstiesto a commissioner appointed by Hunt thatanABC likewise reports January,In theNews&Observer that benefited themfinancially. that theylobbiedfor road projects Hunt appointee) over allegations which, Odell Williamson, wasa board members(atleastoneof 1997 resignation ofthree DOT Representative JoeKiser parental trainingclasses. programsfunding after-school and juvenile justice database;and age 18;creating acomputerized centers untilage 21,instead of holding delinquentsintraining latitude insentencing juveniles; giving judgesgreater agency; creating anewcabinetlevel recommendations include: its report. The commission’s Juvenile CrimeandJustice releases children. subsidized healthinsurance for intention ofexpandingtaxpayer- the GeneralAssembly withthe will callfor aspecialsessionof regressive state salestaxonfood. istheeliminationof priority of aneconomic downturn. The top setting asidesavings intheevent cuttingtaxes; Act; Schools and second installmentoftheExcellent session:fundingthe for thenext outlinesthree goals (R-Randolph) April The GeneralAssembly➤ meetsina The take HouseandSenate ➤ theRepublican Outflanking ➤ 1998 Other Significant Changes 1998 Other children. taxpayer-subsidized insurance for governor’s mandate to expand special sessioninresponse to the cost.” the slightest ideawhatthiswill good, butcautions, “We don’t have (R-Lincoln) thinksthereforms are six weeks to pass the “Health and write into law,” states Basnight. something we needto goahead should beeliminated. is “[It] signals thatthesalestaxonfood Tempore Marc Basnight (D-Dare) legislative leadership, Pro Senate Appropriation of$186millionfor capital • Year 2000-related technology funds • OTHER 227newjudicialbranchpositions • Transfer Boxing Commission of from Secretary • ofJuvenile Justice Office created from divisions • increases of4%to 9%for Salary principals, • increase for governor, 3%salary council ofstate • bonus increase of3%+1%performance Salary • ORGANIZATION COMPENSATION improvements State to CrimeControl &Public Safety programs of$17.3million of HHSandAOC; for reserve office andrelated assistant principals, andteachers branch personnel and otherexecutive officials, aswell asjudicial for moststate employees million for Smart Start, and, yet 1998 EDUCATION FUNDING again, raise salaries for teachers (6.5 percent) and state employees ENROLLMENT CHANGES (5 percent). ° Public Schools: 17,834 (1.5%) increase ° Community Colleges: 49,257(6.9%) increase ➤ Governor Hunt’s spending spree ° UNC: 82 (0.1%) decrease is sidetracked by a N.C. Supreme Court order that the state refund TUITION & FEE INCREASES $1 billion to some 250,000 local, ° Average increase of 3% for in-state and 2% for out-of-state UNC students state and federal retirees. The ° Increase of 0.2% for in-state and no increase for refund resulted from the eight- out-of-state community college students year-old class action suit, Bailey v. State (1998) (Bailey II), regarding OTHER EDUCATION CHANGES the constitutionality of a 1989- ° Increase supplemental funding for small county 1997 tax on retirement benefits. and low-wealth districts ($13 million) ° $22 million for mentor teachers and additional As a result of the ruling, the state pay for extra duties in low performing and will also lose an estimated $120 at-risk schools million in tax revenue. As with the ° $98 million for projected ABC bonuses intangibles tax lawsuits, future ° High schools complete 1st year, K-8 schools Governor Mike Easley is on the complete 2nd year under ABCs losing side as the state’s attorney general. Insurance Program for Children ➤ House Majority Leader Leo Act of 1998” (S.L. 1998-1es). The Daughtry (R-Smithfield) program extends comprehensive and Senator Tony Rand health coverage (including dental (D-Cumberland) negotiate a and vision) to children who are settlement with the Bailey/Emory/ ineligible for Medicaid or Medicare, Patton plaintiffs, in which the state but whose families earn up to 200 agrees to drop its appeal and pay a percent of the federal poverty settlement of $799 million. level ($32,900 for a family of four ➤ The National Education in 1998). The bill also includes a Association releases it annual list modest child insurance tax credit of average state teacher salaries.

of $100 to $300 for low- and 1998 session l CIVITAS INSTITUTE l 179 Thanks to the Excellent Schools middle-income families who Act, North Carolina has risen actually purchase health insurance five spots to reach number 38 (a for their children. figure that does not account for May the state’s below-average cost of living). ➤ Ignoring calls from Republicans that the state set aside money for emergencies, Governor Hunt June proposes spending the $1.2 billion ➤ The Democratic-controlled Senate “April surprise” windfall on a $1.4 refuses to vote on the budget, billion package that will allocate guaranteeing that the “short” $40 million for juvenile justice, $57 session will carry over into August. 180 l CIVITAS INSTITUTE l 1998 session 1998 Significant Tax Changes(BudgetBillUnlessNoted) 1998 Other Revenue1998 Other Sources &Actions On June 30, Senate leaders On June30,Senate ➤ • • • • • Water Management Trust Fund. and $52.5millionfor theClean funding for juvenile justice reform; program; $19.8million Start Smart expansion ofGovernor Hunt’s for state workers; a$56.6million for teachers; a4percent raise that includes:a6.5percent raise propose a$12.5billionbudget Economic Opportunities Act of1998:BillLee Act changes [S.L.1998-55] Act Economic Opportunities Fund, instead ofcounties [S.L. 1998-24] Reduce taxonappliances; increase percent goingto Solid Waste Management Trust forward [S.L.1998-171] nomic losscarry Conform to InternalRevenue Code updates: qualifiedtuitionprograms andneteco- Child HealthInsurance Tax Credit [S.L.1998es-1] 1998 taxrelief: E-911 Fee established(80 Disproportionate Share,Disproportionate insurance, transfers from Highway Trust Fund andHighway Fund sources ofG.F.Other revenue: investment income, judicialfees, Medicaid Transfer Share $35millionfrom receipts Disproportionate 1997-98reserved Medicaid Transfer $145millionto Repairs&Renovations Account creditEarmark $30millionofyear-end balance for aquariumcapitalimprovements Earmark $400millionfor ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ Decrease charge insurance from regulatory 8.75%to 6.00%for 1998 sunsetonQualifiedBusinessCredit;Extend modifyfor movie industry limitforIncrease Conservation Tax Credit Establish Long-term Care Credit Insurance Add schoolsto entitieseligible for salesandusetaxrefund Repeal state inheritance tax;retain estate tax Continue earmarkedrefund for federal retirees Repeal income taxonretired government employees (Baileycase) Repeal 2%state salestaxonfood Bailey/Patton/Emory lawsuit settlement ¢ permonth)[S.L.1998-158] Continuing➤ budgetresolution (S.L. House SpeakerBrubakerlaments ➤ budget isenacted. for agenciesto operate until the 1998-23) ispassedallocatingfunds implemented.” canbe how thewholepackage “I believe we canshow [them] ontaxcuts.”short Adds Brubaker, that theSenateplanis “very July ➤ In a ploy aimed at breaking the ➤ House Republicans release their will of House Republicans, the own $12.3 billion budget. The Senate moves to cut off legislator pay after September 10 (SB 1176). 1998 HEALTH & HUMAN SERVICES BUDGET Standing firm, Speaker Brubaker Total Appropriations $2.53 billion replies, “We [the House] have no problem with that.” Major Items: Medical Assistance (Medicaid): $1,386 million ➤ Governor Hunt explains that he Mental Health/D.D./Subst. Abuse: $551 million backs the Democratic Senate on Social Services: $184 million the budget but also claims he is Child Development: $172 million “not going to get into the blaming Youth Services: $89 million right here” on who is responsible Office of the Secretary: $33 million for the deadlock.

House budget contains $25.6 ➤ Contrary to prior boasts, House million less for Smart Start and Republicans vote down the $13.8 million less for the new Senate plan to cut off legislator juvenile justice program than does pay after September 10 (SB1176). the Senate budget. The package Instead the House passes a bill delivers over $200 million in tax that terminates only the Senate’s cuts, eliminating the regressive pay on December 31. Explains state sales tax on food, repealing House Rules Committee member the inheritance tax, and raising the Representative Jim Gulley personal income tax exemption (R-Mecklenburg): “We’re up from $2,500 to $2,750. here; should it be for free?” Three Republicans and one Democrat ➤ The Senate rejects the House’s do decide to no longer accept the budget. Meanwhile, Governor Hunt $104 per diem. travels across the state to generate public support for his requested ➤ The House bill also includes a funding for juvenile justice. provision permitting the previously agreed upon 6.5 percent and 3 August percent pay raises for teachers and ➤ state workers to go into effect. House Republicans stand firm on 1998 session l CIVITAS INSTITUTE l 181 their proposed tax cuts, sending ➤ The Democratic Senate caves and the short session into September. offers to repeal the inheritance tax if the House agrees to fully fund September Smart Start, the juvenile justice ➤ In a half-hearted move to break program and the Clean Water Trust the impasse, the Senate proposes Fund. to exempt family farms and small ➤ businesses from the inheritance The House counters with a tax. In response, Speaker Brubaker proposal to expand the welfare tells the Senate to go back to reforms of the previous year by the drawing board: “If they keep increasing the number of eligible trying, they might get it right.” counties. 182 l CIVITAS INSTITUTE l 1998 session October According➤ to Representative Because oftheoverwhelming ➤ The approve HouseandSenate ➤ On September30,lawmakers ➤ Huntagain An increasingly angry ➤ Teachers➤ andstate workers receive spite ofhisearliercomments,In ➤ Cherie Berry (R-Catawba), one of Cherie Berry the welfare program. in families are pickedto participate that account for almost9,500 of ahard hat. Twenty-one counties thenamesofcounties out picking stage awelfare reform “lottery” by HouseRepublicans pilot project, signed upfor thewelfare reform number ofcounties thathave system (S.L.1998-202). which overhauls thestate’s current the “Juvenile Justice Reform Act,” 1. The 15.5percent capremains. that itwould have lostonOctober to receive federal matching funds Carolinaagreement, isable North reaching thelast-minuteIn Commission.Employment Security the otherrunby theindependent Hunt’s Commerce and Department programs: onerunby Governor that creates welfare-to-work two strike acompromise (S.L.1998-166) budget. Andthatiswrong.” right now becausewe don’t have a charges Hunt. “That’s nothappening government thepeople,” serve this legislature isto helpstate criticizes theHouse: jobof “The (S.L. 1998-153). their pay raisesretroactive July1 House leadership.” to dowhat’s rightnow lieswiththe Hunt declares, responsibility “The December November The budgetalsomandates➤ thefirst Four➤ thebeginning months after When asked about the possibility When askedaboutthepossibility ➤ Democrats retake control➤ ofthe the GeneralFund. end 1997-1998credit balance of The moneyistakenfrom theyear the reimbursement –$400millionfor bonus. with a1percent nonrecurring workers receive 3percent raises, raiseandstate 6.5 percent salary $47 million. Teachers receive a the Clean Water Trust Fund at system overhaul andfullyfunds million for thejuvenile justice into 100counties, allocates $17.3 expansion Start million for Smart the inheritance tax,grants $42.5 repeals thefood salestax,repeals 30 (S.L.1998-212). The budget budget billisadopted onOctober of thefiscalyear, the$12.6billion have takenSolomon’s wisdom.” counties any otherway “would welfare reform plan,choosingthe the leadingproponents ofthe on –upordown.” about allowing thingsto bevoted because “I have thisphilosophy hewould allow avotethe lottery that despite hisoppositionto candidate for HouseSpeaker, says House, Representative JimBlack, billvote inthe of alottery of35. majority forseats intheSenate asolid total of66);theyalsogainfive seven seatsintheHouse(for a up General Assembly by picking Bailey/Emory/Patton lawsuits. 1999-2000 BIENNIUM 1999 session FY 2000: July 1, 1999 to June 30, 2000

General Assembly: House Dems: 66 House Reps: 54 Senate Dems: 35 Senate Reps: 15

Governor: Jim Hunt (D)

The 1999 Long Session: Budget Bill HB168/S.L. 1999-237 Passed House: June 2, 1999 Passed Senate: June 17, 1999 Conference Version Ratified: June 30, 1999 Signed by Governor: July 1, 1999

he 1999 long session started off billion bond for repairs and construction. with an attempted coup by House The Senate approved the package, but TDemocrats. In an effort to restore Dan the House balked, not only over the Blue (D-Wake) as Speaker of the House, amount, but especially because the bill black members of the House united with did not provide for a public referendum. Republicans in an attempt to elect Blue (The bond was a limited-obligation bond over 1997-1998 Minority Leader Jim Black guaranteed by the value of university (D-Mecklenburg). Although Black was land and buildings, but still backed by initially stunned by the strength of the the state.) As in past years, the House coalition against him, he eked out a one- stood firm, and the General Assembly vote win by persuading various members adjourned without approving the bond to defect from the coalition. package. In September, Hurricanes Dennis and Floyd struck North Carolina, causing 1999 session l CIVITAS INSTITUTE l 183 Taking advantage of Democrat control massive flooding and damage. Governor of the Legislature, Governor Hunt again Hunt initially requested a bloated $5 asked for more education spending – in billion federal aid package and ended particular, for Smart Start and the Excellent up with less than half that. In December, Schools program. With House Republicans the General Assembly returned for a again in the minority, the governor’s special session in order to pass an $830 spending recommendations were quickly million hurricane aid package funded by voted through, with the FY1999-2000 withdrawing $286 million from the “rainy budget passing before July 1 for the first day” fund, using unappropriated funds, time since 1979. The only area of friction delaying capital improvements and cutting between the House and Senate came agency operating budgets. when the UNC system asked for a $3 184 l CIVITAS INSTITUTE l 1999 session 1999 Significant Tax Changes 1999 Other Revenue1999 Other Sources &Actions January Senate leaderMarcSenate Basnight ➤ An economic analysis ➤ conducted • • • • • (D-Dare) claimsataxincrease(D-Dare) revenues (seeQ&A:11). recovery, leadingto highertax Carolina’sfueled North economic argue thatthetaxcutsactually recent taxcutswhileRepublicans on Democrats blametheshortfall $800 millionrevenue shortfall. Research apotential staffpredicts by theGeneralAssembly’s Fiscal Pension [S.L.1999-414] taxwithholding(noestimate ofimpact) agencies, [S.L.1999-438] prescription drugs, medical equipment,localairports) Sales tax/fee changes:exemptions (for orreductions new businessregistration, loan Bill Lee changes, Act sunsetfrom includingextending 2002to 2006[S.L.1999-360] Corporate income taxcredit cigarettes for [S.L.1999-333] ofexported manufacture shoppers’ guides)[S.L.1999-438] Sales tax/fee changes(increases for checkcashing, pawnbrokers, usedequipment, 1999-415] Conform to InternalRevenue Code updates (income tax,statute oflimitations)[S.L. policies andprocedures) [S.L.1999-341] Use tax,income tax,andstate purchasing (smallrevenue increase dueto changes in Disproportionate Share,Disproportionate insurance, transfers from Highway Trust Fund andHighway Fund sources ofG.F.Other revenue: investment income, judicialfees, Medicaid $150 millionto HurricaneFloyd Disaster Reserve Transfer $150millionto Repairs&Renovations Account; thentransfer $60millionofthe Earmark $30millionfor Clean Water Management Trust Fund Legislature mustallocate additional$240million by July10,2000[S.L.1999-327] Transfer $200millionfrom Account theSavings Reserve for intangibles taxsettlement; Earmark $399millionfor Bailey/Patton/Emory lawsuit settlement House Minority Leader-elect Leo Leader-elect House Minority ➤ added revenue year for and next that show over $600millionin estimates by legislative analysts exists, pointingto that ashortfall (R-Johnston)Daughtry denies Basnight. “We cut[taxes] too deep.” the [tax]cutsthatwe made,” states some pointintime, becauseof you thatanincrease iscoming at the state salestax. “I would say to increaseregressive in one-cent is inevitableandpushesfor a Savings Reserve Balance and Cap: 1992-2006 millions of dollars 1991-92 to 2005-06 $900 Statutory Cap $800

$700 Balance on $600 June 30

$500

$400

$300

$200

$100

$0 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

an anticipated $300-$400 million Governor Hunt again declares that revenue surplus this year. “There education is his top priority. Hunt is not a shortfall problem; there calls for making North Carolina’s is a spending problem,” states public schools the best in the Daughtry. nation by 2010.

➤ House Republicans join with ➤ Senator Tony Rand 1999 session l CIVITAS INSTITUTE l 185 several renegade Democrats in an (D-Cumberland) files a lottery bill attempt to elect Representative (SB 21). Dan Blue (D-Wake) Speaker of the ➤ UNC system administrators call House. In return for their support, for a 4.9 percent increase for Republicans are promised co-chair in-state undergraduates and an seats on each committee. The 8.4 increase for in-state graduate coalition fails by one vote and Jim students at UNC Chapel Hill and Black (D-Mecklenburg) is elected NC State University. A 6.9 percent speaker of the House. increase for graduate students at February other schools is also proposed. ➤ In his State of the State address ➤ Hunt submits his $13 billion 186 l CIVITAS INSTITUTE l 1999 session $10 $12 $14 $16 $18 A $0 $2 $4 $6 $8 verage Taxesper$1,000ofPersonalIncome March A joint report by theJohnLockeA jointreport ➤ GovernorMartinHuntEasl million budgetshortfall. to address thepotential ofan$800 aside nothinginsavings andfails sets compulsive spendingpackage conditions. As inpastyears, Hunt’s million for improving rest home juvenile justice program and$5.8 Hunt alsorequests fundingfor his Start. teacher salariesandSmart proposes increases inspendingon recommended budget,which tax revenue. $36.3 millionannuallyinlostsales could cost atleast a state lottery & Tax Center demonstrates that Foundation andtheN.C.Budget 1985-86 Martin Governor

1986-87

1987-88

1988-89 Total Tax Revenue Compare toPersonal Income 1989-90

1990-91

1991-92

1992-93 May April 1993-94 The annual ➤ “April surprise” that When Black’s➤ May 1budgetgoalis With➤ Republicansbackinthe Speaker Blackannounces hewants ➤ Governor Hunt Governor $94 millionmore thananticipated. than-projected revenues isonly usually bringsnews ofhigher- May 20. not met,hemoves thedeadlineto incentives for reducing caseloads. that offered 21counties financial reverse theGOPwelfare reforms minority, Governor Huntmoves to bySenate May 1. to sendthebudgetbillto the 1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01 Governor Easley Governor 2001-02

2002-03

2003-04 ey 2004-05

2005-06 ➤ According to figures from the 1999 EDUCATION FUNDING National Education Association, North Carolina teachers earn an ENROLLMENT CHANGES average salary of $36,141: 89 ° Public Schools: 16,048 (1.3%) increase percent of the national average. In ° Community Colleges: 2,191 (0.2%) decrease only one year, the state has moved ° UNC: 2,029 (1.3%) increase up 10 places to reach the 29th spot TUITION & FEE INCREASES in terms of national teacher salary ° Average increase of 5% for in-state and 1% for rankings. out-of-state UNC students ° Increase of 33% for in-state and 4.9% for out-of- June state community college students ➤ The House finally sends the $13.5 OTHER EDUCATION CHANGES billion budget to the Senate. It ° Increase supplemental funding for small county provides for the third payment of and low-wealth districts ($13 million) the four-year Excellent Schools ° $21 million to improve student accountability Act; $58 million for the continued ° $14 million for mentor teachers expansion of Smart Start; $22 ° $140 million for projected ABC bonuses million in funding for community ° UNC across-the-board reduction of 0.5% college building repairs and ° Student accountability standards approved by State Board of Education new technology equipment; a 3 ° Free breakfast for kindergartners percent raise with $125 bonus ° Judge Manning rules in Leandro that the right and prescription drug card for to an opportunity for a sound basic education state workers; and $1.1 million for may include the right to early childhood free breakfasts for kindergarten education before age 5 students (HB 168). ➤ The Senate passes its version of ➤ When asked about the Senate the budget. The budget is almost lottery bill, Speaker Black says he identical to the House bill in all but will postpone a vote until next two points: 1) permitting university year’s short session. “I don’t see trustees to raise tuition by $250 in how we can vote this year,” states 2000-01 and 2001-02; 2) $500,000 Black. in funding to assist the elderly with ➤ Governor Hunt’s budget proposes prescription drug purchases. spending the state’s statutorily 1999 session l CIVITAS INSTITUTE l 187 mandated “rainy day” fund ➤ Backed by Senate President payment of $40 million. The Pro Tempore Basnight, House governor also proposes spending Speaker Black asserts the tax cuts some $354 million that is to be set of recent years have been “a bit aside to pay for the all but certain reckless.” Black proposes creating second and third installments of a special committee comprised the intangibles tax refund. of legislators, businessmen and ➤ Having again missed his self- tax experts to study ways to imposed budget deadline, Black “modernize” the state tax structure. says, “I’m looking at [the House Black claims he is “not advocating budget bill] being on the floor raising new taxes,” just “a [tax] June 2 and 3.” policy for the 21st century.” 188 l CIVITAS INSTITUTE l 1999 session July The UNC bond package runs The UNC bondpackage ➤ The budgetalsoincludesthe ➤ For➤ thefirsttime ➤ The Senate Democratic leadersintheGeneral ➤ into problems intheHouse. Bailey/Emory/Patton million –stemming from the second reimbursement –$399 assistance for prescription drugs. likewise receive $500,000in receive araiseof3percent. Seniors their funding. State workers also programs receive and theeducation of 7.5percent, an average raise Teachers receive 30 (S.L.1999-237). passed onJune billion budgetis year.$13.5 The of thefiscal before thestart budget ispassed since 1979the (SB912). package approves thebond payments. $39.4 millioninadditionalinterest will cost thestate anestimated bonds, however,limited-obligation proposal to voter approval. The leaders avoid having to submitthe land andbuildings, legislative backed by thevalueofuniversity colleges. Becausethebondsare the UNCsystem andcommunity bondfor$4.5 billionconstruction Assembly propose a$3billionto Fund. money istakenfrom theGeneral lawsuits. The 10% 20% 30% 40% 50% 60% 70% 80% 0% LG CS NV US VA TN SC NC GA FL UNC system➤ administrators trim The GeneralAssembly➤ authorizes Total NonfarmEmployment Growth: approved. a bond. Noneoftheproposals are repayment schedule than shorter million “note” thatwould have a borrowing themoneyusinga$750 theUNCsystemeffort, proposes alastditchto $810million.In request issubsequentlyreduced million appropriation request. This their bondrequest to a$995 not beenrepaid). the following year (butto date has Account, whichisto bereimbursed taken from theSavings Reserve 327). The refund issupposedto be intangibles taxplaintiffs (S.L.1999- a second refund of$200millionto the peopleshouldweigh in.” “We feel withthatamountofdebt, Leader RichardMorgan (R-Moore), referendum. According to Minority withoutapublic the package Republicans refuse to support Southeast States,Southeast 1985-2005 1999 session l CIVITAS INSTITUTE l 189 dumps more rain on North rain on dumps more more causing even Carolina flooding. call a special session of the may possibly over General Assembly, facilitate to in order Thanksgiving, Hurricane effortsrecovery for generate to Proposals Floyd. a $1 funds range from recovery implementing billion bond issue to on spending and a freeze one-cent“temporary” instituting a 4 percent (from sales tax increase 5 percent). to officials estimate Transportation roads state hurricane damage to is at least $76 million, but caution Assembly to send a legislative a legislative send to Assembly campus assess to study committee conditions. winds, force storm tropical course reverses Hurricane Dennis on September and makes landfall 15 inches of 4, dumping up to rain on North with storm Carolina, devastating partssurges of the Banks. Outer strikes North Carolina. Floyd of rain fall on 19 inches Up to causing ground, still saturated especially in flooding, widespread the southeast portion of the state. at put the damage Early estimates $1.3 billion. ➤ On October 17, Hurricane Irene Hunt warns that he ➤ Governor ➤ DepartmentState of UNC leaders invite the General the General ➤ leaders invite UNC with ➤ the coast battering After ➤ 16, Hurricane On September October August September Basnight rejects the House bill, Basnight rejects the House bill, … concur. won’t “We declaring: offer the House to like would We some offer and we’ll concessions, as well.” without a public bond proposal is and no compromise referendum The struck on the UNC bond issue. adjourns. General Assembly request for a $3 billion bond a $3 billion for request package in bonds $1.2 billion to a public on in voted be to referendum. Senate President Pro Tem Marc Marc Tem Pro ➤ Senate President a accept to ➤ refuses House The The House reduces the Senate ➤ House reduces The state employees state as judicial as well officials, and other executive branch personnel principals and assistant principals 8.0% for facultycollege projects established; technology Technology oversight more receive ORGANIZATION COMPENSATION • of state council 3% salary governor, for increase • and salary teachers of 7.5% for increase Average • salary community of 3% for increase Average • Joint Select on Information Committee NCGA • Salary most of 3% + $125 bonus for increase 1999 Other Changes Significant Medical Assistance (Medicaid): Medical Assistance Abuse: Mental Health/D.D./Subst. Child Development: $1,349 million Social Services: $614 million Health: Public Office the Secretary: of $286 million $93 million $150 million $133 million 1999 HEALTH & HUMAN SERVICES BUDGET SERVICES & HUMAN 1999 HEALTH Total Appropriations Appropriations Total Major Items: $2.78 billion 190 l CIVITAS INSTITUTE l 1999 session November Senate PresidentSenate ➤ Pro Tempore withPresidentMeeting ➤ Clinton, The GeneralAssembly➤ backs borrowing.” money. …I’m notonewholikes the taxincrease thanborrow funds, says hewould “rather have billion bondfor hurricanerelief Republican proposal to issuea$1 Basnight, responding to a funds to $1.86billion. request for federal hurricanerelief wildly exaggerated, $5.3billion Governor Huntlowers hisoriginal, damage for months. thetotal that theywillnotknow effort. sales taxwillhelptherecovery think thatincreasing theregressive legislators, inparticular, donot I’ve talkedto.” Many Republican amongthe members support does notseemto have much Black, salestax temporary “The Acknowledges HouseSpeaker increasing thestate salestax. byfund hurricanerelief efforts away from itsinitialproposal to December Having calledtheGeneral ➤ With➤ thestate receiving Act of1999”Act (S.L.1999-463es). million “Hurricane Floyd Recovery one day to approve Hunt’s $830 December 15,theLegislature takes Assembly into specialsessionon CreditUnreserved Balance. unappropriated fundsfrom the Account, andusing$40millionin million from theSavings Reserve budget savings, withdrawing $286 andagency using department improvement, or “pork,” projects, funded by delaying variouscapital issue. istoThe be relief package raise taxes orrely onabond thatdoesnot state aidpackage Hunt proposes an$830million total federal relief aid, Governor approximately $2.2billionin From 2001to 2005,four outoffi increasing theoverall annualtax state budgetbillsraised taxes, DID YOU KNOW? DID YOU burden by $1.4billion. Source: JohnLocke Foundation ve

economic overview 2000-2005 l CIVITAS INSTITUTE l 191

US SC

2000-2005

US TN

Southeast States, 1995-2005 Southeast States, GA

GA FL

Private Share of Total Nonfarm Employment: Total of Share Private

General Economic Trends: 2000-2005 Trends: Economic General (1999- a recession dip into the national economy saw new millennium The (2003-2005). During the three-year (2002), and then rebound 2001), stabilize than the resilient slightly more GDP remained state Northrecession, Carolina’s from growth real annual average experienced the state Thus national GDP. growth North Carolina’s Unlike the national economy, 2000-2002 of 1.9 percent. per year. 1.5 percent dipped below never the national behind lagged one year recovery the state’s being said, That $1.1 in 2001 siphoned approximately in taxes increase A massive recovery. This of the next the course fiscal years. two over the economy billion from each consumer: $500 amount for a not insignificant represented tax increase and spending, consumer higher taxes, of the a result As on average. per year “temporary” of the renewal The declined. confidence, consumer arguably these trends. reverse did little to in 2003 (S.L. 2003-284) and sales taxes income VA

SC NC

OVERVIEW GA

SC NC 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 US 192 l CIVITAS INSTITUTE l economic overview 2000-2005 10% 15% 20% 25% 30% 0% 5% 1 spending inthestate budgetwent from $1.35 billionto $2.44billion. drop off in2004or2005. rollsMedicaid swelled from 840,000in2000to 1.06millionin2003,withno entitlements doesnotgoaway once arecession ends. Thus we find thatthe increased significantly duringthisperiod. Historically, ontax-paid dependency Carolinians duringtherecession, share the Medicaid ofthestate budget toenrollment North anexpansionofMedicaid amongworking-age Owing rebounding to 90percent by 2005. state’s percapitaincome hadfallento 88.7percent ofthenationalaverage, only Carolina wasat90.7percent2000 North ofthenationalaverage. 2003,the In Personal percapitaincome alsodeclinedinrelation to thenational average. In economic average of3.4percent for thesameperiod. 2003 to 2005,real growth averaged 3.2percent, behindthenational two-tenths took anotheryear Carolina’s before North economy hit4percent growth. From Thus whilethenationaleconomy exceeded 4percent inreal growth in2004,it There wasaslightdecrease, however, intheenrollment for children age18andunderin2004;butthisnumber increased againin2005. SF AN CT VA TN SC NC GA FL US State/Local Government Employment Growth: 1 During the same period (FY2000-FY2005), Medicaid Duringthesameperiod(FY2000-FY2005),Medicaid Southeast States,Southeast 1995-2005

economic overview 2000-2005 l CIVITAS INSTITUTE l 193

VA TN

US NC SC

GA FL

US NC VA

TN SC

Southeast States, 1995-2005 Southeast States,

Southeast States, 1995-2005 Southeast States, GA FL

Total Private Employment Growth: Employment Private Total

State/Local Government Share of Total Nonfarm Employment: Total of Share Government State/Local VA

GA FL

US FL GA NC SC TN VA

TN SC 995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 194 l CIVITAS INSTITUTE l economic overview 2000-2005 SF AN CT VA TN SC NC GA FL US Total NonfarmEmployment Growth: Southeast States,Southeast 1995-2005 compared to anaverage regional cost per enrollee, compared to anaverage $841 in Medicaid dollars per resident, dollarsperresident, $841 inMedicaid Medicaid spendingaveragedMedicaid $6,640 of $716perresident. Overall, state For Carolina spent FY2002,North of $5,256for theSoutheast. DID YOU KNOW? DID YOU Source: N.C.Justice Center 1999-2000 BIENNIUM 2000 session FY 2001: July 1, 2000 to June 30, 2001

General Assembly: House Dems: 66 House Reps: 54 Senate Dems: 35 Senate Reps: 15

Governor: Jim Hunt (D)

The 2000 Short Session: Budget Bill HB1840/S.L. 2000-67 Passed House: June 14, 2000 Passed Senate: June 22, 2000 Conference Version Ratified: June 30, 2000 Signed by Governor: July 6, 2000

n Jim Hunt’s final year as governor, budget year. Nevertheless, Hunt’s proposed the General Assembly again passed budget increased spending by 6.8 percent. Ithe budget bill before July 1. With the The governor’s budget, however, presumed gubernatorial election in November, the a 5.8 percent revenue increase while state short session was characterized by relative forecasters predicted an increase of only 3.5 calm between the two Democratic- percent. Governor Hunt’s plan to borrow controlled chambers. In April, Governor $240 million in short-term bonds to pay the Hunt called another special session of the final installment of the Fulton/Smith/Shaver General Assembly – this time to address refunds was also not well received by a the issue of punitive damages against General Assembly already displeased over corporations involved in civil lawsuits. spending increases for Hunt’s special pet A tobacco lawsuit in Florida spurred the projects, like Smart Start. governor to protect the state’s tobacco 2000 session l CIVITAS INSTITUTE l 195 industry from paying exorbitant damages, After failing to get a bond referendum while disputed cases are still on appeal. In passed in 1999, the UNC system won response, the General Assembly passed approval for a November 2000 $3.1 billion a bill staying damage payments in civil ballot initiative. Although Republican cases under appeal in which the judgment presidential candidate George H. Bush debtor posts a bond for a maximum of $25 won North Carolina, Democrat Mike Easley million in noncompensatory damages. defeated Richard Vinroot for governor. Republicans picked up four seats in the With $830 million in state funds going House, closing the gap between the two to hurricane recovery efforts and a parties to a margin of 58 (R) to 62 (D). final payment of $240 million owed to Meanwhile, Democrats remained firmly in intangibles tax plaintiffs, 2000 was a tight control of the Senate. 196 l CIVITAS INSTITUTE l 2000 session April March February January After four➤ hoursofdebate, Fearing➤ thatputative damages The Legislative➤ StudyCommission To➤ aidinruralInternet The N.C.RuralProsperity➤ Task to solidifyhis afinaleffort In ➤ litigation. firms from thislawsuit andsimilar Carolina to protect North an effort Assembly into special sessionin Governor HuntcallstheGeneral Carolina, companies inNorth tobaccocivil suitcould bankrupt yet to beawarded inaFlorida deregulation for sixyears. Carolina delayNorth electricity Carolina recommendsNorth that on theFuture in Service ofElectric local phonecustomers. feewith an8-cent charged to all Broadband Fund thatisfunded recommends creating aRural deployment, thetaskforce markets. and developing newagricultural investments inruralpublic schools, access into ruralareas, increasing expanding highspeedInternet oftheproposal include Highlights plan to stimulate ruraleconomies. thatoutlines a releases areport and chaired Bowles, by Erskine Force, appointed by Governor Hunt school progress. card thatmeasuresannual report whichproposesproject, issuingan the “First inAmericaby 2010” Governor Huntattempts to launch asthe legacy “education governor,” May Governor➤ Huntproposes Richard ➤ Vinroot winsthe 2000 Other Significant Changes 2000 Other transfer tax. arealand fees, estate inparticular funded by aspate of new taxes development. The trustisto be of farmlandandforests from order to protect onemillionacres budgetin million inthenext Preservation Trust Fund to $1 increasing theFarmland damages. compensatory cover and noncompensatory a bondupto $25millionto requiring theappelleeto post damages duringappealby judgment for noncompensatory stay theenforcement ofacivil appeal. isdesignedThe to act fighting ajudicialverdict on whiletheyare from bankruptcy designed to protect companies Damages,” (S.L.2000-1)abill Judgments for Noncompensatory the “Enforcement ofForeign the GeneralAssembly passes Reduce due $52millioninfundsfor debtservice • DEBT SERVICE Reduce retirement system contribution rate from • Average increase of6.5%for teachers and10.0% • increase for governor, 4.2%salary council ofstate • increase of2.2%COLA Salary +2.0%career • RETIREMENT COMPENSATION to revisions inpayment requirements 8.15% to 5.33% for principalsandassistant branch personnel and otherexecutive officials, aswell asjudicial growth +$500 bonus for moststate employees Amount of Personal Income Paid to State as Income Tax millions of dollars $300

State Individual Income Taxes Paid $250 Personal Income After State Taxes Paid

$200

$150

$100

$50

$0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Republican gubernatorial primary. reduction in revenue was primarily In November he will face Attorney caused by Republican tax cuts, as General Mike Easley. well as the recent natural disasters and lawsuits. “When you cut taxes ➤ Unlike previous years, Governor $1.5 billion along with having Hunt waits for April revenue natural disasters and two major

estimates before delivering his 2000 session l CIVITAS INSTITUTE l 197 lawsuits totaling more than $1 budget to the General Assembly. billion, that adds up to no money.” ➤ A bipartisan legislative committee ➤ Hunt finally submits his $13.9 recommends placing a $3.1 billion billion budget. In line with the bond referendum for UNC system Excellent Schools pay raise building improvements on the fall schedule, teachers will receive a 6.5 ballot. percent salary increase. State ➤ The annual “April surprise” brings workers will also receive a 3 bad news, as state revenues are percent raise while Smart Start will $91.7 million below projections. get another $67 million, boosting its annual funding to $288 million. To ➤ House Speaker Jim Black pay for the new spending, as (D-Mecklenburg) claims the 198 l CIVITAS INSTITUTE l 2000 session 2000 Significant Tax Changes 2000 Other Revenue2000 Other Sources (BudgetBillUnlessNoted) &Actions Characteristically,➤ Hunt’s budget • • • • • • • • • does notpropose replenishing the using bondissues. the difference by borrowing funds generated by cutsandmakeup wants to spendany available funds Primarily, however, thegovernor UNC system operatingbudget. as reducing by $7.7millionthe proposes several minorcuts, such million budgetgap, Hunt well asclosethecurrent $450 Exempt rental cars from property tax (impact localrevenues)Exempt tax(impact rental [S.L. 2000-2] carsfrom property 119] taxenforcementImplement measures (smallrevenue increase anticipated) [S.L. 2000- 2000-109] Repeal sunseton3%taxwhite goods(counties receive 72%ofthisrevenue) [S.L. and catalogsales[S.L.2000-120] Streamlined Sales Tax System: firststep to creating remote system collection for Internet Disproportionate Share,Disproportionate insurance, othertransfers sources ofG.F.Other revenue: investment income, judicialfees, Medicaid Transfer $9millionfrom Y2K Reserve Transfer $48 millionfrom HurricaneFran Reserve Transfer $240millionto Intangibles Tax 30,2000) (June Reserve Settlement creditinsufficient year-end balance appropriationDirect of$30millionfor Clean Water Management Trust Fund dueto creditinsufficient year-end balance appropriationDirect of$100millionfor Repairs&Renovations Account dueto appropriationDirect Account of$120millionto Savings Reserve Uniform Commercial Code revision (increase filingfees from $15to $30)[S.L.2000-169] fees byIncrease allcourt $3to $10[S.L.2000-109] In order In to finance➤ thefinal approval. The bondswould cost obligation bondswithoutvoter general $240 millioninshort-term constitutional provision to issue advantageofalittle-used taking tax refund, Huntproposes installment oftheintangibles and hurricanerelief efforts. to fundintangibles taxrepayments drained theprevious year inorder AccountSavings Reserve thatwas the state an additional $40 million days of Governor Martin’s account to $60 million in interest over the shifting techniques to balance next five years. the budget (e.g., shifting the final fiscal year payday to the next fiscal 2000 HEALTH & HUMAN SERVICES BUDGET year), the General Assembly shifts Total Appropriations $3.01 billion the July and August teacher salary payments from the 2001 budget Major Items: to the 2002 budget in order to pay Medical Assistance (Medicaid): $1,540 million Mental Health/D.D./Subst. Abuse: $608 million the $240 million intangibles tax Child Development: $305 million payment (S.L. 2000-67). The move Social Services: $186 million permits the state to balance the Public Health: $132 million budget without borrowing the Office of the Secretary: $90 million money, cutting spending, or raising taxes – at least for the time being. ➤ Hunt defends his budget, saying: ➤ The House passes its budget bill “There is no question that this is a which allocates: $222 million for tough budget year, and we had to the last phase of teacher raises make some tough decisions. There (6.5 percent) stemming from are a lot of things, folks, I would the Excellent Schools Act; $44 like to have had in the budget that million to Smart Start; a 3 percent we didn’t have in there.” raise, with a one-time 2 percent bonus, for state employees; and ➤ Legislators do not share the $1.2 million for Governor Hunt’s governor’s outlook. Observes Farmland Preservation Trust. Senate Minority Leader Patrick Ballantine (R-New Hanover): “He ➤ The Senate budget recommends just does everything for everybody a 6.5 percent raise for teachers, a and wants us to make the hard 3 percent raise for state workers decisions.” Similarly, House Speaker and $2 million for the Farmland Black “commend[s] the governor Preservation Trust. for focusing his proposed budget ➤ The ratified $14 billion budget revisions on children and families” bill (S.L. 2000-67) includes the but also says he will not support following: a 6.5 percent raise for

the plan to borrow money to make 2000 session l CIVITAS INSTITUTE l 199 teachers; a 4.2 percent raise, with the final intangibles tax payment. a one-time $500 bonus, for state ➤ The General Assembly passes workers; $44 million for Smart the “Michael K. Hooker Higher Start; and no $7.7 million cut for Education Facilities Financing the UNC operating budget. Act” (S.L. 2000-3) authorizing $3.1 billion in bonds for the UNC July system. The bond proposal will ➤ The General Assembly grants the appear on November’s ballot for Department of Transportation public approval. authority to grant a license to a private company to build a toll June road (S.L. 2000-145) in a pilot ➤ In a move that harkens back to the program to alleviate the increasing 200 l CIVITAS INSTITUTE l 2000 session September August Lobbyist➤ DonBeasonwrites House The GeneralAssembly➤ passesthe A Mason-Dixon poll shows➤ Easley Black's campaign fundrepays➤ ➤ Democratic gubernatorial the amountof$500,000, fund from hispersonalaccount in writes acheckto hiscampaign personal account. Days later, Black which Blackdepositsinto a a personalcheckfor $500,000 Speaker JimBlack(D-Mecklenburg) rural areas. and broadband deployment in promote economic development in theCommerce to Department 149) whichcreates anewdivision Access Authority Act” (S.L.2000 Carolina RuralInternet “North new roads. costs anddemandsofbuilding pressure onthestate to meetthe (D) leading Vinroot (R)48 percent justice. of andobstruction of bribery will beconvicted onstate charges Black's sentencing hearing. Black will come to light in 2007during $500,000. "loan" This short-term a personalcheckto Beasonfor $500,000. Days later, Blackwrites Black's personalaccount the funded. as to how theprogram would be dress code. Easleyoffers noinsight as changesto thepublicschool poorly behaved students, aswell the creation ofmore schoolsfor theprogramvirtue, promotes and self-discipline teaching kids “character” of education.Instead “No Excuses” program to promote Easleyproposescandidate a Mike November October Mike Easley(D) defeatsMike Richard ➤ As thestate➤ prepares to resume North Carolina grewNorth by 23.2percent –an Between FY 2004 and FY2005, combined Between FY2004andFY2005,combined The nationalaverage was 12.7percent. increase surpassed by onlyfour states undecided. Barbara Howe and13percent candidatefavor ofLibertarian to 37percent with2percent in 62-58. Democratsremain firmlyin thereDemocratic majority to seats intheHouse, trimmingthe percent. Republicanspickup4 Vinroot (R)52percent to 46 the deathpenalty. ofJustice to protestDepartment a rallyinfront oftheN.C. moratorium, 100peoplehold executions aone-year after state andfederal fundingin Medicaid Source: NationalConference of State Legislatures for ataxcanescapetheobligation only oneinwhichthosewhovote A democratic government isthe DID YOU KNOW? DID YOU to pay it. Alexis de Tocqueville 2000 session l CIVITAS INSTITUTE l 201 in court, the U.S. Supreme Court Supreme in court, the U.S. and permits halts the recount certify to its results. Florida control of the Senate, winning 35 winning of the Senate, control 15. seats to vote. of the percent garners 73 Vice Bush (R) defeats W. George winning by (D) Al Gore President a slim by of Florida the state mandatory A margin. recount but still winning, Bush shows a hand ask for to continues Gore recount. After Gore challenges the recount challenges the recount ➤ Gore After ➤ bond issue $3.1 billion UNC The election, presidential ➤ In the U.S. December ENROLLMENT CHANGES ENROLLMENT TUITION & FEE INCREASES FEE & TUITION OTHER EDUCATION CHANGES EDUCATION OTHER w-wealth districts, as well as exceptional as exceptional districts, as well w-wealth 2000 EDUCATION FUNDING 2000 EDUCATION of-state UNC students of-state children ($15 million: $5 million each) ($15 million: $5 children employees of other state equal that to teachers funded in 2000-01 bonuses instead funding for 2001 budget at actual amount and funding public administering for system sound but reserves education is constitutionally is adequately whether it judgement as to serving every student; Manning also rules that pre-kindergarten must provide the state 4 for of failing academically at risk olds who are year of-state community college students community college of-state and lo Community Colleges: 14,533 (1.9%) increase Colleges: Community out- ° student accountability improve $13 million to ° of longevity for rate pay increase $13 million to ° ABC bonuses; projected for No appropriation ° that the state’s Judge Manning rules in Leandro ° out- for and 14.2% in-state Increase of 17% for ° small county Increase for supplemental funding ° increase UNC: 1,774 (1.1%) ° and 2% for in-state of 9% for increase Average ° Schools: increase 15,713 (1.3%) Public ° 202 l CIVITAS INSTITUTE l 2000 session * $23.9millionwaspartof1993Issuebutreservedtobe addressed by1994Session. 00S 003HigherEducationBonds SL2000-3 2000 CleanWaterandNaturalGas SL1998-132 PublicSchoolFacilities 1998 Chapter631 1996 Education,CleanWaterandParks Chapter542 1993 PrisonandYouthServicesFacilities Chapter935 CleanWaterBonds 1990 Chapter677 UNCSystem 1977 Chapter854 PublicSchoolFacilities 1975 Chapter657 NCZoologicalParkFacilities 1973 Chapter953 CleanWaterBonds 1971 Chapter909 1971 erAuthorization Year General Obligaton Acts Bond Voted onby Public: 1971-2000 Community Colleges UNC System Extension ofNaturalGasService Clean Water Clean Water Community Colleges* State Parks UNC System Authorized forusein1993 Authorized forusein1991 (Voted onbythePublic) Grand Total Description tt rjcsLocalProjects State Projects ,9,5,0 3,475,000,000 4,090,250,000 2,500,000,000 310,000,000 200,000,000 112,500,000 800,000,000 35,000,000 43,250,000 87,500,000 2,000,000 1,800,000,000 250,000,000 230,000,000 150,000,000 145,000,000 600,000,000 300,000,000 governor hunt and special sessions l CIVITAS INSTITUTE l 203 rst and rst erson Thomas Jeff Thomas dangers to be feared. dangers to and public debt as the greatest of as the greatest and public debt I place economy among the fi economy I place most important virtues, of republican Governor Hunt called the second special Hunt called the second Governor session of 1996 after negotiations budget during the 1996 short down broke session. was saving, main point of contention The a $700 million spending, as opposed to House Republican The budget surplus. than $398 million no less save to wanted of the surplus and spend much of the The on building new prisons. remainder spend to Democratic Senate wanted mostly on education. surplus, the entire the budget from Although the two-year an in place, long session was already was in the state outraged Hunt declared back into and called legislators “crisis” the legislative session on July 8. After behind closed leadership came together the budget out a compromise, iron doors to 3. on August was passed with no debate also 2, the Legislature August prior, day The Reduction Act of 1996,” “Tax passed the cut the the sales tax on food, which lowered the tax, and instituted income corporate Quality“William Jobs and Business S. Lee known better as the Bill Lee Expansion Act,” Act. In a the fall of 1997 Hunt appointed discuss proposals to special commission with the apparent crime, on juvenile of calling another special session intention 2 hours and 39 minutes, the General 39 minutes, 2 hours and it overwhelminglyAssembly (remember, was an election passed a $140 million year) (S.L. 1996-1es). tax cut unemployment Governor Governor Hunt Special and Sessions While Governor James Martin While Governor (R) attempted implement and to referendums use bond to Jim Governor programs, fund various public use special sessions to preferred Hunt (D) to what he perceived to bring attention to be important and During his third needs. Hunt called a fourth as governor, terms of six special sessions. total in Hunt called his first special session deal with crime to in order 1994 February “keep criminals violent – specifically to a real behind bars longer and make prison 8 Feb. from session lasted The deterrent.” community While Hunt told 26. March to crime leaders he thought that, at bottom, of … a matter problem religious “a was a his initial getting people right in their souls,” $118 million, 36-point anticrime package after-school sentencing, tougher called for and training schools, juvenile programs, The inmates. substance-abuse for programs of the two-monthresult session was long a $257 million crime bill (S.L. 1994-24es) structured sentencing that implemented bill Out” You’re “Three-Strikes, passed a laws, funded offenders, aimed at violent repeat and new prisons, the construction of five school-based programs, funded several for programs as drug treatment as well inmates. special Hunt called two In 1996, Governor 21 first came on February The sessions. Brubaker after Harold Speaker of the House call a the governor (R-Randolph) requested reduce to pass legislation special session to Although taxes. business unemployment Hunt initially balked at the suggestion, Meeting for acquiesced. he eventually that every day theGeneralAssembly that every In 2004,GovernorIn Easleyestimated 204 l CIVITAS INSTITUTE l governor hunt and special sessions is in special session costs is inspecialsessioncosts taxpayers $100,000. sponsored taxcredit for familieswho the Senate’s refusal to consider aHouse- plan alsostalledatthelast minute over responsibility.” Debate over thegovernor’s “fairness, accountability andpersonal defended theproposal asreflecting Speaker Harold Brubaker(R-Randolph) called thepremiums a idea,”“bad House premium ofupto $28. While thegovernor help offset thecost by paying amonthly in to thestate program shouldhave to recommendation thatfamilieswhoopted focus ofdebate wasaRepublican primary two months, from March 24to April30. The As in1994,thespecialsessionlasted nearly budget by $27.7millionperyear. tapped ifthestate increased itshealthcare for children’s healthcare thatcould onlybe annual federal contribution of$79.9million for theexpansionwasavailability ofan limit. federal poverty The initialimpetus families whomakeupto 200percent ofthe a planto cover some71,000children in insurance.” Accordingly, Huntproposed food andshelter for theirchildren orhealth thesefamiliesfaceoften, aterrible choice: they maketoo muchfor Medicaid. … Too uninsured. Their parents work hard, but of children familiesthatare ofworking governor: are tens ofthousands “There healthcare for children. Declared the – theexpansionoftaxpayer subsidized legislation regarding hislatest petproject the GeneralAssembly into sessionto pass and announced thathewasgoingto call the governor abruptlychangedcourse to address theissue. OnFebruary 27,1998, “$100,000 perday of taxpayer money.” General Assembly isinspecialsessioncosts day the himself estimated thatevery development. 2004,Governor In Easley andin2004,forredistricting; economic development; anotherin2003,for for in2003,for redistricting; economic called several specialsessions:in2002, Governor Easley(D) hasalso Mike Following Governor Hunt’s example, states: Georgia, and Kentucky Virginia. Carolina joinedthree otherneighboring during anappeal. passingthelaw, In North punitive damagebonds, thatis, bondsfiled 2000-1) thatplaced a$25millionlimiton session resulted inthepassageofalaw (S.L. of $144.87billion). The four-hour, April5 awarded(in theend, damages thejury billion to $300billionpunitive judgment that wasanticipated to result ina$100 Salem andtheLiggettGroup ofDurham) R.J. Reynolds Tobacco Co. of Winston- Carolina:of whichwere basedinNorth lawsuit involving five tobacco firms(two session wasprompted by aFlorida potentially cripplinglawsuits. The special Carolina tobaccoNorth companies from order to passabillaimedatprotecting called theLegislature in backto Raleigh (S.L. 1999-463es).OnMarch 30,2000,Hunt “Hurricane Floyd Recovery Actof1999” Assembly could passthe$830million December 1999sothattheGeneral specialsessionin Hunt calledhisfifth insurance coverage for theirchildren. tax credit forbuy familieswhoactually also agreed to a$100to $300refundable and prescriptions. The GeneralAssembly for$100 andasmallco-pay visits doctor to pay anannualenrollment fee ofupto limit,butrequiredpoverty thefamilies earn upto 200percent ofthefederal health insurance for children whosefamilies The finalplan(S.L.1998-1es)provided purchase healthinsurance for theirchildren. 2001-2002 BIENNIUM 2001 session FY 2002: July 1, 2001 to June 30, 2002

General Assembly: House Dems: 62 House Reps: 58 Senate Dems: 35 Senate Reps: 15

Governor: Mike Easley (D)

The 2001 Long Session: Budget Bill SB1005/S.L. 2001-424 Passed Senate: May 31, 2001 Passed House: June 28, 2001 Conference Version Ratified: September 21, 2001 Signed by Governor: September 26, 2001

he 2001-2002 biennium was marked included massive increases in education by a budget crisis caused by an spending – in particular, for his pet Teconomic downturn that began “Smart Start” program – even as the in the fall of 2000 and continued into state was hard pressed to pay for soaring 2001. During 2001 alone North Carolina Medicaid expenditures, not to mention lost 50,000 manufacturing jobs – the the multimillion dollar Fulton/Smith/Shaver second-highest such loss in the country.1 v. State and Bailey/Emory/Patton v. State In 2002, the economy picked up slightly, lawsuits. The state’s budget problems were but unemployment in certain sectors exacerbated by the failure to set aside remained high. In Catawba County, for reserve funds to pay for true emergences, instance, the declining fortunes of the tech such as Hurricanes Floyd and Fran. sector caused unemployment to soar from a low of 1.5 percent in the late 1990s to When legislators convened on January 2001 session l CIVITAS INSTITUTE l 205 9.4 percent in FY2002.2 As unemployment 24, 2001, the state was facing a projected rates rose, consumer spending and budget shortfall of almost $791 million personal incomes dropped. For FY2002 – one of the largest in the country – that alone, the state suffered a shortfall in worsened to $820 million as the year receipts of $1.55 billion. progressed. As a result, intense budget negotiations caused the 2001 legislative The immediate source of the budget session to last until December 6 – the crisis, as we saw above, was Governor longest in state history. Hunt’s 1999-2000 budget. Hunt’s budget

1 Christensen, Rob, “Hard times grip state, region,” The News & Observer, 2 December 2001, p. A-1. 2 Financial Highlights, Fiscal Year 2002, p. 3. 206 l CIVITAS INSTITUTE l 2001 session these two areas. 80 percent ofspendingallocated to drove thetaxincreases, withroughly years, healthcare andeducation 4 3 January or raisetaxes. centered onwhetherto cutspending the debate intheGeneralAssembly budget billinSeptember, muchof At least untilthepassageof the 2001recession. a handfulto raisetaxes atall)during raise income taxes (andoneofonly as theonlystate intheUnionto Carolinadoing, markeditself North in analready weak economy. Byso taxes, slowdown causingafurther taxes –bothsalestaxes andincome the FY2002-2003budgetraised Defying theadvice oftop economists, solution to thestate’s budgetwoes. asthe while callingfor astate lottery for taxincreases ofvariouskinds Meanwhile, Governor Easleypushed income taxes instead ofthesalestax. a Houseproposal to raisetop-tier alsorefusedSenate to agree with taxes. As theimpassecontinued, the House budgetthatdidnotraise refused to agree withaninitial the poor. For theSenate itspart, regressive andwould mosthurt on thegrounds thatsuchataxis were fiercelytax by resisted one-cent majority, callsto increase thesales Democrats heldaslimfour-vote Senate PresidentSenate ➤ Pro Tem Marc “State budgetbalances needsandpain,” proposals alsocontributedRedistricting to thelengthof2001longsession. General Assembly willraisetaxes, dismiss suggestionsthatthe Speaker JimBlack(D-Mecklenburg) andHouse Basnight (D-Dare) 3 In theHouse, In where 4 As in recent recent in As The ChapelHillNews,30September2001,p. A4. February Facing➤ anestimated $500million With➤ theprojected budget freezes state spending. Governorbudget shortfall, Easley increase.” Basnight, “I don’t foresee atax instate agencies. Claims efficiency up by increasing operational canbemade budget shortfall suggesting instead thatthe Hurricane Floyd disaster relief fund, and $40millionfrom the from theunemployment insurance payments,Medicaid $50million fund, $95millioninfederal for thestate employee pension Day Fund), $151millionearmarked AccountSavings Reserve (Rainy $157millionfrom the taking through variousmeans–including billionescrow account funded powers asgovernor to create a$1 crisis,” invoking his emergency Governor Easleydeclares a “budget increasing to $791million, shortfall done by alegislature anywhere. You don’t It’s oneoftheall-timestupidestthings raise taxes inarecession, oreven in a dismal economic environment.dismal economic UNC economist JamesSmith,UNC economist September2001 Private Sector Job Growth: North Carolina vs. U.S.

4% US NC

0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-1%

-2%

fund.5 (Recall that Governor Jim eliminating “special-interest” tax Martin had set a similar precedent breaks. Instead of eliminating in 1991 by taking money from the corporate subsidies, the panel Highway Trust Fund.) Easley also proposes broad-based tax holds back $95 million in inventory increases on retiree benefits, tax reimbursements designated candy, soft drinks, tobacco, for local governments, prompting vending machine sales, movie outraged local officials to file suit tickets, out-of-state phone calls, against the state (Cabarrus County, auto/home repair services, and et al. b. Tolson (2002)). various other items. 2001 session l CIVITAS INSTITUTE l 207 ➤ The Senate and House budget ➤ All three major credit rating committee chairmen propose a agencies – Fitch, Moody’s Investors “modified zero-based budgeting” Service, and Standard & Poor’s – plan to help cut spending. reaffirm North Carolina’s AAA bond rating. March ➤ Governor Easley creates ➤ Governor Easley proposes a $14.6 the N.C. Efficiency and Tax billion budget for FY2002 and Preference Commission (The $15.4 billion for FY2003 that “Loophole” Closing Commission) apparently freezes continuation to recommend proposals for spending at year 2000 levels. The

5 Easley later decided not to raid the hurricane relief fund, as much of the money had already been appropriated for other uses. 208 l CIVITAS INSTITUTE l 2001 session April The Houseintroduces➤ abill Among otherthings,➤ theproposed Rejecting earlierproposals toRejecting tax ➤ rate of6.5percent ontoll calls. percent, replacing thecurrent tax gross receipts for allcallsat4.5 providers. The billproposes taxing (HB571) to taxtelecommunications budget thatmakessense.” we are going to a needto craft don’t have nearlytheinformation (R-Johnston).Leo Daughtry “We Leader comments HouseMinority vague,”in hisbudgetare very that anumberofrevenue sources employee pensionplan. appears “It $181millionfrom thestate taking exist yet. The budgetalso proposes thatdoesn’tfrom astate lottery as well as$300millioninrevenue overly optimisticrevenue forecasts, “balanced budget” presumes Four. class size andMore reduction at of thegovernor’s – petprojects percent raisesandalsofundstwo gives state workers andteachers 2 the governor’s proposed budget $800 millionbudgetshortfall, education. Despite theestimated the newspendingdedicated to by 5.6percent, withmostof budget increases overall spending steps to improve government minor saving $91millionby taking Likewise, thegovernor proposes such ascars, boatsandairplanes. items, newspapers; andluxury andseed;satellitefertilizers TV; companies;and limited liability million intaxincreases onHMOs recommendations to callfor $150 the Loophole Commission’s candy andotheritems, Easleyuses May The Lewin➤ Group, an independent The GeneralAssembly➤ seeks fall$61 As Apriltaxcollections ➤ commission. eliminating thestate boxing –for instance,efficiency by hired by theGeneral Assembly, consulting firm healthcare policy waiting to bespent.” having itsitaround inanaccount when itisneededratherthan available [for hurricanerelief] legislators would “make themoney money management,” butthat that recalling thefundsis “sound argues Redwine (D-Brunswick) Representative DavidCo-chair Appropriations Committee Hurricane Floyd relief funds. to recall andreallocate unused scenario.”worst-case new numbersdefinitely indicate a seized inFebruary andthat “these not release any ofthefundshe by June30.Easleyindicates hewill and could increase to $850million hasworsened the budgetshortfall Governor Easleyannounces that ofprojections, million short Source ofBudgetFunds: 2000-01 releases a report describing North while state workers will get a $625 Carolina’s Medicaid program raise. Governor Easley hails the as a “Cadillac” characterized by proposed budget, which passes on unusually high spending driven by a straight party vote, as a “victory.” ➤ The State Employees 2001 Tax Increases as a Percentage of Income Association of North 0.40% Carolina (SEANC) sues 0.36% 0.36% Governor Easley for 0.35% diverting $225 million in 0.30% pension funds from the 0.24% state’s three retirement 0.25% systems in order to 0.20% 0.17% cover the budget deficit. The lawsuit is dismissed 0.15% 0.11% in June 2001, but SEANC 0.10% 0.09% 0.10% eventually wins the case on appeal before 0.05% the North Carolina 0.00% Supreme Court (Stone et Below $15,000- $26,000- $41,000- $67,000- $133,000- Over $15,000 $26,000 $41,000 $67,000 $133,000 $336,000 $336,000 al. v. State of North Bottom Second Middle Fourth Next Next Top Income 0.36% 0.24% 0.17% 0.11% 0.10% 0.09% 0.36% Carolina (2006)). 20% 20% 20% 20% 15% 4% 1% June ➤ Republicans in the House call the politics, rather than medical and Senate budget a ruse that uses factual data. the threat of cuts in mental health ➤ Two thousand students march to generate popular support for a from N.C. State to the General tax increase. House budget writers Assembly to protest proposed promise not to raise taxes and budget cuts in education. not to set a timetable for shutting down mental health facilities. ➤ Senate Finance Committee Chairman Senator David Hoyle (D-Gaston) calls ➤ Senate President Pro Tempore

for a “temporary” one cent increase Marc Basnight proposes raising 2001 session l CIVITAS INSTITUTE l 209 in the state sales tax. alcohol taxes by $100 million and earmarking the funds for mental ➤ The proposed $14.7 billion Senate health. budget (SB 1005) causes controversy by increasing education ➤ With eight Democrats led by former spending, but cutting mental health Speaker Dan Blue (D-Wake) coming services. In what proponents call a out against a regressive sales tax “targeted” tax increase, the Senate increase, the House passes a $14.4 calls for higher taxes on television billion budget that does not raise and long-distance phone calls, as taxes and keeps mental health well as a repeal of the child health- institutions open. The House budget insurance tax credit. Teachers will also includes a 2.86 percent raise for receive a 2.86 percent pay increase teachers, a one-time $625 bonus for 210 l CIVITAS INSTITUTE l 2001 session 2001 Other Revenue2001 Other Sources &Actions July Governor➤ Easleyholdsanews The GeneralAssembly➤ andthe House budgetwriters balance➤ the In anattempt toIn headoffcalls ➤ • • • • • • • right for North Carolina.”right for North for educationis still thinkalottery budget problems. ClaimsEasley, “I willsolve thestate’srun lottery conference declaringthatastate- (S.L. 2001-250). current fundingto July16,2001 budget resolution, extending governor passthefirstcontinuing 18) studentsperteacher. adopting aratioof19(ratherthan size more reductions slowly by measures, andphasinginclass- delinquent taxcollection Trust, more stringent enacting for theClean Water Management budget by decreasing funding More atFour. state workers and$6.5millionfor Citizens for Business and Industry Citizens for BusinessandIndustry Carolinatax loopholes, North for theeliminationoftargeted Credit Account $181millionto theSavings Reserve GeneralFundN.C. Railroad repayment of$19million Transfer $23millionfrom Special, Trust, Funds andReserve Internal Service, Healthrevenue initiatives ($435million) Education/Human Services/Mental Transfer $170millionfrom Highway Trust Fund; transfer $15millionfrom Highway Fund (effective July1,2003) Hold localgovernments harmlessfor swapof1/2 million/year beginning in2003-04) Repeal reimbursements to localgovernments (effective July1,2003,willgenerate $333 While callingfor➤ increased taxes, After holdingbacktax ➤ the votes for asales-taxincrease.” “I doubtseriouslywhetherwe have Meanwhile SpeakerBlackdeclares, downward by $167million). forecast(the actual isrevised revised downward by $300million budget forecasts may have to be Democratsclaimthat Senate option salestaxincrease. Black seconds themove for alocal- of revenue.” HouseSpeakerJim “reliable sources andpredictable half cent sothatlocalitieswillhave option salestaxincrease ofone- Governor Easleycallsfor alocal- governments inFebruary, reimbursements from local services.” usesgovernmentand everybody burden. pays Everybody salestax, “It’s goodto spread outthetax Explains NCCBI President PhilKirk, salestaxincrease.local-option cent tax increase andaone-half cent statewide sales a one-half (NCCBI) urges lawmakers to pass ¢ salestaxfor reimbursements 2001 session l CIVITAS INSTITUTE l 211 proposal for an income tax hike, tax hike, an income for proposal a one-cent for calling instead sales tax increase. Easley appears on Governor and declares television statewide Daughtry (R-Johnston) states: “I states: Daughtry (R-Johnston) They out. are increases think tax trymay us.” scare shame us and to that include million in tax increases a half-cent local sales tax increase, tax income personal a 1 percent on liquor and new taxes increase and HMOs. budget denies that the House cuts actual $800 spending by million, noting that spending hikes in a resulted in other programs in overall $469 million increase expenditures. budget continuing a third extending funding to resolution, 29, 2001 (S.L. 2001-322). August – about $10 million payment the state to – of the fiscal year fund and retirement employee the money in escrow. places and employees of 278 state the elimination of 609 vacant positions. at the Legislative Party” Tea Heel the proposed protest Building to tax increases. ➤ Senate rejects a House The ➤ In the wake of a budget impasse, ➤ MinorityHouse Leo Leader $440 ➤ call for House Democrats (R-Wake) Art➤ Representative Pope passes ➤ Assembly General The the first seizes Easley ➤ Governor ➤ the layoff Easley also announces “Tar ➤ than 600 people hold a More August Carolina’s economic outlook from outlook from economic Carolina’s Easley Governor negative. stable to tax increases. again calls for extending is passed, resolution July 31, 2001 (S.L. 2001- funding to 287). raid the Hurricane Reserve Fund. Easley falsely claims that Governor money borrowed he repeatedly two Fund Trust the Highway “from make payroll times to or three The during the last fiscal year.” fabrication Easley’s N & O attributes build support to a for “effort an to tax increase.” the closure of three tax loopholes tax loopholes of three the closure liability limited regarding payments royalty corporations, and subsidiary dividends. Moody’s downgrades North downgrades ➤ Moody’s budget ➤ continuing A second to Easley again threatens ➤ Governor the News & Observer to , ➤ According The House narrowly agrees to to agrees ➤ House narrowly The Fund in view of the laws sentencing for alternatives prison population growth projected million [S.L. 2001-395] $10 million in 2001 by Fund Trust Management and $40 million in 2002 FUTURE BUDGET CONCERNS BUDGET FUTURE COMPENSATION • Reserve Savings to $181 direct appropriation • develop to Direct Sentencing Commission • $2 for implemented Tax Collect Project Revenue OTHER • Water Clean for Increase appropriation • employees most state $625 raise for • teachers 2.86% raise for Average 2001 Other Changes Significant 212 l CIVITAS INSTITUTE l 2001 session September In spite of the so-called budget budget spite oftheso-called In ➤ Governor➤ Easleyproposes a A statewide pollby➤ Fabrizio, Governor➤ Easleydeclares he will 9/11 terrorist➤ attackon World continuing budget A fourth ➤ both onlyallocated $1million. budgetshad House andSenate annually for thefund;in2001, Legislature had allocated $2million corporations. Traditionally, the provide economic incentives to closing” fund),whichisusedto Fund asthe (better known “deal- RecruitmentCompetitiveIndustrial Assembly for $30millionfor his crisis, EasleyaskstheGeneral lottery. exchange for thepassageofa salestaxincrease in temporary increasing taxes. spending; only17percent favor by cutting the budgetshortfall 63 percent ofvoters would resolve &AssociatesMcLaughlin findsthat sales taxby onecent. governor proposes raisingthe targeted” overall taxcut,the ofa a budgetcrisis. As part “triple- budget resolution. not sign anothercontinuing Trade Center andPentagon. from local governments. and inventory taxreimbursements Easley ofwithholdingintangibles by Governor started the practice sizes. The resolution alsocontinues million initiative to reduce K-3 class for education,inparticular, a$20 changes thatincreases spending 2001-395) contains statutory 28, 2001. The resolution (S.L. resolution ispassedonSeptember In addition,the2001budget In ➤ The budgetmandates➤ a The GeneralAssembly➤ passesthe oa prpitos $3.40billion Major Items: Total Appropriations increase of0.50percent (from manner offiling. The taxbracket to $200,000, dependingonthe on earningsinexcess of$100,000 income taxbracketof8.25percent implements anew “temporary” increase expires. cent salestax one-half temporary 1,2003)whenthestatewide (July increase thatisto gointo effect cent sales tax local optionone-half Likewise, thebudget contains a 16,2001,to July1,2003. October increase isto remain ineffectfrom to 4.5percent. Bylaw, thetax state salestaxfrom 4percent cent thatraisesthe of one-half “temporary” sales taxincrease July 1. flat $625raise, both retroactive to raise, andstate workers receive a Teachers receive a2.86percent at Four are fundedat$21.4million. for classsize andMore reduction budget. Easley’s recommendations Republican to vote infavor ofthe (R-Spruce Pine) beingthelone Representative Monroe Buchanan lines, with passes alongparty 424) onSeptember21. The budget $14.4 billionbudget(S.L.2001- 2001 HEALTH &HUMANSERVICES BUDGET ulcHat: $109million $70million $189million $289million Education Services: Public Health: $581million Services: Social $1,981million Child Development: Health/D.D./Subst.Mental Abuse: AssistanceMedical (Medicaid): 2001 session l CIVITAS INSTITUTE l 213 economy slows, bringing in lower in lower bringing slows, economy revenues. than anticipated cut their budgets by agencies to classroom Medicaid, 4 percent. instruction, and public safety the from exempt are programs mandate. a state for push adjourn, Easley’s to the lottery an end for to bill comes time being. House Acknowledges Majority Phil Baddour Leader “[The lottery] is not (D-Wayne), … way. real being discussed in any burner.” just not on the front It’s $500), effective January$500), effective 1, 2003, An who file jointly. couples for and use tax holiday annual sales school supplies, clothing, for is other such items and computers of the first weekend established for 2002. August hold to Easley continues passes, state from back $142 million freeze funds; a hiring retirement likewise stays begun in February also freezes governor The in effect. and $125 million in the repairs fund. renovations the N.C. rating for outlook” economy. simplification bill passes (S.L. applies a measure The 2001-430). on all tax rate 4.5 percent standard servicestelecommunications and simplifies the distribution scheme cities. to of revenue In the aftermath of 9/11, the state’s ➤ In the aftermath of 9/11, the state’s state Easley orders ➤ Governor prepares ➤ the General Assembly As Even after the 2001 budget ➤ Even “negative its retains ➤ Moody’s tax ➤ telecommunications The October 7.75 percent to 8.25 percent) is to is to 8.25 percent) to 7.75 percent January in effect from remain 1, January2001 to 1, 2004. “triple-targeted” tax governor’s package, which entails relief from tax credit the child increasing January $75 beginning $60 to $100, to $75 1, 2002, and from Januarybeginning 1, 2003 – but the children’s also repealing tax The credit. health insurance cut package also eliminates the marriage penalty (a cut of or community colleges, and $15 or community colleges, The budget contains the ➤ budget contains The ENROLLMENT CHANGES ENROLLMENT TUITION & FEE INCREASES FEE & TUITION OTHER EDUCATION CHANGES EDUCATION OTHER 2001 EDUCATION FUNDING 2001 EDUCATION or out-of-state UNC students to develop “coordinated, effective educational effective “coordinated, develop to the have children all at-risk ensure to strategy” opportunity a sound basic education for grants in Development of Health & Human of Health in Development grants Services schools with 80% low-income students and schools with 80% low-income level 45% of students performing grade below ($12 million) and 18 in 2002 ($26 million) funds based on revised schedule funds based on revised million for UNC million for f students community college state $4 million f Community Colleges: 2,488 (0.3%) increase Colleges: Community ° and local leaders state Judge Manning orders ° and related Program at Four Establish More ° in K-3 grades 1:15 for to class size Reduce ° million) ABC bonuses earned in 2000-01 ($93 ° in kindergarten class size Reduce 19 in 2001 to ° One-time reduction in school bus of $24 million ° and 10% in-state of 14% for increase Average ° out-of- and 2% for in-state Increase of 12% for ° public schools, reduction Net of $190 million for ° increase UNC: 7,031 (4.3%) ° Schools: increase 18,488 (1.5%) Public ° 214 l CIVITAS INSTITUTE l 2001 session December November A technical corrections bill(S.L. ➤ ➤ Governor Easleysays thatthe particular, Alcoa Industries. tax break for –in manufacturers sales restoration ofanelectricity 2001- 487)passesthatincludes teams. seven regional bioterror response immediately inorder to create state mustspend$13.6million Anticipated revenues➤ for thefirst The 2001longsessionendson ➤ Seventy-four percent ofvoters opposed spending by more than$1.2billion and raised taxes by more than$900million. $189.4 million. five months ofFY2002are down $10 million. is atleast$65,000perday orsome by 159days. The cost to taxpayers past thefiscalyear endofJune30 December 6,2001,having gone the FY2006budget, whichincreased Source: August Poll 2005CivitasDecisionMaker DID YOU KNOW? DID YOU 2001 session l CIVITAS INSTITUTE l 215 local sales tax (local impact, July 1, 2003) effective ¢ New tax on HMOs of 1.1% in 2003 and 1.0% in later years; exempts HMOs from HMOs from exempts years; later of 1.1% in 2003 and 1.0% in New tax on HMOs 1.1% in 2003 and 1.0% medical serviceIncrease tax on 0.5% to from companies 1, 2001) December Impose sales tax (effective 6% state 2002) 1, February 25% (effective 28% to tax from excise Reduce corporate income and franchise taxes and franchise income corporate tax or franchise corporate pay do not these companies years; in later ➔ ➔ ➔ ➔ Remove $1,500 cap on highway use tax for most noncommercial vehicles; money goes vehicles; most noncommercial use tax for cap on highway $1,500 Remove (gain less than $3 million) General Fund to $90 million in at 6% (gain of $35 million in 2001-02, all telecommunications Tax varied tax rate S.L. 2001-424]; previous [S.L. 2001-430, as amended by subsequent years) calls 6.5% on intrastate calls to 0.0% on interstate from service television Impose tax on satellite 5% sales property or lease of real purchase for including new 30% tax credit Act changes, Bill Lee [S.L. 2001-476] in tax year $5,500 $5,000 to deduction married filing jointly from Increase standard for 2003-04) $6,000 in 2003 (tax reduction of $45 million by 2002 and to $100 in 2003 (tax 2002 and to $75 in tax year $60 to from children for Increase tax credit 2003-04) reduction of $55 million by $6 million local) (reduction of less than $9 million state, sales tax holiday Create additional 1/2 Authorize Create new 8.25% income tax bracket for highest income households (sunset after 2003 highest income bracket for tax new 8.25% income Create tax year) of $19 2001; tax increase tax year (effective tax credit health insurance Repeal children’s million) DepartmentEnhance [S.L. debt collections (gain of $50 million each year) of Revenue 2001-380] gain of $112 million) [S.L. 2001-427] (mostly 1 year tax payments: Accelerate of $14 million in 2002-03): on spirituous liquor (net increase Taxes Tax gross premiums of HMOs and medical service of HMOs premiums [S.L. 2001-424, as companies gross Tax S.L. 2001-748]: amended by 2001 Significant Tax Changes (Budget Bill Unless Noted) Changes (Budget Bill Tax 2001 Significant 216 l JOHN WILLIAM POPE CIVITAS INSTITUTE l 2001 session by that government, underwhichunequal A just security to property isnotafforded to property A justsecurity taxes ofproperty oppress onespecies sanctuaries ofthe rich, sanctuaries and excessive arbitrary taxes invadearbitrary thedomestic and reward anotherspecies: where taxes the faces ofthepoor. grind James Madison 2002-2003 BIENNIUM 2002 session FY 2003: July 1, 2002 to June 30, 2003

General Assembly: House Dems: 62 House Reps: 58 Senate Dems: 35 Senate Reps: 15

Governor: Mike Easley (D)

The 2002 Short Session: Budget Bill SB1115/S.L. 2002-126 Passed Senate: June 19, 2002 Passed House: August 13, 2002 Conference Version Ratified: September 20, 2002 Signed by Governor: October 1, 2002

s legislators began the 2002 short passed in 2001. As in 1991, the state was session they were greeted with also warned that its bond rating might Aincreasingly gloomy news about be downgraded. Unlike Martin, however, a budget shortfall. Although the initial Easley actually did withhold local funds projected shortfall was $900 million, this and Moody’s Investors Service actually did number would grow to $1.6 billion, with downgrade the state’s credit rating to Aa1. the “April surprise” resulting in a 6 percent decline in revenue. Following Governor Having already raised taxes by a significant Martin’s example from 1991, Governor margin in 2001, Governor Easley was Easley ordered state agencies to cut forced to consider cutting spending. He spending and proposed withholding tax also found money to pay for current and reimbursement payments from counties new initiatives by raiding various funds, and cities in return for accelerating the including the Highway Trust Fund and the 2002 session l CIVITAS INSTITUTE l 217 half-cent local option sales tax increase Savings Reserve Account. While mandating across the board spending cuts for state 2002 HEALTH & HUMAN SERVICES BUDGET agencies and departments, Easley called Total Appropriations $3.64 billion for continued increases in education – once more for class size reduction, hiring Major Items: additional teachers, and More at Four. Medical Assistance (Medicaid): $2,219 million In an effort to use the so-called budget Mental Health/D.D./Subst. Abuse: $581 million crisis to force the lottery through, Easley’s Child Development: $289 million Social Services: $195 million budget anticipated millions of dollars Public Health: $104 million (this time $250 million) in revenue from Office of the Secretary: $48 million a lottery that did not even come close to passing in 2001. 218 l CIVITAS INSTITUTE l 2002 session January the Senate. seven moreelecting Republicansto the Houseto Republicansandalso by returning controlshortfall of Democrats’ handlingofthebudget November,In voters rejected the taxpayers for theearlytaxincrease. reciprocally lowered to compensate “temporary” state salestaxwasnot December 1,2002.Predictably, the date for thetaxfrom July1,2003,to pushing forward theimplementation cent by tax increase ofone-half accelerated thelocaloptionsales The GeneralAssembly also in2003. shortfall stage for amassive $2billionbudget local taxreimbursements, settingthe the Highway Trust Fund, andseizing by raidingvariousstate funds, like of thebudgetdeficitwasresolved receive raise. Again, much asalary were cutandstate workers didnot hire 1,000 newteachers, state jobs While fundswere appropriated to education proposals. agreed to fundthegovernor’s theend,In theGeneralAssembly Governor➤ Easleysays there could On theheelsoflongest ➤ million for 2002. ofupto $900 be abudgetshortfall different work ethic.” point would have created a contemplates thata “stopping MarcSenator Basnight(D-Dare) againaboutsessionlimits. talking Carolina lawmakersNorth start legislative sessioninhistory, February Anticipating aprojected $900 ➤ Continuing➤ to cite thestate’s tax by thegovernor. beer andwine–are alsowithheld inventory taxes, taxes onutilities, owed to localgovernments –e.g., More than$200millionintaxes Water Management Trust Fund. and $20.8millionfrom theClean from Health theMental Trust Fund, Highway Trust Fund, $37.5million Account, $80millionfrom the million from theSavings Reserve governor moves to seize $313 addition,the 2001).In in October top ofthefour percent ordered cut spendingby 3percent (on agencies (butnoteducation)to the governor orders moststate his administration. Subsequently, the second emergency”“budget of Easleydeclares million shortfall, “update” thetaxcode. will lookatways to “simplify” and businessmen, thecommission Comprised oflegislators and to Modernize State Finances. Easley appointsaCommission woes, Governorof budgetary asoneofthecauses structure This budgetisgoingto beoutofbalance is the fourth failed budget passed by this failedbudgetpassedby this is thefourth before thatandtheyear before that. This just liketheyear before andtheyear Rep. Art PopeRep. Art (R-Wake), 2002 September General Assembly inarow. State/Local Taxes as Share of Personal Income: Select Southeast States, 1985-2005 4.0% NC 3.5% VA 3.0% NC US VA 2.5% US

2.0%

1.5%

1.0%

0.5% FL FL

0.0% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

NOTE: This figures does not include sales tax, but is the standard measure used by the Bureau of Economic Analysis for “personal current taxes.” As such, it includes income taxes and taxes on personal property.

March down 6 percent. Comments ➤ The UNC Board of Governors Principal Fiscal Analyst David approves an 8 percent tuition Crotts about the impending increase for in-state students and a shortfall: “Everybody has hoped it 12 percent increase for out-of-state would not be as bad as 1991, and students. UNC Chapel Hill tuition it had not been until April.” will rise by 18 percent; NC State ➤ Legislative leaders project that the University by 16 percent; and NC 2002 session l CIVITAS INSTITUTE l 219 revenue shortfall could reach $1.6 Central University tuition by 14 billion. percent. ➤ The governor’s proposed budget April includes the following reductions: ➤ Moody’s Investors Service gives cutting $726 million overall from North Carolina a second warning state programs; no raises for state and places it on its Watchlist workers; and cutting over 2,600 because of successive years of jobs – 1,400 of which are filled. The budget shortfalls. budget increases spending in the following areas: hiring up to 600 May new public school teachers, a 1.84 ➤ According to the N.C. Department percent raise for teachers, $28 of Revenue, tax collections are 220 l CIVITAS INSTITUTE l 2002 session June Backpedaling from the Backpedaling ➤ “triple- Easley intends to➤ balance his The proposes Senate ➤ resolving ofaHousebudgetmodel A draft ➤ Governor➤ Easleyemphasizes one-half cent. one-half temporarily raisingthesalestaxby passed in2001return for repealing thetaxcutsthatwere families,” Easleyadvocates Carolina’sto North “hardworking targeted taxrelief” hepromised nonexistent state lottery. $250 millioninrevenue from a to citiesandcounties, andusing million inreimbursements owed Highway Trust Fund, keeping$200 transferring $210million from the budget by cuttingstate jobs, officers. hiring ofover 600newcorrections education,andthe elementary million to reduce classsizes in million for More atFour, $26.2 year, anddelaying thechild tax forof themarriagepenalty one a year, delaying theelimination delaying thesalestaxholiday for fees andfines,raising variouscourt (SB 1292)includesthefollowing: taxes. The resulting tax package by raising the budgetshortfall through 2006-07. annual shortfall anticipates a$1billionto $2billion children are intrailers.” Carolinain South whileour now we’re“Right buildingschools Carolina lottery, Easleycharges: cross theborder to play theSouth Carolina citizensto North who education programs. Referring isneededto fund that alottery The approves Senate ➤ its$14.2 Governor➤ Easleytakes$150million Representative Michaux ➤ Mickey (D-Orange) EllieKinnaird Senator ➤ 2002 Other Significant Changes 2002 Other what is a $1.55 billion shortfall for what isa$1.55billionshortfall order tobillion budget.In close final weeks ofthefiscalyear. have cashonhandto pay for the Tobacco Trust Fund inorder to fund and$50millionfrom the from theHurricaneFloyd relief Michaux’s billpasses. NeitherKinnaird’spack. billnor to raisethecigarette taxto $1per filesabill(HB1547) (D-Durham) 50 cents perpack. cigarette taxfrom 5cents apackto files abill(SB1314)to raisethe instead ofJuly2003asplanned. cent inAugust 2002– by one-half them to increase thelocalsalestax cities inexchange for allowing reimbursements to counties and also offers to swapinventory tax credit for oneyear. The package • S.L. 2002-120 (as amended by Section 65of S.L.2002-120(asamendedby Section • REVENUE Operatingfundsfor new prisonsandfundsfor • negative andline- reserves Department-specific • • Statewide of$25millionby implementing Reduction • PRISON INCREASES GENERAL REDUCTIONS withholding orimpoundinglocalrevenues S.L. 2002-159)prohibits thegovernor from inmate medicalcosts item reductions of$42million reserve recommendations Governor’s Commission Efficiency management flexibility recurring managementflexibility FY2002, the Senate recommends July transferring $205 million from ➤ The Senate passes a House toll the Highway Trust Fund, taking road and bridge authority bill that $120 million from three different was not acted upon by the Senate tobacco settlement funds and in 2001, but carried over into the seizing $100 million from the 2002 short session (SB 701). Hurricane Floyd relief fund. Teachers will receive a 1.8 percent ➤ The House rejects the Senate’s raise, state workers receive no local sales tax acceleration bill that raise, and there will be tuition would raise the local sales tax by increases of 8 percent for in-state one-half cent on August 1, 2002 students and 12 percent for out-of- (SB 1292). state students. ➤ Governor Easley cuts 2,600 state jobs, saying: “The longer General Fund Balances: 1997-2007 we wait to make the cuts, the bigger the thousands of dollars budget hole grows.” $2,500,000 ➤ The House approves Unreserved its own $322 million tax $2,000,000 Reserved package. The proposal requires voter approval $1,500,000 for a plan in which the local option sales tax $1,000,000 would increase one- half cent by January 1, 2003, in exchange $500,000 for reducing the state sales tax by one-half $0 cent on January 1, 2003. Thus the overall sales -$500,000 tax would remain the same while allowing local governments to -$1,000,000 2002 session l CIVITAS INSTITUTE l 221 recoup lost revenue. By contrast, the Senate proposal raises the overall tax rate ➤ The Senate does not provide by one-half percent. expansion funding for Easley’s More at Four program. August ➤ Governor Easley declares a ➤ The House approves a $14.3 billion financial emergency for FY2002- budget. The budget provides for a 03. The order grants him special 1.84 percent raise for teachers but powers to cut spending and order no raise for state workers; tuition layoffs without having a new increases of 8 percent for in-state budget in place. students and 12 percent for out- of-state students; $56.3 million 222 l CIVITAS INSTITUTE l 2002 session House Minority Leader LeoHouse Minority ➤ Easley employs➤ Moody’s letter Moody’s➤ downgrades North 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% black eye. … We’ve spentallour downgrade is giving usa “like (R-Johnston)Daughtry says the predictability.” lotteries, and theirstability Moody’s is highonstate “very with legislative leaders, claiming fight as aweapon inhislottery Aaa rating. Carolina regainhelping North its would raisemore revenue, thus or additionalsalestaxincreases letter to thestate thatalottery to Aa1.Moody’s indicates ina Carolina’s bondratingfrom Aaa program. million for Easley’s More atFour for classsize and$28 reduction;

1985 1986 NC 1987 State/Local Taxes asShare ofPersonal Income:

1988 US North Carolina vs.North U.S. Average, 1985-2005 1989 1990 1991 September With➤ the “short” sessiondrifting 1992 The bill Housedefeats➤ alottery A Housesessionlimitbill(HB280) ➤ “It doesgive“It peopledeadlines.” about sessionlimits,” claimsBlack. sessions. “I’ve changedmy mind constitutional amendmentlimiting revises hisearlierpositionona Jim Black(D-Mecklenburg) into September, HouseSpeaker able to control therate ofgrowth.” deficits andsimplyhave notbeen resources, hadthree years of Owens (D-Pasquotank)Owens (HB1676). sponsored by Representative Bill to 54. to 60days. The billisdefeated 59 session to 135days and theshort proposes limitingthelongsession 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2002 session l CIVITAS INSTITUTE l 223 of the marriage penalty is also one year. postponed by uses $800 the General Assembly revenue, million in nonrecurring a budget gap for thus creating Laments Speaker Black next year. “There is a hole about the budget: get very to have We’ll nextfor year. doesn’t if the revenue innovative come.” in the House on the Senate vote raise the local sales tax to proposal one-half by Representative cent, that the says Dan Blue (D-Wake) determined, is already “fate bill’s and it is doomed.” In order to balance the budget, ➤ balance In to order on the upcoming ➤ Commenting sales tax option [S.L. 2002-123] sales tax option ¢ $14.3 billion budget bill (S.L. 2002- 800 state budget cuts over The 126). the tuition for jobs and increases in-state for 8 percent by UNC system out- for students and 12 percent new budget,The students. of-state spending in also increases however, raises of 1.84 teacher areas: several hires; 1,000 new teacher percent; and at Four; More $28 million for cut class sizes. $27 million to tax cuts passed in 2001: shifting tax credit of the child the increase January $75 to $60 to from 1, 2003, $100 to $75 to of and the increase elimination The January 1, 2004. ➤ the passes General Assembly The ➤ 2002 budget postpones the The Tax Collect Tax Increase transfer from Highway Trust Fund to $252 million; “borrow” additional $125 “borrow” million; $252 to Fund Trust Highway from Increase transfer Fund Highway from $15 million transfer HTF; million from & ($38 million), Health Fund Trust Tobacco from Divert MSA settlement proceeds ($40 million) Fund Trust Wellness ($20 million) Special Funds Transfer ($38 million) increases Fee $223 million++ Generated: Revenue Nonrecurring ++Total Conform to Internal Revenue Code changes (pensions and education, estate tax credit, tax credit, (pensions and education, estate changes Code Internal Revenue to Conform depreciation) accelerated Project Delay 2001 tax breaks (standard deduction/marriage penalty, increase in child tax credit) in child increase deduction/marriage (standard penalty, tax breaks 2001 Delay income of business definition Broaden tax franchise in LLC Close loophole local governments to Repeal reimbursements the local 1/2 Accelerate • • • • • 2002 Other Revenue Sources & Actions Sources 2002 Other Revenue 2002 Significant Tax Changes (Budget Bill Unless Noted) Bill Unless (Budget Changes Tax 2002 Significant 224 l CIVITAS INSTITUTE l 2002 session November October Elizabeth Dolebreaks the two- ➤ Republicans pickupthree seats ➤ With onemonthaway,➤ elections thesamebillinJuly,After rejecting ➤ Citing thestate’s➤ to meet inability beating former Clinton Chiefof by major statewide elections Democraticwinstreakcycle on Democratic advantageto 28-22. the in theSenate, shrinking Republicans gainseven seats with61seats. majority one-vote in theHouseto winatenuous and economic growth. inflation, population,employment limit spendingto aformula tiedto “Spending Control Act” thatwould Republican candidates promote a percent. one-quarter salestaxisfinallycutby temporary until July2006,whentheso-called will ultimately remain ineffect increases to 7percent. This rate sales tax(inmostcounties) 2002-123). As aresult, theoverall the billandEasleysigns it(S.L. December 1. The ratifies Senate local optionsalestaxbeginning by approving anincrease inthe reverses course andplays Scrooge House the Democrat-controlled toll turnpikeprojects. operating andmaintainingthree is charged withplanning, 2002-133). The TurnpikeAuthority of Department Transportation (S.L. withinthe public agency supposed to beanindependent Turnpike Authority, whichis Carolinacreates theNorth repairs, theGeneral Assembly the demandfor newroads and The andHousereconvene Senate ➤ Leader LeoHouse Minority ➤ sharplytoBasnight reacts the ➤ Governor➤ Easleyissuesthefirst increase in upper-end income tax rates,increase in upper-end in aspecialveto session.Instead “bizarre.” likewise callstheveto Daughtry leadership’s appointments. the cost ofhiringthelegislative claims, could addupto more than to return to session–which,he per day for theGeneralAssembly notes Basnight,itwillcost $65,000 and fixtheappointments.” But, appointments, we willcome back us to come backandfixthe Basnight: thegovernor“If wants governor’s veto. Comments Black’s appointees are unqualified. that anumberofBasnight’s and Easleycites concernsJim Black. Marc BasnightandHouseSpeaker made by President Pro Tempore state commission appointments abill(SB1283)regardingrejecting by Carolina veto history inNorth (R) seat. retiring U.S. SenatorJesseHelms’ to 45percent intherace for Bowles by 54percentStaff Erskine on healthmaintenance organizations. North Carolina wasoneoffourNorth states 1 percent in2001,with atemporary to raisetotal taxes by more than half-cent salestaxincrease,half-cent an Source: Governing magazine, Feb. 2003 a newliquortaxand alevy DID YOU KNOW? DID YOU 2002 session l CIVITAS INSTITUTE l 225 tax increase goes into effect. The The effect. goes into tax increase as of sales tax is 7 percent, overall 1, 2002. December of attempting to override Easley’s Easley’s override to of attempting sends Assembly the General veto, and committee to the bill back afteradjourns meeting for officially minutes. just a few but faces speaker, for candidate some members. opposition from Believing Daughtry for is ill suited Richard the task, Representative his states (R-Moore) Morgan “If speaker. run for to intention elect to going a speaker, we’re find somebody who is got to we’ve unify our caucus.” able to recommends Finances State or eliminating tax credits reducing business for as an incentive also commission The recruitment. expanding the sales recommends services. tax so that it taxes ➤ half-centThe local option sales Leo Daughtry➤ Leo is the leading Modernize to Commission ➤ Easley’s December ENROLLMENT CHANGES ENROLLMENT TUITION & FEE INCREASES FEE & TUITION t school operations OTHER EDUCATION CHANGES EDUCATION OTHER 2002 EDUCATION FUNDING 2002 EDUCATION or out-of-state UNC students ruling that the state has failed to provide equal provide to has failed ruling that the state educational opportunities all children to responsible for meeting the needs of all for responsible written provide to and directs the state children reports taken to every on the steps 90 days with his order comply to be taken at campuses’ discretion) be taken at campuses’ to 02 f suppor lease-purchase school buses for plan to local education agencies (LEAs); cuts to be cuts to local education agencies (LEAs); to LEAs of taken at the discretion Community Colleges: 10,427 (1.3%) decrease Colleges: Community ° general appeals Manning’s attorney State ° Judge Manning is solely that the state rules ° 1 in grade class size reduce $27 million to ° UNC (cuts Recurring reduction to of $50 million ° 412 non-instructional Eliminate positions ° ABC bonuses earned in 2001- $101 million for ° and 14% in-state of 17% for increase Average ° 10% tuition by Increase community college ° $45 million in capital funds to of Transfer ° a to Reduction switching of $20 million by ° increase UNC: 7,175 (4.2%) ° One-time reduction in funds of $43 million ° Schools: 21,117 (1.4%) increase Public ° 226 l CIVITAS INSTITUTE l 2002 session 2003-2004 BIENNIUM 2003 session FY 2004: July 1, 2003 to June 30, 2004

General Assembly: House Dems: 60 House Reps: 60 Senate Dems: 28 Senate Reps: 22

Governor: Mike Easley (D)

The 2003 Long Session: Budget Bill HB397/S.L. 2003-284 Passed House: April 17, 2003 Passed House: April 30, 2003 Conference Version Ratified: June 30, 2003 Signed by Governor: June 30, 2003

epublicans began the year readying passed in 2001 and scheduled to go into themselves for majority party status effect in 2002; however, the Democratic- Rin the House only to lose the majority controlled General Assembly delayed the when Representative Michael Decker implementation of the cuts until 2003. (R/D-Forsyth) abruptly switched party Facing another budget shortfall, this time affiliation to become a Democrat. (Decker of $2 billion, Easley and the Senate favored subsequently claimed he was bribed by delaying the cuts once more. House Speaker Jim Black (D-Mecklenburg) to switch parties.) Decker’s perfidy led to a After an audit of Smart Start found 60-60 tie in the House that was resolved by that funds for the program were being splitting the speaker’s position and duties mismanaged, the House was also able to between Representative Jim Black and push through a reduction in funding for Representative Richard Morgan (R-Moore). Smart Start – albeit not the 10 percent cut session l CIVITAS INSTITUTE l 227 2003 Many predicted the new power-sharing initially sought. (The subsequent increase agreement would cause even greater in funding for More at Four, though, legislative gridlock, but as it turned out the was virtually identical to the decrease budget was passed before July 1 for the in funding for Smart Start.) The General first time in three years. Assembly also successfully fended off the governor’s now annual attempt to push The House won the budget battle for 2003 through an “education lottery” in order by enacting two tax breaks opposed by the to help close recurring budget shortfalls. governor and the Senate: a $15 increase Following Hunt’s example, Governor Easley that raised the child tax credit from $60 called two special sessions. The first was to $75, as well as a phasing out of the related to malpractice lawsuits. The second marriage penalty. Both cuts were initially special session was devoted to corporate 228 l CIVITAS INSTITUTE l 2003 session January Salem. expand itsoperationsin Winston- in Durhamandfor R.J. Reynoldsto Co., to Inc. buildanewvaccine plant fora taxincentive Merck & package welfare andresulted inthepassageof Governor➤ Easleyseeksto takeback The legislative➤ session begins with Representative P.➤ Michael Decker ofalawsuit filedagainst As part ➤ ➤ A 20percent increase inhabitual- proposes renewing the so-called proposes renewing theso-called tax system. particular, In Easley we] “can get abetter grip” onthe now,” warnsthegovernor, [until to freeze right thetaxstructure “You are probably goingto have families” Carolina in2001. ofNorth promised to the “hardworking the “triple-targeted” taxrelief he no speaker. and hedidn’t offer.” Deckerreplies: Black, “I didn’t ask asked ifhestruckadealwithJim a 60-60tieintheHouse. When Republican to Democraticcreating affiliationfrom changes party the GeneralFund. from theHighway Trust Fund to transfersany ofmoney further prohibiting injunction preliminary askfor a Goldston (D-Rockingham) former state Senator William JimHarrington (R)and Secretary former state Transportation Assembly inNovember 2002, Governor EasleyandtheGeneral of three newprisonsin2003. completiondespite theexpected exacerbates prisonovercrowding, felon convictions in2002 2003 Other Significant Changes 2003 Other In spite ofthe$2billiondeficit, In ➤ Authorize counties to create specialeconomic • Authorize development localoptionproject • LOCAL GOVERNMENTS Authorize financingof$491million for UNC • Authorize purchase prisons of2privately-owned • $28millionfor capitalprojects • CAPITAL ($38million)inappropriation 38%reduction to • $113millionincrease inappropriation for state • increase for Less teachers than2%salary and • bonusof$550for moststate One-time • CLEAN WATER MANAGEMENT TRUST FUND COMPENSATION get mainstreamed.” learnEnglishand kids the Hispanic gap,” explainsEasley. “That’s where eliminate the achievementefforts to reduce classsizes. two “Those $25 millionfor More atFour and the governor alsoplansto askfor penalty. elimination ofthe$500marriage passed in2001,aswell asthe credit (from $60to $75)thatwas increase ofthechildincome tax again proposes postponingthe to expire onJuly1,2003.Healso tax increases thatare supposed state salesandincome temporary development andtrainingtaxdistricts approved by voters to takeeffect) financing (constitutional amendmentmustbe related infrastructure in Butner, and$300million for state facilitiesand projects, $110millionfor apsychiatric hospital to $364million) costprisons (estimated $344million construction to finance 3new and useoflease-purchase fund for 2003and2004 employees healthplan principals employees Debt to Personal Income Percentages

February ➤ Black defends the generous ➤ Five Republicans join with allotment to the former Republican Democrats to elect Representative saying, “There was absolutely no Jim Black and Representative payoff to Michael Decker.” Richard Morgan as co-speakers of the House. Under the power- March sharing agreement, Black and ➤ In his State of the State address Morgan will alternate days as Governor Easley asks the General speaker and all committees will Assembly to enact session limits, have equal membership. While limit spending, give the governor a most committees will have line-item veto and pass his lottery Republican and Democratic bill. co-chairs, the powerful Rules ➤ Easley releases his $15 billion Committee will be chaired by only budget. In spite of an anticipated 2003 session l CIVITAS INSTITUTE l 229 one legislator: Representative $2 billion budget shortfall, the Bill Culpepper (D-Chowan). The governor increases spending for Appropriations Committee will be his two pet projects: $25 million chaired by four Democrats and four for class size reduction and $8.6 Republicans, the “Gang of Eight.” million for More-at-Four. Easley ➤ Co-speaker Black grants also proposes giving teachers a Representative Michael Decker one 1.8 percent raise and state workers of the coveted 12 administrative a 1.6 percent raise. To pay for the assistant positions on the speaker’s new spending and to make up the staff. Decker hires his son for the budget shortfall, Easley’s budget $46,496 per year job. contains the tax increases he proposed in January. 230 l CIVITAS INSTITUTE l 2003 session April The Housepassesa$15billion ➤ House budgetwriters cut $9 ➤ Jim Start, An auditofSmart ➤ BlackandMorgan Co-speakers ➤ BlackandMorgan Co-speakers ➤ Both chambersfilebillsto raise ➤ the following items from Easley’s deadline. The budgetincludes budget billby the April18 Start. million from Smart healthcare.obtain quality helping children 18andunder office isdefended asameansof terminated. The purchase ofthe ofcare,quality was the contract arose regarding thedentist’s $10,000 permonth.After questions $170,000 andhired adentistfor purchased adentist’s office for capital spending. Oneoffice even renovations, despite afreeze on building improvements and offices spentfundson Some offices are mismanaging funds. under agesix,findsthatlocal education program for children Hunt’s petday care/early scheduled. permitted to gointo effectas As aresult, thetwo taxcutsare deduction. the marriagepenalty permit thechildtaxcredit and and theincome taxincrease, but thesalestaxincrease to re-enact increases. particular, In they agree move to reduce Easley’s tax and passabudgetby April18. Houselegislatorsdirect to draft in committee. billdies during thesession,every of seven separate billsare filed the cigarette tax.Althoughatotal The Housebudgetalsoincreases➤ Water Management Trust Fund, appropriations for theClean cuts $75millioninannual students,in-state andout-of-state UNC tuition5percent for both million for More atFour. class size and$8.6 reduction, recommended $25million)for $23 million(instead ofthe 1.6 percent state worker raise, pay raiseof1.81percent, a recommended budget:ateacher ° Public 21,569(1.7%)increase Schools: ° ° N.C. Supreme Court hearsthestate’s N.C.Supreme Court arguments ° $11millionrecurring to reduction community ° $48millionrecurring and$14million reduction ° $25millionto reduce classsize ingrade 2 ° $96millionfor ABCbonusesearnedin2002-03 ° positionsand Eliminate 533non-instructional ° of$44millioninfunds Recurringreduction ° ° to Netreduction publicschoolsof$52million ° of5%for Increase in-state and3.5%for out-of- ° Average increase of6%for in-state and5%for ° UNC:6,380(3.6%)increase ° remedies related to the for throwing outJudgeMannning’s rulingsand colleges (to betakenatcampuses’ discretion) taken atcampuses’ discretion) nonrecurring to reduction UNC(cutsto be 173 vocational educationpositions taken atthediscretion ofLEAs to localeducationagencies(LEAs); cutsto be and $35millionin2004 toNet reduction UNCof$44millionin2003 in 2003and$176million2004 state college community students out- Community Colleges: 14,878(1.9%)increase of-state UNCstudents 2003 EDUCATION FUNDING OTHER EDUCATION CHANGES TUITION & FEE INCREASES ENROLLMENT CHANGES Leandro case implements a $15 increase to the offer emergency relief funds to child tax credit and includes the financially strapped states. $500 increase to the deduction for ➤ In light of lower-than-anticipated married couples. April projections, as well as the ➤ Former House leader Leo Daughtry increase in federal aid, the House (R-Johnston) defends his vote revises its budget downward to against the budget. “[It] raises $14.8 billion. Among other items, taxes,” says Daughtry, “and I cannot Medicaid spending is cut by $200 support it.” million. ➤ The Democratic Senate passes its ➤ Governor Easley notifies legislative own $15.1 billion budget bill. It leaders that he anticipates a delays all of the tax cuts scheduled further loss of $55 million in for the year, allocates $25.3 million revenue due to weak economic for class size reduction, $8.6 million growth. for More at Four, cuts Smart Start by $7.7 million, and raises UNC June tuition by 5 percent. ➤ Governor Easley vetoes a bill (SB 931) that would transfer power ➤ The Senate also proposes diverting over teacher certification from tobacco settlement funds to help the State Board of Education to close the budget shortfall. the General Assembly. Explains May Easley: “A section of the bill would strip the authority to set higher ➤ The “April surprise” is $400 million standards from the state board below forecasts, meaning both that has overseen the most gains chambers will have to revise their in education in the country, and respective budgets to account for would put it in the political arena. the additional shortfall. Education is too important to be politicized.” 2003 HEALTH & HUMAN SERVICES BUDGET Total Appropriations $3.38 billion ➤ The Senate readjusts its budget to account for the April revenue Major Items: statement shortfall, but instead Medical Assistance (Medicaid): $1,987 million 2003 session l CIVITAS INSTITUTE l 231 of cutting spending, the budget Mental Health/D.D./Subst. Abuse: $577 million raises “sin taxes” on cigarettes and Child Development: $259 million Social Services: $179 million alcohol by $330 million. The new Public Health: $124 million Senate budget – at $15.6 billion – Office of the Secretary: $82 million is even larger than the original. When asked about the $767 million ➤ President Bush’s new federal tax in tax increases and delayed tax plan gives North Carolina an breaks included in the revised unexpected injection of $510 Senate budget, Senate President million in immediate federal aid. Pro Tempore Marc Basnight The tax plan is approved in a deal (D-Dare) declares: “We did what was where the federal government will responsible.” 232 l CIVITAS INSTITUTE l 2003 session 2003 Significant Tax Changes(BudgetBillUnlessNoted) 2003 Other Revenue2003 Other Sources &Actions Budget negotiationsbetween ➤ • • • • • • • • • • Senate proposalsSenate to raisetaxes stalloverthe HouseandSenate Tax drinksinvending machinesat50%ofgeneralsalestaxrate soft Tax for reductions federal conformity [S.L.2003-25] Revenue Tax projects Collect andCompliance conformity to federal sunset onpartial estateExtend tax Adjust bonusdepreciation (revenue lossin2003,gain2004) (netrevenuesoftware increase) Conform to streamline sales taxprovision for drinks, soft prepared food, andmodified 65corporations Equalize insurance taxrate onArticle Conform to federal definitionof “child” for state childtaxcredit 8.25%income taxforMaintain top income taxbracket 4.5%state salestaxrateMaintain ++Total Nonrecurring Revenue Generated: $386million++ Share,Disproportionate insurance, saleofsurplusreal property sources ofG.F.Other revenue: investment income, judicialfees, Medicaid Hurricane Floyd Disaster ReliefFund ($109million) Federal ReliefPackage grant ($137million) Transfer SpecialFunds ($20million) proceedsDivert from 911Fund ($33million) FundsSettlement ($10million) Fee increases ($5.7 million) Discontinue tobacco andalcohol discounts ($5.4million) Wellness Trust Fund ($25million),other($1.8million) MSAsettlementproceedsDivert from Tobacco Trust Fund ($40million),Health& Fund HighwayIncrease Trust Fund transfer to $252million;transfer $18millionfrom Highway 30 thestate salestaxdecrease of agreement isnotreached by June on cigarettes andalcohol. an If 2003 session l CIVITAS INSTITUTE l 233 a budget surplus. DID YOU YOU DID KNOW? when the state already enjoyed already when the state a candidate who increased taxes who increased a candidate Eighty-six percent of voters stated of voters Eighty-six percent they would be less likely to vote for vote likely to be less they would Source: September 2005 Civitas DecisionMaker Poll Source: session between September 15-16 session between regarding legislation consider to The medical malpracticelawsuits. amends bill (SB 802) resulting and creates the rules of evidence jury curb runaway a method to both parties In particular, verdicts. to be required would in a lawsuit of damages for submit an estimate the jury. by consideration pass the malpracticeto bill and bill of the year. The bill (HB 917) The bill of the year. mortgage increased have would as high to 1 percent from loan fees In rejecting the bill, as 3 percent. “has that it declares the governor North benefit to no economic or our working families.” Carolina meets in a the General Assembly the dead refer to session” “skeleton committee. bill back to Unemployment Insurance Unemployment of the two (the larger Fund funds) is $500 unemployment million or less the surtax will not be charged. ➤ Senate meets in special The return ➤ House declines to The Governor Easley vetoes his second his second vetoes Easley ➤ Governor veto, ➤ the governor’s to In response September August a bill delaying the 20 percent the 20 percent a bill delaying surtax insurance unemployment on businesses (S.L. 2003-405). Normally the surtax is triggered Securitywhen the Employment $163 falls below Reserve Fund adds legislation The million. the further prevent to criteria long as the As surtax trigger. one-half effect go into will cent on July 1. his support tax the House for package. the House and Senate agreeing extendto the half-cent sales state also They years. tax another two the .50 percent renew to agree tax income personal “temporary” the soft increase and to increase $25.3 million drink tax, and allocate reduction class-size Easley’s to More and $8.3 million to program Smart Start $7.7 is cut by at Four. Easley’s receive Teachers million. salary 1.8 percent proposed receive workers and state increase a one-time bonus of $550. budget, the $14.8 billion to agree the bill. veto to Easley threatens “This this budget is not balanced, this budget has budget is not real, this no integrity and I will veto he claims. budget,” he imposed taxes “temporary” on July 1, Easley neverthelessexpire bill (S.L. 2003-284; the budget signs S.L. 2003-283). but cf. The General Assembly passes ➤ General Assembly The Governor Easley expresses Easley expresses ➤ Governor ➤ impasse ends with budget The as the House and Senate ➤ Even ➤ letting the risk to Unwilling July 234 l CIVITAS INSTITUTE l 2003 session November October Easley announces thatGeneral ➤ While his2003budget ➤ The state’s➤ and proficiency The billissubsequentlynotpassed. May.decides to consider itnext Carolina. to North division headquarters willbemoving itsnuclear Electric down from 6.9percent.” see thecorporate taxrate come Governor Easleysays hewants “to tax increases passedin2001, “temporary” salestaxandincome recommended renewing the of$44million. causing ashortfall the Legislature initiallyanticipated, more teachers earnbonusesthan to 73percent in2003.As aresult, fromskyrocket 35percent in2002 achievement test results somehow December The GeneralAssembly➤ approves Governor➤ Easleycallsfor aspecial equipment. breaks onbuildingmaterial and for landacquisition andtax while Merck willget$36.8million taxcredit overexport 13years will receive a$126millioncigarette Merck (S.L.2003-435).R.J. Reynolds for R.J.packages Reynoldsand two multimillioncorporate welfare to secure them.” to makesomeadditionalchanges to thestate, butweindustry need jobsand bring somehighquality by explaining: “We are poisedto round ofcorporate incentives governor justifiesthislatest Carolina. business to North The that willfocus onattracting sessiononjobcreation one-day 2003-2004 BIENNIUM 2004 session FY 2005: July 1, 2004 to June 30, 2005

General Assembly: House Dems: 60 House Reps: 60 Senate Dems: 28 Senate Reps: 22

Governor: Mike Easley (D)

The 2004 Short Session: Budget Bill HB1414/S.L. 2004-124 Passed House: June 8, 2004 Passed Senate: June 24, 2004 Conference Version Ratified: July 17, 2004 Signed by Governor: July 20, 2004

he year began with signs that the Republican party control of both of North economy was improving. With Carolina’s U.S. Senate seats. Tthe “temporary” sales and income tax increases still in place, tax revenues In December Governor Easley called the brought in a budget surplus. Gearing up General Assembly into special session to for reelection, Governor Easley proposed pass a tax incentive package especially an “adjusted” budget that was $1.1 billion for the computer manufacturer Dell. The more than the biennial budget passed the package was passed in one day by the previous year. Predictably, much of the General Assembly. new spending was devoted to education – in particular, for class size reduction and More at Four. With Democrats in control of January

➤ State budget analysts report that 2004 session l CIVITAS INSTITUTE l 235 the Senate and Republicans divided in the despite an increase in tax revenues House, the General Assembly passed the that puts North Carolina $25.8 million budget in July. ahead of the six-month, $7 billion revenue target, lawmakers could In the November election, Governor find themselves $900 million short Easley won a second term by defeating by the spring. Cautions David Crotts, former state Senator Patrick Ballantine (R). principal fiscal analyst for the General Republicans also lost seats in the House Assembly: “We’ve seen some dramatic and Senate giving full control of the House improvement in the economy-based back to the Democrats. In the race for revenues in recent months. But by all U.S. Senate, former U.S. Representative means, we’re not out of the woods yet.” Richard Burr (R) defeated former Clinton Chief of Staff Erskine Bowles (D) to give the ➤ The UNC Chapel Hill Board of Trustees 236 l CIVITAS INSTITUTE l 2004 session April March February A bipartisan group oflegislatorsA bipartisan ➤ Governor➤ Easleytells legislators he BlackindicatesHouse Co-speaker ➤ The college community system➤ Governor➤ Easleyunveils aplanto augment itsbudgetby $15million. are approved theuniversity will thetuitionandfeeIf increases $1,500 andin-state tuition$300. votes tuition to raiseout-of-state Governor Easley’s plan to cutthe is offered asanalternative to income. The proposed reduction $10,000 to $20,000ofannual from paying taxes onthefirst seeks to exempt smallbusinesses his budgetproposal. will notraisethecigarette taxin cigarette tax. is muchinterest inraisingthe that hedoesnotthinkthere colleges. a press release issuedby the stretched to thelimit,” states a slashingofresources already colleges, eachpercentage cutis 3 percent. “For thecommunity for budgetcutsbetween 1and assails Governor Easley’s call funds. endowments from state education adding $10millionto university tax credits for investors; and creating additionalincome Carolina; locate orexpandinNorth incentives to to companies seeking used by thegovernor to provide Carolina Fund,One North whichis adding $15millionperyear to the Carolina. North The planincludes: more biotechattract companies to May Even➤ ashecallsfor anexpansion In referenceIn ➤ to theunexpected Dave➤ Crotts thatthestate projects ° Public 20,846(1.6%)increase Schools: ° ° N.C. Supreme Court upholdsJudgeManning’s N.C.Supreme Court ° Appropriate $11millionfrom EscheatFund ° $23millionrecurring to reduction UNC(cutsto ° $50millionto reduce classsize ingrade 3 ° $108millionfor ABCbonusesearnedinthe ° of$28millioninfunds reduction One-time ° of7%for Increase in-state and7%for out-of- ° Average increase of11%for in-state and4%for ° UNC:6,268(3.3%)increase ° to be “fiscally responsible.” businesses onlyifitcanbeshown ataxexemption forsupport small program, Easleysays hewill of thestate’s corporate welfare percent to 5.9percent. corporate income taxfrom 6.9 generate $2billioninrequests.” comments that “$200 million will surplus, Black HouseCo-speaker economic rebound. that thisdoesnotsignify amajor surplus for theyear butcautions will endupwitha$190million rulings intheLeandro appropriation for oneyear) for UNCfinancialaid(reduce GeneralFund be takenatdiscretion ofcampus) 2003-04 schoolyear taken atthediscretion ofLEAs t state college community students out- Community Colleges: 18,122(2.3%)increase o localeducationagencies(LEAs); cutsto be of-state UNCstudents 2004 EDUCATION FUNDING OTHER EDUCATION CHANGES TUITION & FEE INCREASES ENROLLMENT CHANGES case Individual Income Tax Filers and Liability by Income Level

Adds Black, “Everyone’s going to Forrester (R-Gaston) expresses his see it and say, ‘Hey, this is the year. dismay that the budget is $1.1 We’ve been waiting for this for a billion more than the pervious long time.’” year’s budget of $14.8 billion. “It would be nice if we could see a ➤ Governor Easley indicates that reduction in spending,” comments state agencies will end the fiscal Forrester. year with $100 million unspent. Easley wants to use the money ➤ Ever in search of new ways to help legislators balance the to increase revenue to cover budget. increased spending, Senate President Pro Tempore Marc ➤ Governor Easley proposes a $15.9 Basnight (D-Dare) declares that “a billion adjusted budget. Easley’s lottery or cigarette or alcohol tax recommendations include: a 2.5 would be a big help in getting us percent raise for teachers; a 2 there.” percent pay raise for state workers, June 2004 HEALTH & HUMAN SERVICES BUDGET ➤ In spite of a Republican- Total Appropriations $3.86 billion Democrat split in the House, the Major Items: House passes the governor’s Medical Assistance (Medicaid): $2,449 million recommended budget with few

Mental Health/D.D./Subst. Abuse: $580 million alterations. The $15.8 billion House 2004 session l CIVITAS INSTITUTE l 237 Child Development: $259 million budget includes: a 2.3 percent Social Services: $189 million raise for teachers; a $1,000 raise Public Health: $123 million for state workers; a 7 percent raise Youth Services: $81 million for community college tuition; $9 million for More at Four; and $50 plus a $250 bonus; and $59.6 million for class size reduction. million for More at Four and class size reduction. Easley also requests ➤ The Senate’s $15.8 billion budget an exemption on the first $20,000 includes: a 2.75 percent raise for of income subject to the corporate teachers; a raise of 2.75 percent, income tax. or at least $1,000, for state workers; $21.2 million for class ➤ Senate Minority Leader Jim size reduction; $4.5 million for 238 l CIVITAS INSTITUTE l 2004 session July The $15.9billion ➤ ➤ Patrick Ballantine The Houseoverrides➤ Easley’s veto, Governor➤ Easleyvetoes abillthat health insurance program. an expansionofthestate’s child More atFour; and$8.8millionfor a raiseofatleast$1,000,or 2.5 a 2.5percent raisefor teachers; subsidized health care for children; million for anexpansion ofstate The budgetalsomandates: $6.6 at $50.5millionand$9.1million. and More atFour –are funded – namely, classsize reduction Governor Easley’s petprojects budget passes(S.L.2004-124). Ballantine. conceding to out oftherace, subsequently bows Vinroot and Richard Vinroot. between himself the way for arunoff the vote, preparing win 40percent of primary, butfailsto gubernatorial wins theRepublican 1213). requirements (HB compensation with lessrigorous a newbillboard bill passed andcreates guts abilltheHousehasalready the vetoed bill. The instead Senate on takesnoaction but theSenate the billboard (HB429). wantsto remove orcity the county to compensate abillboard owner if would require alocalgovernment $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $5,000 $0 1985 1995 2005 LG CS NV US VA TN SC NC GA FL August September A pollby Research➤ 2000shows Governor➤ Easleysigns the “new” Marking thefirst timethe Marking ➤ colleges. UNC universities andcommunity average 7.3percent tuitionhikeat percent, for state workers; andan percent. Ballantine –51percent to 37 over Republicancandidate Patrick Governor Easleywithanearlylead 2004-152). billboard compensation bill(S.L. Governor to Easleyneglected give Ballantine. The unionisupsetthat its membersto vote for Patrick Carolina urges (SEANC) North State Employees Association of a Republicanfor governor, the organization hasever endorsed 1985 1995 2005 Southeast States,Southeast 1985-2005 Per Capita Personal Income: 1985 1995 2005 1985 1995 2005 1985 1995 2005 1985 1995 2005 1985 1995 2005 state workers a pay raise in 2002 November and only gave a marginal raise ➤ Mike Easley wins a second term as governor, defeating Republican 2004 Other Significant Changes challenger Patrick Ballantine 55 percent to 43 percent. COMPENSATION ➤ Democrats win back their majority • Salary increase of 2.5% or $1,000 - whichever is greater - for most state employees in the House, gaining three seats to give them a 63-57 advantage. • 2.5% average salary increase for teachers They also retain control of the CAPITAL Senate by a margin of 29-21. • Authorize financing of $355 million for UNC capital projects ➤ Richard Burr (R) defeats former Clinton Chief of Staff Erskine in 2003 and 2004. (Meanwhile Bowles 52 percent to 47 percent in teachers received raises of 1.84 the race for the open U.S. Senate percent in 2002, 1.8 percent in seat vacated by John Edwards. 2003, and 2.5 percent in 2004.) Republicans now hold both of the Ballantine wins SEANC’s support state’s U.S. Senate seats. by promising state workers a 5 percent raise over the next three ➤ President George W. Bush (R) years. wins a second term, defeating Massachusetts Senator John Kerry ➤ Easley claims that he expects (D) 51 percent to 48 percent. the temporary half-cent sales tax increase and half-percent income ➤ The General Assembly meets on tax increase will finally expire next November 4, 2004, to pass the “Tax year. Incentives for Major Computer Manufacturing Facilities” Act (S.L. October 2004-204). The legislation provides ➤ Governor Easley announces that Dell, Inc. $242 million in tax breaks he will call the General Assembly over 15 years. back into session to consider a tax incentive plan aimed at bringing the computer manufacturer Dell, Inc. to North Carolina. 2004 session l CIVITAS INSTITUTE l 239

DID YOU KNOW? North Carolina imposes an excise tax on illegal liquor and drugs, such as cocaine and marijuana. The tax can be up to $200 per gram, depending onthe type of controlled substance. Source: N.C.G.S. 105-113.107 240 l CIVITAS INSTITUTE l 2004 session 2004 Significant Tax Changes(BudgetBillUnlessNoted) 2004 Other Revenue2004 Other Sources &Actions December Although Republicanslostcontrol➤ • • • • foolishly believes Democrats will Richard Morgan (R-Moore) of theHouse, former Co-speaker Renewable fueltaxcredits [S.L.2004-153] Research anddevelopment taxcredit Qualified businessinvestment taxcredit sunsetonJobDevelopment ProgramExtend Investment Grant(JDIG) sunset onlow-incomeExtend housingcredit [S.L.2004-110] ofsalestaxrefundsExpand numberandtype andexemptions Bill Lee changes: Act Reduce alcohol andtobacco taxdiscount for wholesalers: Share, insurance sources ofG.F.Other revenue: investment income, judicialfees, Disproportionate Medical $4.1 million) ofState Fund Controllermillion), Office Regulatory ($2.2million),Insurance (increase by Transfers from Fire Safety Loan Fund ($0.25million), Veteran’s Home Trust Fund ($0.5 Tobacco payments decline$5million Transfer $243 millionfrom Highway Trust Fund ➔ ➔ ➔ ➔ ➔ development) Modify formulaModify usedto determine tiers[S.L.2004-202] Change employment levels [S.L.2004-170] sunsetto 2010[S.L.2004-435](2003specialsessiononeconomicExtend S.L. 2004-84reinstates thediscount at2% Budget billeliminates 4%taxdiscount government ishere to stay.” Morgan says: “I thinkcoalition the results ofthelasttwo years, continue to share power. Basedon 2005-2006 BIENNIUM 2005 session FY 2006: July 1, 2005 to June 30, 2006

General Assembly: House Dems: 63 House Reps: 57 Senate Dems: 29 Senate Reps: 21

Governor: Mike Easley (D)

The 2005 Long Session: Budget Bill SB622/S.L. 2005-276 Passed Senate: May 5, 2005 Passed House: June 16, 2005 Conference Version Ratified: August 11, 2005 Signed by Governor: August 13, 2005

overnor Easley began the year by the Senate tried to balance the budget discussing the possible repeal of the by restructuring the Medicaid eligibility Gtemporary sales and income taxes he formula – a cut the House opposed. For its had pushed through in 2001. By February, part, the House fought the Senate’s plan Easley had backed away from talk of to give tuition setting authority to UNC letting the taxes sunset. Instead, the taxes Chapel Hill and NC State. Instead of cutting were renewed again in June and then Medicaid, the House budget made cuts again in August, with a new expiration in education in return for giving teachers date of July 1, 2007. another pay raise.

Legislative gridlock prevented the passage Education cuts were made easier to of a budget until September, with issues swallow by the passage of the so-called pertaining to Medicaid and education Education Lottery. While the lottery bill 2005 session l CIVITAS INSTITUTE l 241 spending driving the debate. In particular, passed the House in April, Senate President Pro Tempore Marc Basnight (D-Dare) resorted to questionable procedural tactics 2005 HEALTH & HUMAN SERVICES BUDGET in order to push the lottery through. Total Appropriations $4.03 billion During the latter part of the session, Major Items: questions also began to emerge about Medical Assistance (Medicaid): $2,510 million the illicit fundraising activities of House Mental Health/D.D./Subst. Abuse: $603 million Speaker Jim Black (D-Mecklenburg). Child Development: $268 million Amongst other charges, it was revealed Social Services: $189 million that Black was part of a triumvirate that Public Health: $152 million used a hidden $14 million slush fund to Office of the Secretary: $114 million win influence among legislators. Along 242 l CIVITAS INSTITUTE l 2005 session January with herwork onthelottery. state lobbying laws inconnection director, Meredith Norris, hadviolated become clearthatBlack’s political By theendofyear ithadalso ofCultural Resources.Department Decker (R/D-Forsyth) withtheN.C. for former Representative Michael fund wasusedto create aposition particular, In districts. moneyfrom the groupsmoney to select incertain state agenciesthatredistributed the channeled thefundsthrough three Richard Morgan (R-Moore), Black and HouseSpeakerPro Tempore Presidentwith Senate Marc Basnight In response,In ➤ legislative leaders Governor➤ Easleyindicates he only taxes ofchoice,” declares to remind you thattheseare to offset revenue losses. “I’d like and alcohol –willbenecessary increases in “sin taxes” ontobacco claim thatnewtaxes –inparticular, 2005. expire asscheduledonJuly1, 2001, andagainin2003,actually increases hepushedthrough in percent income tax and one-half salestax onehalf-cent temporary would liketo seetheso-called February The lottery plancontinues to The lottery ➤ Speaker Blackstates hewould➤ issues.” sharing theirrevenues for theright “[Tobacco companies are] opento Adds HouseSpeakerJimBlack, PresidentSenate Marc Basnight. education moneyhere.” to play thelottery, let’s keepthe of thestate. theyare going …If seeing isourmoneyflowing out hesays: Industry we are now“What of N.C.Citizens for Businessand lottery. Aton astate-run ameeting astatewide referendumsupport improve, thestate taxes, cuts addsmajornewinitiatives reduce staffs, withholdpay outprograms. raises andcut and otherwise acts asthoughwe acts have beenthrougha and otherwise Then, asalways happens unique experience. my three decades, During we have Each timethestate goesthroughthiskindoftrouble, we reactthesameway—we budgets, radically cut James R. Leutze, Chancellor ofUNC-Wilmington, May 2001 gone upanddown thisroadfourtimes. , thingsimprove. W hen things gain steam under the guidance the remainder taken from state of longtime proponents Senator reserve funds. Governor Easley Basnight and Governor Easley. opposes the plan as too costly. ➤ David Crotts, principal fiscal analyst ➤ In his State of the State address, for the General Assembly, reports Governor Easley asserts that North that corporate tax revenues are Carolina’s economy is on the mend about $50 million more than in after losing more than 160,000 November 2004. manufacturing jobs in the three- year downturn. Tax Burden in Southeast States: 2006 ➤ Senator Basnight acknowledges 12% that instead of adopting Governor Easley’s proposed sales tax 10% increase on consumer items he would “rather go to alcohol” by doubling the beer tax to 10 cents a 8% can. Says Basnight, “I can’t believe you would lose one drinker for 5 6% cents more a can.”

4% March ➤ An Elon University poll shows 2% 60 percent support for a proposed cigarette tax increase of 5 to 50 cents over two years. 0% FL GA NC SC TN VA ➤ UNC Board of Governors approves several fee increases, as well as a tuition increase for out- ➤ Despite this growth in income tax of-state and graduate students. revenue, Governor Easley backs away from his earlier proposal ➤ Senate budget writers look to to let the temporary sales tax contain North Carolina’s rising and income tax increases sunset. Medicaid costs (about 12 percent

Easley claims the January surplus annually) by cutting several 2005 session l CIVITAS INSTITUTE l 243 report does not give him enough optional state-funded benefits and confidence to end the temporary lowering the income threshold taxes. for certain recipients. The savings measure would cut 65,000 people ➤ UNC Board of Governors freezes from the Medicaid rolls, most tuition for in-state undergraduate of whom (an estimated 57,000) students for the 2005-06 school are already on Medicare. Warns year. Senator Kay Hagan (D-Guilford): ➤ Senate passes a $214.5 million “The state needs ideas for holding relief package for 2004 mountain down Medicaid expenses. If we flood victims. To pay for the don’t, there won’t be enough package, $90 million is to come money to cover other items.” from state agency budgets, with 244 l CIVITAS INSTITUTE l 2005 session April The considers Senate ➤ rolling moneywouldLottery betreated➤ The Houseapproves ➤ theNorth Governor➤ Easleyproposes a$17 gain more traction forgain more thetax traction billsoasto into the lottery alcohol and cigarette taxincreases devoted to educationalpurposes. remaining 25percent for afund universities andcolleges, andthe need-based scholarshipsatstate 25percentconstruction, for percent usedfor publicschool as neweducationfundswith50 through college.” pre-K educational opportunities improve ourschoolsandincrease continue to resources to additional give us Carolina will North in lottery education declares, “An Easley Governor education, per year for $400 million will generate the lottery Claiming that to 59). one vote (61 by Act Lottery Carolina State 2006. increase in additional 10-cent the cigarette taxin2005andan increase toincludes a35-cent billion two-yearbudgetthat $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $500 $0 State &Local Tax Burden perCapita: 2003-2004 LG CS NV SSE US VA TN SC NC GA FL May Buttressed by claims that a lottery Buttressed by➤ claimsthatalottery The budgetcuts65,000 Senate ➤ The passesa$17billion Senate ➤ in educationcuts. writers seekto make$245million year in educationfunding;budget will generate $400millionper like thosetaxes.” consider thingssuchasthat. We legislation. Says Basnight: “We will measure granting trustees atUNC bill alsoincludesacontroversial people from rolls. Medicaid The oil, and funeralservices. equipment, farmmachinery, fuel sales taxes onfilmmaterials and 6.9 to 6.4percent andlowering corporate income taxes from and liquor. alsoproposes cutting It phonebills digital radioservice, tobacco, candy, satellite and TV increases taxes oncigarettes and budget bill. The proposed budget

Southeast Region ➤ The House proposes cutting 2005 EDUCATION FUNDING hundreds of teaching positions and $44.3 million per year for ENROLLMENT CHANGES public schools. In return, teachers ° Public Schools: 31,686 (2.4%) increase across the state would receive an ° Community Colleges: 4,335 (0.5%) increase average raise of 2.5 percent. Such ° UNC: 6,635 (3.4%) increase cuts enable the House to restore TUITION & FEE INCREASES the Medicaid coverage cut in the ° Average increase of 3% for in-state and 2% for Senate budget. out-of-state UNC students ° Increase of 4.7% for in-state and 4% for out-of- ➤ “Take Back Our State” rally calls state community college students for lower spending and fiscal responsibility. OTHER EDUCATION CHANGES ° Establish state education lottery ➤ House Speaker Black gives his staff ° Numerous small increases for various public pay raises ranging from 7 percent school and UNC programs; $26 million for to 58 percent. capital improvements at individual community colleges ➤ The Legislature fails to pass a ° Additional $42.5 million for disadvantaged budget before the end of FY2005 student and low-wealth supplemental funding on June 30. ° Add 3,200 More at Four slots in DHHS for $17 ➤ million First continuing budget resolution ° $100 million for ABC bonuses earned in the extends funding for three more 2004-05 school year weeks. Known as the Budget ° Potential teacher salary increase, contingent Continuation Act (S.L. 2005-144), upon study ($85 million) the resolution again renews the ° Redirect sales tax refundable to LEAs to the 4.5 percent sales tax – bringing Public School Fund (enables General Fund in anticipated revenues of $417 reduction of $33 million in 2006-07) million for FY2005-2006. This time ° Budget (i.e., appropriate for General Fund line legislators promise that “in no items) increased receipts from Civil Penalties event is the tax extended beyond & Forfeitures Fund (enables General Fund December 31, 2005.” reduction of $103 million) ° Continue funding UNC need-based financial aid ➤ Included in the budget is a lottery from the Escheats Fund (enables General Fund distribution different than the bills 2005 session l CIVITAS INSTITUTE l 245 reduction of $24 million) passed in the House and Senate. ° $31 million recurring reduction to UNC (to be The Senate worked effectively to taken at discretion of campus) change the allocation in the final budget, avoiding making any Chapel Hill and NC State University changes to the lottery bill itself. the power to set their own tuition Primary changes include: more rates without the approval of the money allocated to retailers, less UNC Board of Governors. money for school construction and more money for class-size June reduction and More at Four. ➤ The House votes against raising the minimum wage from $5.15 to July $6.15. ➤ Senator Basnight cancels all taxes are too highwhile54percent the right amount. Of those polled, thosepolled, the rightamount.Of 32 percent believe taxes are setat

246 l CIVITAS INSTITUTE l 2005 session voters believe taxes are too high; 69 percent ofRepublicansthink Source: Poll May 2006 Civitas DecisionMaker Sixty percent of North Carolina percent ofNorth Sixty DID YOU KNOW? DID YOU of Democratsagree. August Disagreement➤ over tuitionsetting House negotiators win back ➤ The Housepassesanotherstopgap➤ In a flurry oflast-minute deal aflurry In ➤ A third stopgap➤ billispassedon budget isinplace. committee meetingsuntila continues to holdupthebudget. intheUNCsystemauthority problem. proposal to continue to studythe clients by agreeing to aSenate coverageMedicaid for 65,000 $73 millionto UNCschools. million to colleges, community and million to publicschools, $7.8 funding for education:$125 measure alsoprovides increased funding anothertwo weeks. The measure onJuly19,extending effective September1,2005,and increase to the cigarette tax negotiators agree to a25-cent House andSenate making, million. costs taxpayers anestimated $1 the Legislature remains insession August 4.Eachadditionalmonth ➤ After promising thattheSenate bill(S.L. ➤ OnAugust 13,thelottery BasnightannouncesSenator that ➤ infection), the lottery billpasses infection), thelottery recoveringGarwood from aleg was onhishoneymoonand unable to return (Brown to Raleigh (R-Wilkes)and JohnGarwood Brown (R-Onslow) Senators Harry to againvote onthelottery. With back into sessiononAugust 30 year, BasnightcallstheSenate has concluded itsbusinessfor the yet.” Basnight declares, “It’s notover by avote of24to 26.Senator 2005-344) isdefeated intheSenate budget impasse. most contentious measures inthe is dead, eliminatingoneofthe special tuitionsettingauthority andNCState UNC ChapelHill the Senate’s proposal to grant whichever isgreater. pay raiseof2percent or$850, employees are alsogiven a effective July1,2006.State increase an additional5-cent Source ofBudgetFunds: 2005-06 2005 session l CIVITAS INSTITUTE l 247 tuition up to $300 for in-state in-state $300 for tuition up to out-of- $900 for students and up to proposes NC State students. state raising tuition $325. House grant General Cooper Speaker Black permission to up to the state from recoup connected to $30,000 in legal fees jury grand a federal investigation. political director, Meredith Norris, Norris, Meredith political director, as questions surface her regarding Scientific for as a consultant work lottery a Georgia Games, company. to pleads no contest Norris later state that she violated charges laws. lobbying to submit to a comprehensive comprehensive a to submit to sets aside budget The exam. eye assist low-income to $2 million As the exams. for pay parents stands Black an optometrist, the personally gain from to is provision The requirement. year's following in the diluted a to a requirement budget from for exams optional eye subsidy for exam who failed an eye children 2008 The a pediatrician. from eliminate budget will completely the provision. ➤ UNC Chapel Hill raising considers Easley and Attorney ➤ Governor ➤ his House Speaker Black dismisses November December October concludes that Senate President that Senate President concludes Basnight and Tempore Pro co-House Speakers Jim Black did nothing and Richard Morgan a $14 illegal when they created Nonetheless, million slush fund. the fund was concludes, Cooper its lack its secrecy, for “problematic and its end run of accountability process.” the legislative around Jim Black requires the budget by kindergarten entering children $17.2 billion budget (S.L. 2005-276) $17.2 billion budget on September 2. 25-24. Lt. Governor Perdue casts Perdue Governor 25-24. Lt. vote. the deciding Attorney General Roy Cooper Cooper General Roy ➤ Attorney added into ➤ A special provision The General Assembly passes a ➤ General Assembly The September Infrastructure Program the budget in 2001 balance to system retirement and businesses programs, greater - for most state employees most state - for greater RURAL ECONOMIC DEVELOPMENT CENTER DEVELOPMENT ECONOMIC RURAL COMPENSATION • the North continue $20 million to Carolina RETIREMENT • the $25 million of the funds taken from Repay OR BUSINESS FUNDS NONPROFIT, LOCAL, • local nonprofits, municipalities, $151 million for • Salary is of 2% or $850 - whichever increase • salary teachers for 2.24% average increase 2005 Other Changes Significant 248 l CIVITAS INSTITUTE l 2005 session 2005 Significant Tax Changes(BudgetBillUnlessNoted) 2005 Other Revenue2005 Other Sources • • • • • [S.L. 2005-345] Increase contribution to N.C.Political Parties Financing Fund (taxreturn designation) American JobCreation andcharitablecontributions Act; for tsunamirelief) Partially conform to Families Internal Revenue Code updates (Working ReliefAct; Conform estate taxto federal sunset[S.L.2005-144] 1,2007) others (effective January corporateIncrease gross excise taxfor HMOsfrom 1.0%to 1.9%,therate paidby all Continue usetaxlineonindividualreturns increase to 35 Tobacco taxrate changes(increase from 5 sales, useandexciseOther taxchanges: 4.5%state salestaxrateMaintain 8.25%individualincome taxrateExtend for 2more years Streamlined salestaxchanges: insurance sources of G.F.Other revenue: investment income, Share, Disproportionate Medicaid Transfer $5 millionfrom SpecialRevenue andotherfunds Transfer $34millionfrom Tobacco Trust Fund Transfer $253millionfrom Highway Trust Fund Court feeCourt increases: ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ ➔ (previously 1%tax) reimbursement toproportional interstate carriers Refund excise taxonunsalablecigars[S.L.2005-406] andaviationMotor fuelstaxchanges[S.L.2005-435] sales taxrefundSchool swap Exempt pottingsoilfor farmers salestaxto satelliteExtend radio telecommunicationsExtend taxto voicemail Apply generalsalestaxrate (7%)to cable(wasonlyalocaltax,upto 5%) Apply uniform sales taxto candy Exempt from salestax,items machinery ranging from horsesto laundry taxonrailwayIncrease cars&locomotives from 3%(w/$1,500cap)to 7%with Increase taxonliquorfrom 6%to 7%(nolocalshare by law) from taxonhomesatelliteIncrease 5%to television 7% services taxontelecommunicationsIncrease from 6%to 7% Increase civil court fees, civilcourt Increase specialproceedings, andestate fees by $10 fees byIncrease criminalcourt $9.50 ¢ perpackJuly1,2006) ¢ to 30 to ¢ perpackthrough June30,2006; economic overview 2006-2010 l CIVITAS INSTITUTE l 249 2006-2010

General Economic Trends: 2006-2010 Trends: Economic General economies.” of two “tale like the 2010 unfolded 2006 through years The robust 2006 and 2007 featured the housing market bubble, by Propelled this one ended with however, all booms, Like unemployment. low and growth market in late the implosion of the housing by Triggered bust. a tremendous what came to into fell – economy – and thus North Carolina’s 2008, the nation’s recession.” “great as the to referred be commonly contraction the Great the deepest economic since arguably by Marred turmoil economic 2010 experienced of 2008, 2009 and the years Depression, crisis and a home foreclosure market plunge, stock with a massive complete get the economy to responses government – but misguided – federal massive back on course. Free-Fall The ended 2008 flat. Domestic Product, Gross by as measured economy, nation’s The plummeted. prices and stock 2.7 percent, contracted by In 2009 the economy ! %! ! %! OVERVIEW (+ '+ &+ %+ $+ #+ "+ !+ + + 250 l CIVITAS INSTITUTE l economic overview 2006-2010 and purchases oftroubled assetsof major investment banks. The initiative was another $700billionto “bailout” majorbanks. The moneywasspentonstock tax rebate checks to citizens across thecountry. President Bushalsoauthorized of2008signedAct by President George W. Bush. consistedThis primarilyof act the recession. The firstsignificant step wasthe$152billionEconomic Stimulus numerous,government undertook aimed atcorrecting andsubstantial, efforts to aneffort In “do something” to resolve theeconomic crisis, thefederal Government Response reached anall-timehigh. With plummetinghousingprices andrisingunemployment, homeforeclosures time, ofnearly11percent. acontraction Carolina’sNorth economy private sector lostmore than 370,000jobsduringthat peaked at11.4percent, more thandoubletherate ofjust21monthsprior. Carolina of2010,state unemployment hard.Joblessness hitNorth January In percent. of 2009,andremained stubbornlyhigh.Bytheendof2010,itstillstood at9.4 later. Nationalunemployment reached itshighpointof10.1percent inOctober skyrocketed from 5.4percent inMay of2008to 9.4percent only12months The ranksoftheunemployed swelled rapidly. The nationalunemployment rate value injustundersixmonths. Average dropped atotal of7,440points–losingmore than50percent ofits From of2008to lows highsinOctober inMarch of2009,theDow Industrial "$!) "#!) "!!) &!) %!) $!) #!) !) #!"! #!!% economic overview 2006-2010 l CIVITAS INSTITUTE l 251 $""( $"")

highly unpopular with the American public who perceived it as bailing out who perceived American public with the highly unpopular man. of the common the plight while ignoring banks Street Wall irresponsible It the economy. in efforts stimulate to Reserve also got involved Federal The struggling from financial assets purchase dollars to trillions in new created firms. failing investment loans to “emergency” extendbanks and and bailout responses the stimulus Barack Obama continued President in January office afterbillion than $80 took he more He authorized of 2009. manufacturers Chrysler up auto as well prop and General Motors, to largely that program “cash-for-clunkers” a notorious for of millions more as hundreds destruction a for and purchased traded in their old vehicles paid people who bill “stimulus” – – and much larger another approved Obama also new vehicle. going to share billion, with a sizeable bill spent $787 The of 2009. in February North their ailing budget situations. up help them shore to governments state help fill to years of two the course billion over than $2.3 more received Carolina bill in “stimulus” about the Obama more can read (You gap. budget its sizeable the 2009 timeline.) more Reserve committed initiatives and Federal government federal All told, than $35,000 more That’s the recession. combat to 3 years than $11 trillion over the first stimulus was When every and child in the nation. for man, woman rate unemployment Bush, the national President 2008 by in February signed 2010, at the end of and $11 trillion later, years three Nearly at 4.8 percent. stood at 9.4 percent. stood rate the national unemployment (, ', &, %, $, #, ", 252 l CIVITAS INSTITUTE l economic overview 2006-2010 $#, $$, $%, $&, $', (, ), ! %##) TIMELINE: 2006-2008 INTRODUCTION

The three legislative sessions from 2006 to 2008 in Raleigh featured sharp increases in state spending, and a dramatic and unaccountable rise in state debt.

Growth in Spending Spending increased by $2.5 billion over just two years (fi scal years ending 2007 to 2009), which is an overall increase of 13 percent. Even after adjusting for infl ation and population growth, spending per person still climbed by 2.5 percent.

Spending growth was fueled by more than $1 billion in new spending for K-12 education and more than half a billion in new state spending on Medicaid/NC Health Choice. In terms of spending growth rates by category, Medicaid/Health Choice spending led the way with a 20.5 percent growth over the two years. Spending on the UNC system climbed by 19.3 percent, while K-12 spending rose at a rate of 16 percent. By comparison, transportation spending increased by 15.4 percent.

State Debt Increased Dramatically – Without Voter Approval State lawmakers authorized $2.2 billion in new state debt in the three budgets approved during the 2006, 2007 and 2008 sessions. None of the debt was approved by voters.

Because “special indebtedness” was used, the bonds were issued at a higher interest rate than bonds that do receive voter approval. The extra interest payments will cost taxpayers millions over the next several years.

Refl ecting the state’s growing debt, annual debt service payments were 13 percent higher in fi scal year ending 2009 than just two years prior – refl ecting an increase of more than $72 million. As lawmakers continue to accumulate ever more state debt, this amount will continue to climb. The more money needed to fi nance state debt, the less money there will be available in the economy to create jobs, or for state government to fi nance public safety, roads and schools.

A new report released in 2008 reveals that the state of North Carolina is liable for $29 billion in unfunded retiree health premium benefi ts, as calculated Dec. 31, 2007. Basically, the amount of

future retiree health benefi t payments already accrued by current and future retirees is calculated to 2006-2008 be $29 billion, with no money set aside to pay for these future costs. The General Assembly made no progress in addressing this massive shortfall during the three sessions from 2006-20008. Any proposed legislation to annually set aside more money towards future benefi ts, or to establish a

Trust Fund, died in committee. l CIVITAS INSTITUTE l 253 General Assembly: 2006 session House Dems: 63 House Reps: 57 Senate Dems: 29 Senate Reps: 21 2006-2007 BIENNIUM FY2006-2007: July 1, 2006 to June 30, 2007 Governor: Mike Easley (D) he top stories of 2005 – the passage of the Tlottery and the ongoing federal grand jury The 2006 Short Session: investigation of House Speaker Jim Black Budget Bill SB 1741/S.L. 2006-66 (D-Mecklenburg) – continued to make news in 2006. The year began with a Rhode Island Passed Senate: May 25, 2006 company being awarded the rights to Passed House: June 15, 2006 manage North Carolina’s new “Education Conference Version Ratified: July 6, 2006 Lottery.” The launch of the lottery was marred, Signed by Governor: July 10, 2006 however, by charges that two individuals closely tied to Black had performed illegal lobbying services related to the lottery. The lottery also came under fi re as Gov. Mike Easley (D) faced Elections in November saw Democrats criticism that proceeds from the lottery were strengthen their majorities in the state House being used to supplant existing education and Senate, while North Carolina Democrats spending, rather than expand new programs. gained a 7 to 6 edge in the number of U.S. Representatives in Washington. The gains by Throughout the year, reports continued Democrats in the North Carolina General to circulate that Black was being investigated Assembly mirrored nationwide trends. In the U.S. on charges related to bribery and corruption. House of Representatives, Democrats picked up In an attempt to distance themselves from 32 seats to win a majority for the fi rst time in Black’s questionable fundraising activities, 12 years. In the U.S. Senate, Democrats picked up lawmakers ended the session by passing a seven seats to win the majority in that body for sweeping ethics reform bill. The new bill, the fi rst time since May 2001. (Democrats briefl y however, was criticized for failing to address regained the U.S. Senate majority in 2001 with primary sources of lobbyist infl uence – namely the defection of Vermont Republican Jim large donations from special interest groups, as Jeff ords, only to lose it again in the 2002 well as large scale fundraising events. midterm election.)

With excess budget revenue projections January reaching $2.3 billion, the General Assembly ■ A working group comprised of about 50 used part of the surplus to give public school economists, tax attorneys, and political teachers and state employees their largest pay and business leaders conducts a study raise in roughly 15 years. Likewise, the General organized by The Institute for Emerging Assembly rolled back half of the “temporary” Issues – a think tank founded by income and sales tax increases from 2001 – former Gov. Jim Hunt (D) – that evaluates cutting the sales tax by ¼ cent and the income ways North Carolina’s tax system could tax by ¼ of a percentage point. Overall, the be overhauled. While stopping short of budget increased spending by almost 10 making specifi c recommendations, the percent – breaking a promise made by Easley study mentions the following options that he would restrict increases in state as worthy of consideration: cutting spending to 5.6 percent. or reducing the corporate tax rate, l CIVITAS INSTITUTE l 2006 session 254 l CIVITAS DID YOU KNOW? State government tax collections as a share of personal income in North Carolina are higher than that of New not replace tax revenue state offi cials already spend on education. With the York, Massachusetts and Connecticut lottery in place, Easley now claims it was (as of FY 2006). his plan all along to use lottery revenue to supplant funds already dedicated Source: N.C. Department of Revenue to class-size reduction and preschool programs. Easley vows, however, that the supplanted money will stay in the education budget. reducing the top marginal income tax, ■ Updated tax revenue estimates project expanding the sales tax to include a revenue surplus beyond what services and giving local governments legislators have budgeted to spend. more taxing power. February projections show that tax ■ Attorney General Roy Cooper (D) collections are running about 7.6 percent recommends that the state amend the ahead of last year’s pace, or roughly $213 process through which spending items million ahead of schedule. The budget make it into the budget. Specifi cally, target is for 5.3 percent growth in tax Cooper expresses concern about “pork” revenues. projects being inserted into the fi nal budget without fi rst appearing in either March the House or Senate budget proposals. ■ As such, these provisions are not Rep. Lorene Coates (D-Rowan) becomes subject to formal debate. “The General the fi rst Democrat House member to Assembly budget process often results publicly call for the resignation of House in decisions being made at the last Speaker Black. Coates says Black needs minute and middle of the night without to step down because the scandal has open debate,” Cooper charges. become a distraction for other members. ■ ■ The State Board of Elections votes At 6 a.m. on March 30, North Carolina to formally investigate campaign State Board of Education Chairman donations made by video poker and Howard Lee buys the ceremonial fi rst optometry interests to House Speaker ticket of the N.C. Education Lottery. Re- Jim Black. tail sales of four scratch-off games begin across the state, with the Powerball ■ GTECH , a Rhode Island-based company, game expected to be available in late 2006 session l CIVITAS INSTITUTE l 255 wins the rights to provide both May. scratch-off instant tickets and online ■ lottery ticket sales. The terms of the While claiming they will help Easley contract call for ticket sales to begin ensure that lottery money will not simply before the end of March, with GTECH replace existing spending on education, to be paid a percentage of the lottery’s legislative leaders warn that the lottery is profi ts. not a cure-all for schools. “I think there is an absolute perception that the lottery’s going to take care of everything. February People call me every day asking for a ■ Gov. Easley draws signifi cant criticism leftover,” cautions Rep. Jim Crawford over his new “Education Lottery” revenue (D-Granville), a cochairman of the House allocation formula. Easley had previously Appropriations Committee. promised that the lottery money would April Senate unveil their proposed budget ■ Revenue estimates continue to be adjustments for FY 2006-07. The revised upward, with fi scal analysts governor’s recommendations include: predicting a surplus of $1 billion a 9.6 percent spending increase over the available to carry over to the upcoming previous year (in 2005 Easley claimed he 2006-07 fi scal year. The surplus includes would veto any budget that increased roughly $600 million in tax revenue spending by more than 5.6 percent); an above previous expectations, combined 8 percent pay raise for teachers and a 4 with a projected $617 million in unused percent raise for state employees. money from FY 2005-06 that will likewise ■ The Senate’s proposal includes pay raises carry over. Representative Beverly Earle of 8 percent for teachers and 5 percent (D-Mecklenburg), a co-chair of the House for state employees. Appropriations Committee, notes that a ■ With regards to taxes, the Governor and variety of special interests are lobbying Senate both recommend permitting half for their share of the surplus. “Folks are of the temporary sales tax rate to sunset, just lining up. I’m probably one of the thus reducing the state sales tax rate most popular people in the state right from 4.5 cents to 4.25 cents, and capping now. I know it’s not because they like the gas tax at its current rate of 30.15 me,” Earle says. Likewise, House Speaker cents per gallon. The two proposals dif- Jim Black comments: “For an extra $1 fer regarding the temporary income tax billion there will be about $10 billion in rate. The Senate’s adjustments include requests. There’s not really much extra a proposal to reduce the top personal money.” income tax rate from 8.25 percent to 8 percent while the Governor’s plan makes May no mention of the temporary income tax rate. ■ With HB 2174 approved in the House by a vote of 72 to 43, an increase in the ■ The Senate approves its budget proposal minimum wage creeps closer to and passes it along to the House. becoming law. The bill would raise the state’s minimum wage by $1 an hour, up June to $6.15. Similarly, the Senate’s proposed ■ News from the Offi ce of State Budget budget includes a $1 increase in the and Management that lottery revenue minimum wage. Thus, the two chambers estimates are being revised downward merely need to agree as to whether the causes concern among county school increase will be passed on its own or leaders. Donny Lambeth, chairman of the as part of the budget. Gov. Easley also Winston-Salem/Forsyth County School expresses support for the increase. Board, says the changing numbers make ■ A surplus of excess tax revenues, it hard for school offi cials to do their job. combined with unappropriated and “You do have to plan, and if those unspent funds from the current fi scal numbers vary by 10 [percent], 15 year, reaches a total of $2.3 billion, a percent, that’s a concern,” he explains. record for North Carolina. “We had an ■ The House approves its proposed $18.9 April surprise, and it was very nice,” billion budget, which is nearly 10 per- observes Representative Crawford. cent above last year’s budget. House ■ First the governor and then the l CIVITAS INSTITUTE l 2006 session 256 l CIVITAS Majority Leader Joe Hackney (D-Orange) ■ The FY 2006-07 budget bill becomes justifi es the increase by saying: “We have law. With $18.9 billion in total spending, some money this year. We are wisely in- the budget is $1.5 billion larger than the vesting it. And I’ll tell you, the people of previous year – an increase of almost 10 North Carolina want the same priorities percent. that are in this budget.” ■ Advocates for fi scal restraint express ■ Highlights of the House budget include: concern over the sizeable increase in partially rolling back the “temporary” spending, as well as the use of one-time taxes, including reducing the state sales money to pay for recurring costs such tax by 0.25 cents (while making the as salaries. This practice of paying for remaining 0.25 cents permanent) and long-term spending commitments with cutting the “temporary” income tax rate nonrecurring revenue leaves a hole that on the highest tax bracket by ¼ of a legislators will have to address in future percentage point (leaving the remaining budgets. “History tells us we’re going ¼ of a point intact until 2008). to encounter an economic downturn,” ■ House Republicans who voted against cautions Sen. Phil Berger (R-Rocking- the budget express concern over the ham). “It may not be this year, but it will sharp spending increase, as well as the happen. Until we get serious about fact that the budget uses one-time controlling the spending side, we’re revenues to pay for recurring expenses. going to go through these cycles of “This again, again, again … digs a boom and bust.” Berger estimates structural defi cit hole for next year of that such built-in commitments will about a billion dollars,” charges Rep. Paul contribute to a projected shortfall of $1 Stam (R-Wake). billion the following year. (Fortunately for the General Assembly, the economic ■ Budget writers from the House and downturn did not materialize in 2007. Senate fail to come to an agreement on a The result was a revenue surplus of fi nal state budget before the beginning roughly $1.4 billion.) of the new fi scal year (July 1, 2006). The “temporary” taxes, along with diff erences ■ The fi nal budget allows the two over roughly $100 million for UNC con- “temporary” taxes fi rst enacted in 2001 struction projects, prove to be the main to partially sunset. The sales tax will areas of contention. “We’re very, very decrease by ¼ cent to 6.75 percent as of

close,” says state Sen. Linda Garrou (D- Dec. 1, 2006, with the remaining ¼ cent 2006 session l CIVITAS INSTITUTE l 257 Forsyth). “There are just a couple of capi- still scheduled to expire on July 1, 2007. tal items we disagree on. We’re going to Meanwhile, the highest income tax rate meet in the morning and see where we will fall ¼ point to 8 percent, beginning go from there.” Jan. 1, 2007, and fi nally return to 7.75 percent eff ective Jan. 1, 2008. July ■ The budget caps the gas tax rate at 30.15 cents per gallon for FY 2006-07 only. ■ The Senate moves on the House’s plan to implement a minimum wage increase ■ Public school teachers receive a pay raise as a separate bill, approving HB 2174 by that averages 8 percent. This marks the a vote of 37 to 12. The minimum wage largest single increase in at least 15 years. is increased by one dollar, to $6.15 per hour, eff ective Jan. 1, 2007. ■ State employees receive a pay raise of controversy surrounding his political 5.5 percent, also the largest increase in and campaign activities. “This will be roughly 15 years. the most diffi cult election I have faced in many years due to the onslaught “Even the baby Jesus accepted gifts, and brought on by my political adversaries and the media,” writes Black in a I don’t think it corrupted him.” fundraising letter. –Rep. Drew Saunders (D-Mecklenburg) on new ethics laws. ■ A report from the North Carolina section of the American Society of Civil August Engineers (ASCE) raises concerns ■ Gov. Easley signs HB 1843 into law. regarding the condition of North The bill enacts sweeping ethics reform Carolina’s infrastructure. Roads, airports, regarding lobbying and campaign dams and bridges earn the poorest activities. Among other things, the bill grades, ranging from D to C-, on the ASCE bans gifts – including dinners and drinks report card. Storm water, wastewater, – from lobbyists; prohibits lobbyists and schools are all rated C- while drink- from making campaign contributions to ing water earns a C+. The report esti- candidates; establishes an eight-member mates a shortfall of $29 billion in funding State Ethics Commission to conduct for roadwork and construction over the inquiries into possible ethics violations next 25 years, but N.C. Transportation by members of all three branches of Secretary Lyndo Tippett claims that state government; requires increased number is closer to $60 billion. disclosure of government offi cials’ personal fi nancial records; and lowers October the threshold for reporting occupation/ ■ The education lottery makes its fi rst employer of campaign contributors from payment toward education programs, $100 to $50. Advocates for ethics but the amount is lower than initially reform are quick to point out what the legislation does not do. While the law prevents lobbyist campaign contributions, the special interest groups that hire these lobbyists are still free to contribute up to $4,000 per election cycle to the candidate of their choice. “I don’t believe ultimately voters care Lobbyists are also still allowed to about scandal if it’s dealt with. But if it’s sponsor fundraising events where thousands of dollars can be funneled not dealt with, and it’s an outstanding to individual candidates. Furthermore, issue in the 2006 elections and every the legislation fails to place restrictions on elected offi cials’ legal defense funds. Democratic House member’s got to basically defend themselves, and say, September ‘How much money you’ve taken from ■ House Speaker Jim Black confi rms that Black, are you going to vote for Black for he will seek reelection in spite of the speaker?’ … That’s a recipe for disaster l CIVITAS INSTITUTE l 2006 session 258 l CIVITAS for Democrats.” Joe Sinsheimer, former Democrat political consultant promised. The fi rst transfer is $95 million, ■ Tax and fee revenues outpace initial which is at least $17 million less than estimates by roughly $130 - $160 projected. The shortfall is attributed to million for the fi rst fi ve months of the fi rst quarter lottery sales falling $50 fi scal year. Lawmakers will need these million short of lottery director Tom excess revenues to help balance the Shaheen’s initial forecast. upcoming budget, as spending increases and new programs built into the November previous budget are projected to create a $1 billion structural defi cit. ■ Republicans are unable to capitalize on the controversy surrounding House ■ An article in the News & Observer Speaker Jim Black as Democrats criticizes how the Clean Water strengthen their numbers in both the Management Trust Fund is awarding state House and Senate. Democrats gain grant money. The fund, fi nanced by fi ve seats in the House, providing a 68 transfers from the General Fund, grew to to 52 advantage. They also pick up two $100 million annually beginning in 2005. more seats in the Senate, and now have Although the fund exists for the purpose a 31 to 19 majority. of assisting local governments in poorer areas with sewerage treatment and ■ On the national level, all incumbents water quality improvement eff orts, it has from North Carolina win reelection to been used to make questionable grants the U.S. House of Representatives, except for an Outer Banks erosion control proj- for Charles Taylor (R), who loses narrowly ect, the construction of a training center to newcomer Heath Shuler (D). North industrial park in Robeson County, and Carolina now has seven Democrats and various projects in Brunswick County six Republicans serving in the U.S. House (home of the fund’s then-chairman of Representatives. Robert Howard). Senate Majority Leader ■ For the fi rst time in 12 years, Democrats Tony Rand (D-Cumberland) says he take control of both the U.S. House and is concerned that the grant making Senate. Election results show a 233 to process has become political. “Are the 202 edge for Democrats in the House projects, the criteria by which they are and a 51 to 49 advantage in the Senate. judged, well founded and are they followed?” Rand asks. “Or is it somebody December calling and saying ‘give me that money’? If it’s going to be a straight political pro- 2006 session l CIVITAS INSTITUTE l 259 cess, we need to know that. Then we’ll 2006 HEALTH & HUMAN SERVICES BUDGET play politics. I didn’t think we were doing Total Appropriations $4.2 billion that on this.” Major Items: Medical Assistance (Medicaid): $2.644 billion Mental Health/DD/SAS: $663 million Child Development: $296 million Social Services: $206 million Public Health: $169 million Office of the Secretary: $64 million NC Health Choice: $52 million 2006 Significant Tax Changes (Budget Bill Unless Noted)

A portion of the “temporary” sales tax is allowed to sunset. The state sales tax will decrease by ¼ cent to 4.25 percent as of December 1, 2006. (Local governments add another 2.5 cents, with Mecklenburg Co. adding yet another half cent) The highest marginal income tax rate will fall ¼ point to 8 percent eff ective taxable year beginning January 1, 2007 Cap the variable wholesale component of the motor fuels tax so that the total gas tax cannot exceed 30.15 cents per gallon for FY2006-07 Provide tax credits to small businesses that subsidize employee health insurance premiums. The maximum credit is $250 per employee; total statewide credits will total roughly $7.2 million Provide tax credits to companies that construct and place into service renewable fuel facilities for both processing and dispensing fuel Off er tax credits up to a maximum of $500,000 for biodiesel providers Provide a refund to “professional motorsports racing teams” of 50 percent of sales and use taxes paid on specifi ed racing vehicle accessories Grant an exemption for an “eligible Internet data center” (Google) on sales taxes paid on electricity; total amount of the exemption is estimated at $2.25 million. Reduce the sales tax from 2.83 percent to 2.6 percent on electricity sold to manufacturers

2006 Other Revenue Sources & Actions

■ Transfer $425 million from State Lottery Fund to General Fund ■ Transfer $252 million from Highway Trust Fund to General Fund ■ Allocate $27 million to counties to freeze their share of rising Medicaid costs ■ Create a reserve fund for the motor fuels tax ceiling by transferring $23 million from the Savings Reserve Account to the Reserve for the Motor Fuels Tax Ceiling l CIVITAS INSTITUTE l 2006 session 260 l CIVITAS 2006 Other Significant Changes 2006 EDUCATION FUNDING CAPITAL ENROLLMENT CHANGES ■ Allocate roughly $140 million for new UNC ° Public Schools: 53,731 (4%) increase construction projects ° Community colleges: 7,415 (0.92%) increase COMPENSATION ° UNC: 6,133 (3%) increase ■ 8 percent average salary increase for teachers TUITION & FEE INCREASES ■ 5.5 percent raise for state employees ° Average increase of 11% for in-state and 3.3% ■ for out-of-state UNC students Modify eligibility requirements for state-paid ° Increase of 0.3% for in-state and 0.06% for retirement health insurance benefits so as to require future retirees to earn a minimum of 20 out-of-state Community college students years of state service to become eligible for fully OTHER EDUCATION CHANGES paid enrollment in the state health insurance ° Transfers the More at Four program and the plan; the previous threshold was only five years Office of School Readiness to the Department OTHER of Public Instruction effective July 1, 2006. The ■ Increase minimum wage by one dollar, to $6.15 program and office had previously been a part per hour, effective January 1, 2007 (S.L. 2006-114) of the Department of Health & Human Services since established in 2001 ° Directs $127.9 million in the state Education Lottery proceeds to class size reduction, with another $66.6 million to the More at Four program ° Provides $90 million for ABC bonuses earned in the 2005-06 school year ° Allocates $8.2 million for the Kannapolis Research Center, establishing a “public/private” collaboration ° Expands Learn & Earn program by an additional $9.6 million 2006 session l CIVITAS INSTITUTE l 261 General Assembly: 2007 session House Dems: 68 House Reps: 52 Senate Dems: 31 Senate Reps: 19 2007-2008 BIENNIUM FY2007-2008: July 1, 2007 to June 30, 2008 Governor: Mike Easley (D) 007 began with news of disappointing lottery 2revenues, with actual sales fi gures falling 25 The 2007 Long Session: percent below expectations. Education pro- Budget Bill HB 1473/S.L. 2007-323 grams saw a shortfall of at least $75 million as a result. In spite of the defi cit, Gov. Mike Easley (D) Passed House: May 11, 2007 proposed a biennial budget that included Passed Senate: May 31, 2007 signifi cant increases for pet programs such as Conference Version Ratified: July 30, 2007 More at Four and Learn & Earn. Easley also Signed by Governor: July 31, 2007 proposed allocating $50 million to fi nance college scholarships for students from low income families. In spite of the previous year’s focus on ethics reform, a variety of scandals plagued the With the election of Rep. Joe Hackney General Assembly throughout the year. In (D-Orange) as speaker, the House took a more February, former House Speaker Jim Black liberal turn, casting the Senate in the atypical (D-Mecklenburg) pled guilty to three felony role of being the more conservative body. In counts, including bribery and accepting bribes. spite of large Democratic majorities in both A month later, Rep. Thomas Wright (D-New chambers, diff erences in philosophy and style Hanover) was accused of converting as much as led to very diff erent budget proposals. Most $222,000 in campaign money for personal use notable contrasts were disagreements over the and supplying false information on a real estate expiration of the “temporary” sales and income transaction. Rep. Mary McAllister (D-Cumberland) taxes, the implementation of a state Earned was likewise fi ned $16,000 for using campaign Income Tax Credit, and Medicaid relief for funds to make improper payments to herself. counties. The Senate’s plan to issue $1.2 billion in new COPs (certifi cates of participation) debt Finally, in September the Governor called a – which does not require voter approval – also special session to address his veto of a $40 came under heavy criticism by Gov. Easley and million economic incentives bill for Goodyear State Treasurer Richard Moore (D). Tire. The result was a $60 million “compromise” package that included incentives for Goodyear, Legislators concurred on a fi nal budget on July Bridgestone Firestone and as many as three 30, 2007, one month into the new fi scal year. The other companies. budget appropriated $20.7 billion in operating funds, up $1.8 billion from the previous year. The January increase marked a 9.5 percent jump from the ■ Shortly after his election as House prior budget and a 20 percent increase in two speaker, Joe Hackney (D-Orange) years. The budget elicited confl icting reactions addresses the General Assembly. He from members of each party. Gov. Easley declares, “I am no fl ash in the pan. I know praised the budget for creating educational a thing or two about this institution opportunities for “generations to come.” and its customs and procedures.” In Conversely, Senate Minority Leader Phil Berger particular, Hackney promises to reform (R-Rockingham) criticized the spending plan the budget process by adhering to l CIVITAS INSTITUTE l 2007 session 262 l CIVITAS for neglecting basic infrastructure needs. longstanding legislative rules regarding taxes for North Carolina’s lowest earners. the last-minute insertion of substantive Critics, however, point out that the gov- provisions into the budget. Says ernor’s proposal would not help as many Hackney: “I will work to allow ample people as he claims. A report by the N.C. time for the study of legislation before Justice Center fi nds that the plan would we vote. I will try to keep substantive “impact an estimated maximum 649,000 unrelated legislation out of the taxpayers as opposed to his claim of 1.17 appropriations bill.” million.” ■ The Governor also asks for aggressive funding for some of his favorite projects. These include: a $56 million expansion of More at Four; $50 million for a new “EARN” college scholarship program for students from poorer families; and a $20 million expansion of Learn and Earn. ■ State Treasurer Richard Moore releases the 2007 Debt Aff ordability Study. The report urges the state to limit new tax-supported debt to $384 million annually. The study also recommends that North Carolina reduce its reliance on the use of special indebtedness (i.e., certifi cates of participation) and instead “balance its approach and consider the authorization of General Obligation debt as the preferred, if no longer exclusive, February

method to fi nance capital 2007 session l CIVITAS INSTITUTE l 263 ■ Gov. Easley releases his recommended projects.” Since FY2001-02, the General biennial budget. His proposed budget Assembly has relied exclusively on COPs includes $20.1 billion in spending, up 6.4 type debt, and has authorized more percent from last year. Easley proposes than $2.3 billion in debt without voter extending the remaining portion of the approval. “temporary” sales and income taxes, in ■ Former House Speaker Jim Black pleads spite of last year’s budget which called guilty to three felony counts: one of for their complete sunset by July 1, 2007 bribery, one of obstructing justice, and and taxable year beginning January 1, one of corruptly accepting things of 2008, respectively. Easley also proposes value. Black’s crimes include accepting what is billed as a tax cut for the state’s $29,000 for pushing legislation poorest citizens. His plan would favorable to chiropractors and extending eliminate or cut in half state income a $50,000 bribe to former Rep. Michael Decker (R/D-Forsyth) to switch party Rep. Thomas Wright (D – New Hanover), affi liation from Republican to Democrat a top lieutenant to Jim Black, for failing so that Black could serve as co-speaker to report more than $100,000 worth of of the House during the 2003-2004 campaign contributions since 1992. session. Black is sentenced to fi ve years State law makes it a misdemeanor to and three months in prison and fi ned intentionally fail to report a campaign $1.1 million. “It’s corruption so severe, contribution and a felony (perjury) so egregious, that the people not only to knowingly submit a false campaign lose faith in politicians but lose faith in report. democracy itself,” declares U.S. Attorney George Holding about Black’s actions. April ■ Gov. Easley urges legislators to support March a $3 million tax credit for adoption as a ■ The state lottery completes its fi rst full means of refocusing the public debate year of operation, and sales are found over abortion to include positive to be signifi cantly below forecasts. Sales alternatives and choices. The tax credit total roughly $900 million, compared would off set normal costs associated to the $1.2 billion predicted by Easley’s with the adoption process and would be offi ce. By the end of the fi scal year, set at $5,480 – or 50 percent of the lottery revenue transfers will fall roughly federal credit amount. Easley proposed $75 million short of the $425 million the same credit last year, but it did not projected by Gov. Easley’s offi ce. Industry pass. analysts claim the shortfall is due largely ■ After quick passage in the House and to economic factors, in spite of evidence the Senate, Gov. Easley signs into law a of strong lottery sales in neighboring bill abolishing the three-year-old N.C. states. The shortfall prompts Easley to Commission on State Property. The consider increasing the share of sales Commission, the brainchild of disgraced proceeds going to prizes in order to former House Speaker Jim Black, was stimulate ticket purchases. created to initiate sales of state property ■ The state board of elections investigates deemed to be no longer needed. In its three year history, not one such sale was facilitated by the Commission.

May ■ The House approves its FY 2007-09 “I guess I’d like to say that biennial budget early in the month, with the Senate passing its own budget a few the people in the west are weeks later. The diff erences between the most intelligent. They’ve the two plans foreshadow a lengthy negotiation process. In terms of fi gured out that you have spending, the House budget is largest, at a better chance of getting $20.28 billion. Proposals by the Governor struck by lightning than to and Senate are almost the same amount, at $20.06 billion and $20.05 billion, win a big lottery prize.” respectively. Highlights from the three l CIVITAS INSTITUTE l 2007 session 264 l CIVITAS Senator Martin Nesbitt Jr. (D-Buncombe) plans include: Certifi cates of participation good, tasty product that everyone can (COPs), a form of bond debt not enjoy,” boasts Rep. Mickey Michaux authorized by voters: The Senate (D-Durham). plan calls for $1.2 billion over four ■ House Republicans are less pleased years. The House plan requests $449 with the budget, which is said to be a million over two years. Meanwhile, continuation of a “Democrat-led $209 million over six years is recom- spending binge that began in 2003.” mended by the Governor. Comments House Minority Leader Paul “Temporary” taxes and gas tax: Stam (R-Wake) about the budget, Only the Senate proposes allowing “Structurally, we cannot keep doing this the “temporary” sales and income tax year after year after year – spending increases to expire as approved in greater and greater percentages way last year’s budget. The Senate above population growth and infl ation, budget is the only plan that would and not keeping our word to the citizens permanently cap the gas tax. of this state when we create temporary taxes.” Pay raises for teachers and state ■ employees: All three budget plans In the Senate, for the fi rst time since include an average teacher pay raise 2000, Republicans join with Democrats of 5 percent. The House plan (at 4.25 to approve the budget proposal. “I fi nd percent) off ers up the most myself in the unusual position of generous increase for state speaking in favor of this budget,” employees; the Senate and Governor confesses Senate Minority Leader Phil propose raises of 4.0 percent and Berger (R – Rockingham). “There’s a big 2.5 percent, respectively. diff erence in this budget as far as I’m concerned, and I’m going to urge people Medicaid burden: The House plan to vote for it.” Gov. Easley and State would appropriate $100 million to Treasurer Richard Moore criticize the county governments to help Senate budget for proposing $1.2 billion alleviate their growing Medicaid in new COPs (certifi cates of participation) burden. By contrast, the Senate debt. proposal merely includes a declaration of intent to develop a plan to permanently end the policy June of counties paying a share of ■ The House refuses to concur (by a vote 2007 session l CIVITAS INSTITUTE l 265 Medicaid costs. The Governor’s of 68 to 47 ) with the Senate’s proposed proposal makes no mention of budget, setting in motion negotiations Medicaid relief for counties. that will continue past July 1, 2007 – the ■ The House budget is approved by a vote beginning of the new fi scal year. House of 67 to 50, largely along party lines. Republicans follow the lead of their Democrats voice support for the colleagues in the Senate and vote for budget because of the generous pay the Senate budget, but are heavily raises off ered to teachers and state outnumbered by House Democrats. employees, the $100 million provided ■ Negotiations remain tense throughout for county Medicaid relief, and the the month despite news that tax revenue creation of a state level earned income projections have been revised upward tax credit (EITC). “We came up with a by another $256 million. The total budget surplus swells to $1.4 billion. the most controversial part of the “swap” Holding up a fi nal agreement are is a plan by House Democrats to permit disputes over the “temporary” taxes and localities to increase the land transfer tax county Medicaid relief. The Senate would as well as the local sales tax. In response like to see both “temporary” taxes expire to the proposed increase, the N.C. while the House wants to extend both Realtors Association launches a taxes. well-funded publicity campaign against ■ There is also heated debate over how the land transfer tax. to fi nance a proposal in which the state ■ With the fi scal year coming to an end, will take over the county share of state the General Assembly passes a stop gap Medicaid costs. Ultimately, budget spending bill that keeps spending and writers propose a plan that was not taxes at their current levels for another included in either the original House or month. Senate budgets. The new plan includes ■ Summing up the often frustrating, a “swap” in which the state picks up the month-long negotiation process, Sen. counties’ Medicaid tab in return for David Hoyle (D-Gaston) states: “We keeping a portion of local sales tax haven’t reached an agreement.” revenues. Local governments would then be given authority to hold a vote on creating a new revenue source to replace the revenues sent to the state. Perhaps

2007 Significant Tax Changes (Budget Bill Unless Noted)

Make permanent the remaining ¼ cent of the “temporary” sales tax rate Close corporate tax loophole by implementing “combined reporting” method for business tax fi ling Increase the research and development tax credit rate (calculated as a percentage of qualifi ed R&D expenses): ■ increase small business rate from 3 percent to 3.25 percent; ■ increase low-tier research (applies to companies in lower-income counties) credit from 3 percent to 3.25 percent; ■ increase university research credit from 15 percent to 20 percent; ■ apply “other research” credits according to the dollar amount invested Provide $2.3 million tax credit for constructing renewable fuel facilities Create adoption tax credit of $5,480 Off er long-term care insurance tax credit, capped at $350 Cap the variable wholesale component of the motor fuels tax so that the total gas tax cannot exceed 29.9 cents per gallon until June 30, 2009 Expand the sales and use tax refund for certain aircraft manufacturers

l CIVITAS INSTITUTE l 2007 session 266 l CIVITAS Establish a state level Earned Income Tax Credit (EITC) to be set at 3.5 percent of the federal credit; estimated cost to taxpayers of $48.3 million in its fi rst year 2007 Other Revenue Sources & Actions

■ Medicaid Swap: The state will assume the county share of Medicaid costs in a plan that is to be phased in over three years. In exchange for their Medicaid burden being lifted, counties will transfer ½ cent of their local sales tax revenues to the state. In return, the state gave counties the option of increasing the local sales tax by ¼ cent or increasing the local transfer tax from 0.2 percent to 0.6 percent.

■ Appropriate $175 million for the Savings Reserve Account

■ Increase court fees in various amounts; anticipated revenue increase nearly $36 million

2007 Other Significant Changes July ■ Budget negotiations in the conference COMPENSATION committee are held up primarily by ■ 5 percent average pay increase for teachers, disagreements over the local option judges, UNC faculty and community college transfer tax. Committee members from instructors the House want to include a transfer tax ■ 4 percent pay increase for state employees increase as part of the Medicaid “swap” CAPITAL plan, but members from the Senate ■ $554 million in certificates of participation (COPs) are strongly opposed to the tax. House for capital projects, mostly for higher education members force the issue by threaten- OTHER ing to reject the Senate’s plan to boost fi nancing for the existing University ■ Require the state’s power companies to increase the amount of energy created from renewable Cancer Research Fund by $50 million sources. The legislation will increase rates by annually beginning in FY 2009-10. In the roughly $3.6 billion over the next 10 years [S.L. end, the Senate capitulates and an 2007-397] agreement is reached that includes both ■ Allocate $6.3 million for the N.C. Museum of the transfer tax increase, as well as History Chronology Exhibit Phase appropriations for cancer research. ■ The fi nal budget passes both chambers, 2007 session l CIVITAS INSTITUTE l 267 largely along party lines. Democrats hail the budget as a courageous document that prepares the state for a wave of new residents. “This budget really stands out,” claims Senate Appropriations Co-Chair Kay Hagan (D-Guilford). “I think future generations will look at this and say we did great things for the future.” Republicans respond that this is simply not true because the budget neglects basic needs in infrastructure and roads. ■ Republican lawmakers also express real estate transfer tax, or an concern over the number of provisions additional ¼ cent added to the local – in particular, the Medicaid Swap – sales tax rate. The swap includes a included in the fi nal budget that did not “hold harmless” provision that will fi rst appear in any of the previous bud- use state funds to reimburse those get proposals (a violation of General As- counties that lose money under sembly rules, cf. House Rule 44(b)). “We the new plan. The anticipated said at the start of the session we’re not Medicaid burden for counties alone going to do that anymore,” complains was expected to reach $571 million Rep. John Blust (R-Guilford). “Well, we’re for fi scal year ending 2008. still in the same session and we’re doing it.” Medicaid Swap and the Sales Tax: ■ As July comes to a close, Gov. Easley The FY 2007-08 budget made the remaining signs the FY 2007-09 biennial budget ¼ cent “temporary” sales tax permanent. into law. The budget spends $20.7 billion The changes made the state sales tax rate in FY 2007-08. The amount is $1.8 billion 4.25 cents and the local sales tax rate 2.5 more than last year, an increase of 9.5 cents, for a total of 6.75 cents. Under the percent. The new budget is also $350 mil- Medicaid Swap, however, ½ cent of the local lion more than the most expensive bud- sales tax will be shifted to the state portion get plan originally proposed by either of the tax under a phased-in plan. The result chamber or by Gov. Easley. will be that the overall rate will continue to ■ Highlights of the FY2007-09 budget be 6.75 cents, but the state’s share will be include: 4.75 cents and the local share will be 2 cents. Furthermore, those counties that choose to “Temporary” taxes: The 0.25 do so are authorized to place a ¼ cent local percentage point temporary increase sales increase on their ballots in the future. of the highest marginal income tax rate is fi nally allowed to return to the pre-2001 rate of 7.75 percent. The COPs debt: The budget approves remaining ¼ cent “temporary” sales $669 million in certifi cates of tax is made permanent. participation (COPs) for capital projects, mostly in higher education. Medicaid swap for counties: The The COPs authorization is the largest state will assume the county share in state history and represents over of Medicaid costs in a plan to be half a billion dollars in new debt not phased in over the next three years. subject to voter approval. Counties will no longer pay any Medicaid costs, and the state will State Earned Income Tax Credit: assume all nonfederal payments. Beginning in FY2008-09, North In exchange, counties will transfer ½ Carolina will establish an EITC set cent of their 2 ½ cent sales tax at 3.5 percent of the federal credit revenues to the state. Counties will rate. The program will cost taxpayers then have the option of replacing $48.3 million and result in an average this lost revenue with new local op- payout of less than $5 per month per tion taxes (subject to voter approval). benefi ciary. The tax options include an increase from 0.2 percent to 0.6 percent in the l CIVITAS INSTITUTE l 2007 session 268 l CIVITAS Pay raises for teachers and state saying it took “more courage than I have employees: The budget provides ever seen by any Legislature since I’ve for an average pay raise of 5 percent been in public offi ce. This budget is for teachers, judges, UNC faculty and absolutely magnifi cent.” As Easley community college instructors. State explains, the fi nal budget not only employees will receive a 4 percent increases spending for his favorite pay increase. educational programs, but also includes Learn and Earn: Governor Easley’s new healthcare (NC Kids Care) and venture will expand by $28 million environmental (e.g., Land for Tomorrow) over the next two years. Funding will initiatives. go to both the creation of new Learn ■ Republicans express concern that while and Earn schools as well as a new the new budget increases spending by online program. 9.5 percent over last year and 20 percent over two years, very little is done to keep NC Kids Care: The budget creates a up with growing school construction new government-subsidized health and transportation needs. Senate insurance plan that could expand Minority Leader Phil Berger (R-Rocking- government-run health care ham) comments, “Twenty percent in two programs to roughly half of all years, and what do we have to show families in North Carolina. for it? We have an education system Specifi cally, beginning in FY2008-09, that’s failing students. We have a the budget grants $7 million for “a transportation system that’s crumbling.” program of comprehensive health ■ care benefi ts” for children in families The General Assembly passes an “Act to with annual incomes between 200 Create the Job Maintenance and Capital percent ($41,300 for a family of four) Development Fund” (HB 1761). and 300 percent ($61,950 for a family Sponsored by Representative Rick of four) of the federal poverty level Glazier (D-Cumberland), the legislation is (FPL). to be used to allocate $40 million over 10 years to the Fayetteville Goodyear factory in return for Goodyear’s promise “Democrats annually make big to invest $200 million to upgrade the plant. ■ promises about our education Gov. Easley signs the “Promote Renew- 2007 session l CIVITAS INSTITUTE l 269 system and their plans for our able Energy” bill into law (S.L. 2007-397) on August 20, 2007. The bill requires the public schools, yet, year after state’s power companies to increase the year, that system fails to show any amount of energy created from comparative improvement.” renewable sources. Qualifying sources include solar, wind, hydroelectric, tidal –Senate Minority Leader Phil Berger energy and agricultural waste. (R-Rockingham) Legislators cap the increased utility costs the program will create at $10 per year August per residential customer, going up to $30 per year by 2015. The cap, however, ■ The newly approved budget receives does not apply to increased costs owing mixed reviews – largely along partisan to new plant construction. According to lines. Gov. Easley praises the budget, a report by the North Carolina Utilities off ensive is that these multibillion dollar Commission, the legislation will increase companies can cut jobs and still qualify. rates by roughly $3.6 billion over the It’s a huge slap in the face to businesses next 10 years. across the state who don’t qualify.”

September October ■ Questions about economic incentives ■ Tax receipts for the fi rst quarter of FY come to the forefront, as the General 2007-08 come in roughly $75 million Assembly goes into special session to ahead of projections. Yet budget experts, respond to Gov. Easley’s veto of HB such as Fiscal Research Economist Barry 1761. As indicated above, the legislation Boardman, downplay expectations for allocates $40 million to the Fayetteville a budget surplus: “It’s too early to get Goodyear factory in return for excited one way or the other. If we had Goodyear’s promise to invest $200 been down, I’d be saying the same thing. million to upgrade the plant. Easley’s The fi rst quarter, really the fi rst half, tells main criticism is that the bill sets a you very little about where you’re going minimum employment requirement to end up at the end of the year.” of 2,000 workers, far below the plant’s current employment level of 2,750. In November eff ect, Goodyear could cut 750 jobs and ■ A more detailed analysis of tax still receive the subsidy. Easley says he collections during the fi rst quarter of the cannot support a bill that would set such fi scal year reveals that corporate income a precedent: “Never in the history of the tax collections have slowed signifi cantly. state has anyone given a company up to Business tax revenues grew at only $40 million and allowed them to lay off 0.5 percent over the previous quarter, hundreds of workers.” much slower than the 20 percent ■ The two-day special session comes to a annual growth rate experienced in 2007. close on September 11. The result is not The downturn foreshadows a faltering an override of the Governor’s veto, but economy, caused in no small part by the the approval of a new $60 million housing sector slowdown. incentives bill (see sidebar). ■ Voters in 16 counties soundly reject ■ Critics from all points on the political ballot proposals to create a local transfer spectrum lambaste the new legislation. tax. As part of the Medicaid swap, several Rep. Jennifer Weiss (D-Wake) chides counties propose a tax of .04 percent of her fellow legislators for passing the value of property to be assessed on “compromise” legislation that increased the seller at the time any property is sold the overall incentives package by 50 (in addition to the .02 percent statewide percent. Warns Weiss, “We better hurry transfer tax currently in place). In county up and wrap things up before we get to after county (16 in all) voters oppose $80 million.” For his part, Republican the increase, with the average margin of candidate for governor and former N.C. defeat being three to one. (In Graham Chief Justice Bob Orr questions the County 97 percent voted against the fairness of the deal: “We’re not talking tax.) Those localities opting instead for about a company moving into the state a ¼ cent sales tax increase do not fare like Dell did. This takes it to an entirely much better. Voters in 11 of 16 counties l CIVITAS INSTITUTE l 2007 session 270 l CIVITAS new level and what I think is particularly reject the tax hike. December ■ An “Economic Development Inventory” (EDI) study produced by the Fiscal Research Division reports that the state has spent an estimated $3.7 billion in the past three years on economic incentives to attract and retain jobs. The study was produced at the request of a legislative panel charged with evaluating the state’s economic incentives program. Ninety percent of the inventory, which reached $1.2 billion for FY 2007-08, consists of targeted tax breaks. Committee cochairman Senator David 2007 HEALTH & HUMAN SERVICES BUDGET Hoyle (D-Gaston) is among those who Total Appropriations $4.63 billion are skeptical that the tax incentives are Major Items: really helping North Carolina. “That’s a Medical Assistance (Medicaid): $2.92 billion lot of money,” observes Hoyle. “Are we NC Kids Care Report: $0.368 million getting $1.2 billion of benefi t from it? I Mental Health/D.D./Subst. Abuse: $713 million probably doubt it.” Supporters of the tax Child Development: $307 million breaks counter that they are necessary, Social Services: $217 million even for ineffi cient industries. “I’m Public Health: $192 million positive it’s in our best interest to keep Office of the Secretary $71 million XYZ company with 1,000 jobs, even if NC Health Choice $59 million they’re making buggy whips,” declares Rep. Pryor Gibson (D-Anson). The expected to slow economic growth, inventory does not include a cost-benefi t with job growth already off the analysis and also does not account for previous year’s pace. In the Triangle area, 2007 session l CIVITAS INSTITUTE l 271 local government spending on job growth in October 2007 is up just incentives. 2.3 percent, compared to a 4.2 percent ■ The subprime loan foreclosure crisis growth rate in 2006. Any economic causes substantial losses for North slowdown will inevitably aff ect tax Carolina-based banking giants. Bank of revenues, and thus the amount of money America expects a fourth quarter available for the 2008 budget. investment value loss of $3 billion, while Wachovia faces a loss of $1.1 billion. Compared to other states, such as Ohio, Michigan and Indiana, North Carolina’s foreclosure rate is relatively low, and below the national average. But the bursting of the housing bubble is 2007 Special Session: Economic Incentives

Gov. Easley’s veto of a bill (HB 1761) extending $40 million in economic incentives to Goodyear Tire & Rubber Company brought lawmakers back to Raleigh for a special session that lasted from Sept. 9 to Sept.11, 2007. According to North Carolina law, when a veto occurs after the General Assembly has adjourned, the Governor is required to reconvene the General Assembly within 10 days of the veto, or the bill becomes law. Also known as the “Goodyear bill,” HB 1761 would have granted $40 million in taxpayer funds over the next 10 years to a Goodyear plant in Fayetteville in return for Goodyear’s commitment to invest at least $200 million to upgrade their tire-making facility. Typical in such incentive agreements are standards for job creation and wage rates. The only employment criteria contained in the Goodyear bill was a requirement that the plant maintain at least 2,000 workers. Because the Goodyear plant currently employed 2,750 workers, 750 jobs could have been cut and Goodyear would still have received the incentives package. Gov. Easley’s veto message explained that he was vetoing HB 1761 “because it extended up to $40 million in cash to an existing company in one county with little or no regard for how much the company actually pays in state and local taxes, what wages it pays now or in the future, or whether it lays off nearly 25 percent of its workforce.” Other critics assailed the bill as creating a dangerous precedent by awarding incentives to a fi rm already operating within the state, as opposed to an out-of-state company considering a move to North Carolina.

Rather than override the Governor’s veto, legislators passed a new bill, which Gov. Easley subsequently signed into law (S.L. 2007-552). Details of the new law include: ■ Creation of The Job Maintenance and Capital Development (JMCD) Fund as a “restricted reserve” in the Department of Commerce. The fund is to be fi nanced via transfers of taxpayer dollars from the General Fund. As much as $60 million over the next 10 years will be allocated to the JMCD Fund. Most of that money will likely go to Goodyear and Bridgestone Firestone, with as many as three more companies eligible for the incentives. According to an analysis in the Charlotte Observer, the incentives package will likely extend $2.5 million a year for 10 years to Goodyear, with a smaller Bridgestone Firestone plant in Wilson County getting up to $2.2 million a year. ■ In order to receive the grant money, eligible companies must have a minimum of 2,000 employees and invest a minimum of $200 million in plant upgrades during a six-year period. The six-year time period is retroactive so that it can include the Wilson Bridgestone Firestone plant, which began investing in plant

upgrades in 2005. ■ The new bill features stricter employment and salary eligibility guidelines. Specifi cally, companies must provide health benefi ts, as well as pay average wages that are 40 percent above the county average. ■ If a company cuts its worker rolls, grants will be proportionately reduced. If an eligible company’s work force falls below 80 percent, it receives no payments until it increases employment above the 80 percent threshold. ■ The economic incentives will entail the refund of 95 percent of sales tax on machinery, building materials and energy. Companies will also be reimbursed for a portion of their state income tax. Economic incentives will also cover all worker training costs and state permitting fees. The funding mechanism, however, includes a caveat that says that the payment calculation “is not necessarily limited to these factors.” Reactions to the new legislation were mixed. Gov. Easley hailed the bill as “a fantastic statement by the General Assembly that North Carolina is focused on the future and determined that our citizens will compete and win in the new world economy.” Added Easley, “This legislation will create cutting edge economic competitiveness in North Carolina, unlike any state in America.” A bipartisan coalition of legislators, however, criticized the measure as fi scally irresponsible. Rep. Paul Luebke (D-Durham) cautioned that the new incentives plan was

l CIVITAS INSTITUTE l 2007 special session 272 l CIVITAS “unprecedented in terms of public policy posture. We have not thought this through.” House Minority Leader Paul Stam (R-Wake) also voted against the legislation. “Tomorrow morning every CEO in North Carolina is going to wake up and decide to hire lobbyists instead of engineers,” declared Stam. “Forget about selling tires. Hire lobbyists!” DID YOU KNOW? Sixty-nine percent of voters 2007 EDUCATION FUNDING say they would prefer smaller ENROLLMENT CHANGES government with fewer ° Public Schools: 19,136 (1.4%) increase ° Community colleges: 20,055 (2.5%) increase services, compared to fi fteen ° UNC: 6,678 (3.3%) increase percent who claim they would TUITION & FEE INCREASES ° Average increase of 6.3% for in-state and 3% prefer bigger government that for out-of-state UNC students provides more services with ° Increase of 6.2% for in-state and 6.3% for out-of-state Community College Students higher taxes. OTHER EDUCATION CHANGES Source: July 2007 Civitas ° Authorized $482 million in Certificates of DecisionMaker Poll Participation to finance UNC capital projects. The new debt is not subject to voter approval ° $27.6 million devoted to new EARN scholarship program, which provides tuition subsidies for families earning up to 200 percent of federal poverty limit ($41,300 for a family of four). EARN program slated to expand to $100 million next year ° $7 million appropriated to dropout prevention grants aimed at curbing the high school dropout rate ° $70 million for ABC bonuses earned during the 2006-07 school year ° Spends $37.5 million to maintain a student/ teacher ratio of 18:1 for grades K-3 ° $56 million expansion of More at Four to accommodate 10,000 additional children and finance a slight increase in per enrollee costs 2007 session l CIVITAS INSTITUTE l 273 General Assembly: 2008 session House Dems: 68 House Reps: 52 Senate Dems: 31 Senate Reps: 19 2008-2009 BIENNIUM FY 2008-09: July 1, 2008, to June 30, 2009 Governor: Mike Easley (D) he beginning of 2008 saw an economy in Tdecline. Fortunately for lawmakers, however, The 2008 Short Session: revenue stayed slightly above projections as Budget Bill HB 2436/S.L. 2008-107 fi scal year 2007-08 wound down – netting a mild revenue surplus. Passed House: June 5, 2008 Passed Senate: June 19, 2008 In March, the North Carolina House of Conference Version Ratified: July 8, 2008 Representatives voted nearly unanimous to Signed by Governor: July 16, 2008 expel Rep. Thomas Wright (D – New Hanover) for campaign fi nancing violations and illegal use of government grant money. Wright became the fi nancial sector rapidly slowed the economy to fi rst North Carolina General Assembly member a possible recession. Fall tax revenue reports expelled since 1880. Although he maintains his revealed that North Carolina faced a budget innocence, Wright was sentenced to prison on shortfall in the 2008-09 fi scal year. Revenue was counts of felony and fraud in April. falling well short of projections, and legislative economists estimated the budget hole could The fi scal year 2008-09 budget approved by law- grow as large as $1.6 billion. Making matters makers included an unprecedented amount of worse, it is discovered that the State Health Plan authorized debt. Limited by revenue estimates will have insuffi cient funds to pay its benefi ts – a projecting a very minor increase in funds shortfall estimated at close to $300 million. available to spend, lawmakers decided to borrow $857 million in order to fi nance an The looming budget crisis prompted Gov. Easley aggressive slate of government construction (D) in September to order most state agencies projects. New buildings for UNC campuses and to cut spending by two percent. By November, new jail space dominated the debt-fi nanced Easley’s Offi ce of State Budget and Management construction binge. Despite Civitas Institute poll (OSBM) unveiled the state’s plan detailing how it results showing 77 percent of voters believe the intended to fi ll the budget gap. The OSBM plan General Assembly should not be allowed to issue holds back funds from every major state agency; debt without voter approval, not one penny of with the cuts ranging from 1.5 percent to 5 per- the $857 million in authorized debt will be cent (K-12 cuts are deemed “voluntary”). The plan subject to a vote by the public. also dips into the state’s Rainy Day fund, and taps various reserves to fi ll the projected budget hole. To balance the budget, lawmakers also raided approximately $60 million from several funds The oncoming crisis led some observers to note established for various purposes. Monies were the similarities between Easley’s fi rst and last taken from funds such as the Disaster Relief years in offi ce. In both cases, a budget shortfall Reserve, the Tobacco Trust Fund, and the Health was preceded by rapid increases in spending & Wellness Trust Fund. during robust economic times. When the economy –and thus revenue – dried up, the The new fi scal year quickly uncovered troubling state was simply unable to meet its spending budgetary news. The meltdown in the national obligations. (SEE CHART) l CIVITAS INSTITUTE l 2008 session 274 l CIVITAS DID YOU KNOW? Seventy-seven percent of

North Carolina voters believe ■ North Carolina’s Education Lottery ticket that state government should sales measure $18 million above last year’s sales at this time. The news comes not be allowed to issue new debt a year after the General Assembly voted to allow the lottery to off er more without voter approval. winning payouts and prizes. A new “$100 Source: May 2008 Civitas DecisionMaker Poll Million Cash Spectacular” scratch-off game that began in January is at least partially credited with the boost in sales. Payouts for the new game are estimated to be 73 percent of ticket sales, compared to an average 53 percent payout in 2007.

March ■ The N.C. Open Government Coalition sponsors a workshop to release a new booklet entitled “Guide to Open Government and Public Records.” The guide was created by the N.C. Press Association and Attorney General Roy Cooper. The guide’s release comes on the heels of a controversy surrounding Governor Mike Easley (D) in which Easley is accused of disposing of public records and enacting a policy allowing January state employees to delete e-mail ■ Despite a slowing economy, North messages – also considered to be public Carolina’s state revenue for the fi rst half records. The keynote speaker for the of fi scal year 2008 is $125 million above event is Debbie Crane, former projections. Conservative revenue spokeswoman for the state Department estimates crafted by legislative of Health and Human Services. Crane economists last year are to be credited

was fi red at Easley’s request on March 4. 2008 session l CIVITAS INSTITUTE l 275 for the surplus, as revenue growth is Crane claims that her job had essentially slower than normal but still outpacing evolved into defending the Easley projections. administration from negative media attention. “I don’t think the taxpayers February should be paying spin doctors,” said ■ Healthy growth of withholding tax Crane. revenue indicates that North Carolina’s ■ By a vote of 109 to 5, North Carolina’s economy is thus far faring better than state House votes to expel Rep. Thomas most states during a nationwide Wright (D-New Hanover). Wright faces economic slowdown. “We think North allegations that he failed to report Carolina will fare better than other $180,000 in campaign contributions and states,” says Fiscal Research Economist used charitable grants for personal use. Barry Boardman. Wright is the fi rst North Carolina General Assembly member to be expelled since ■ Analysis of Federal Highway 1880. Wright continues to adamantly Administration fi gures reveals that declare his innocence. North Carolina receives less from the ■ National economic forecaster Moody’s Federal Highway Trust Fund than what Economy.com predicts that North it sends in. Since the creation of the Carolina will most likely not fall into a federal fund in 1956, North Carolina has recession. North Carolina General received only 90 cents in return for every Assembly’s chief economist largely dollar sent in. Each state sends revenue agrees. “I’d put the chances (of to the fund based on federal gas and use recession) at one in three,” said David taxes as well as various vehicle-related Crotts. A recession is traditionally fees. North Carolina has the third worst defi ned as two consecutive quarters of return in the nation, better than only negative economic growth. North Texas and Indiana. State Senator David Carolina’s economy is acknowledged Hoyle (D-Gaston) questions the to be slowing, in part evidenced by the necessity of the federal fund. “Why slowdown in sales tax collections does it (the revenue) have to go to compared to last year. Washington and be laundered?” he asked. ■ Skybus, the discount airline company “Let me make this clear: off ered up to $3.98 million in government incentives to locate in I’m innocent of the charges Piedmont Triad International Airport less before me.” than six months ago, closes up shop and considers declaring bankruptcy. –Thomas Wright (D-New Hanover) Fortunately, none of the promised moments before House members voted handouts have been realized because overwhelmingly to expel him from the they were based on performance and General Assembly. job creation that never materialized. Overlooked by most observers, however, April is the deadweight loss to the economy ■ Thomas Wright is found guilty of three as millions of dollars worth of felony counts of fraud, and sentenced to resources were squandered in pursuit 70 to 95 months in prison. Wright and his of government handouts. attorney, Doug Harris, maintain Wright’s ■ Disappointing tax collections in March innocence. Wright contends that the shrink the expected budget surplus charges were politically motivated for the current fi scal year. As recently while Harris declared that it was unjust as January, collections looked to be on to hold the trial just three weeks after pace for a $125 million surplus. The latest Wright was expelled from the General fi gures force lawmakers to revise down Assembly. Harris insists the verdict will their expectations for a surplus of beoverturned as they plan on appealing approximately $15 to $20 million. the decision. “This verdict will be set aside because it’s awful, awful justice to May try somebody in this atmosphere,” Harris ■ said. In spite of a signifi cant spike in lottery ticket sales, the expected allocation to l CIVITAS INSTITUTE l 2008 session 276 l CIVITAS education appears to be falling short of budget. Also under the Senate budget, expectations. The North Carolina $68.6 million more would go to the UNC Education Lottery Commission is system, a diff erence largely comprised projecting sales of $1.27 billion for the of the Senate opting not to impose a current fi scal year, which would 1 percent across-the-board spending translate into $358 million devoted to decrease proposed by the House plan. education programs. The amount still Another signifi cant diff erence in plans is will be $18 million less than what Gov. that the Senate would cease enrollment Easley’s recently released budget in the State Children’s Health Insurance proposal assumes. Program as of Sept. 1. The House proposal expands the program size by June 10,700 enrollees and $10.4 million. In terms of teacher and state employee ■ House budget makers unveil their $21.35 pay, the Senate and House plans are in billion FY 2008-09 budget proposal. If full agreement. “We all wanted to do approved, the plan would represent more for teachers, but we all don’t want a biennial spending increase of 13.2 to raise taxes,” said Sen. Linda Garrou, percent, and a 47 percent increase since D-Forsyth, co-chairwoman of the Senate 2001-02. Included in the House’s plan is Appropriations Committee. the authorization of $560 million in non voter-approved public debt to fi nance ■ Amid the beginning of budget 14 capital building projects – mostly negotiations between the House and on UNC campuses. To adhere to the Senate plans, Senate Republicans constitutional requirement to balance release a list of all Senate bills fi led in the the budget, the House plan raids nine current legislative session that would trust funds for more than $60 million appropriate money for any reason. The to fi nance new General Fund report reveals that Senate Democrats spending. Included is $21 million from sponsored $1.9 billion worth of the Disaster Relief Reserve, and $5 spending bills, compared to only $80.7 million each from the Tobacco Trust Fund million in Republican-sponsored bills. and Health & Wellness Trust Fund. Under The report includes all appropriation bills the House budget, teachers would and doesn’t attempt to narrow focus to receive an average 3 percent pay raise, spending items commonly referred to as “earmarks.” Republicans downplay any

while state employees would receive the 2008 session l CIVITAS INSTITUTE l 277 greater of a 2.75 percent raise or a $1,100 discrepancy, however. House Minority bump. House Speaker Joe Hackney Leader Paul “Skip” Stam (R – Wake) says (D – Orange) describes the House “the intent is the same” regardless of any budget as “a sound, good government, offi cial classifi cation of earmarks. “I think fi scal stability budget.” (the Senate fi gures) showed that the Democrats are only constrained by the ■ Two weeks later, the Senate releases lack of money,” added Stam. its budget plan. The Senate proposal spends roughly $15.5 million more than ■ The annual transfer from the Highway the House, and includes a few notable Trust Fund to the General Fund is slated diff erences. The Senate plan would to be reduced in both House and Senate devote $41 million to Easley’s More at budget plans. Both plans would reduce Four program, signifi cantly more than the annual transfer by $25 million. The the $23 million off ered up by the House annual $172 million transfer is to be reduced by $25 million beginning FY K-12 teachers. North Carolina’s SCHIP 2008-09. The money would instead go program, N.C. Kids Care, will be delayed to the N.C. Turnpike Authority to assist in until July 2009 pending the federal the fi nancing of Raleigh-area toll roads. government’s re-authorization of the House and Senate proposals diff er, how- SCHIP program, saving $7 million. N.C. ever, as to the future of the transfer. The Health Choice, another government House plan would reduce the transfer insurance program for low-income by another $24 million by mid-2010. The children, will expand by $9.4 million. The Senate proposal would reduce the trans- annual transfer from the Highway Trust fer by another $74 million by the middle Fund to the General Fund will be largely of 2011. Both plans divert the funds to phased out. For FY 2009, the transfer the Turnpike Authority to fi nance various would be reduced by $25 million, with toll projects and a bridge over Currituck plans to incrementally decrease the Sound. transfer over the next three years. By FY 2010-11, the transfer will be reduced by July $99 million. Instead the money would be directed toward paying off specifi c ■ The new fi scal year begins without the projects including: the Triangle passage of a new budget bill. In the Expressway, the Monroe Connector/ interim, a temporary authorization bill Bypass, the Mid-Currituck Bridge and the enables state government to continue Garden Parkway. Currently, the transfer functioning. Senate and House is scheduled to be about $172 million. Republican leaders criticize Democrats More at Four will expand by roughly $30 for the manner in which the budget million, bringing total funding to more process is being carried out. “Here we go than $170 million annually. again,” said Senate Republican Leader Phil Berger (R – Rockingham). “This is not ■ Perhaps the most discussed aspect of unlike what has occurred in past years; the newly-approved budget is the $857 Democrats conduct the people’s million in new, non-voter approved debt. business in secret meetings and those Most of the money will go toward capital closed discussions are likely to result in building projects on UNC campuses. The a spending plan that hikes expenditures $857 million fi gure raised eyebrows not by amounts greater than either the only because it is $300 million more than House or Senate plans adopted earlier in the House plan and about $180 this session with potential serious million more than what the Senate adverse fi scal consequences.” proposed, but because it is an unprecedented amount of debt to be ■ The FY 2008-09 Budget Bill (S.L. 2008- issued without voter approval. 107) is signed into law on July 16. The Republican leaders criticized the lack budget spends $21.35 billion, an in- of fi scal restraint, comparing the crease of roughly 3.2 percent over last borrowing to irresponsible credit card year. The budget provides state em- use. Sen.Phil Berger suggested, “It’s like ployees the greater of $1,100 or a 2.75 we have a credit card, and we just percent salary increase. Public school continue to max it out.” Democrats teachers, UNC professors and communi- defended the borrowing largely because ty college instructors would receive aver- it would be cheaper to fi nance the age pay increases of 3 percent. Moreover, construction projects now rather than l CIVITAS INSTITUTE l 2008 session 278 l CIVITAS $90 million will be allocated to the state’s later, and because the projects will ABC’s of Public Education bonuses for “They should not make our constitution irrelevant.” Rep. Bill McGee, R-Forsyth, complaining about non-voter September approved borrowing contained ■ North Carolina’s Department of in the state budget. Transportation announces a hiring freeze. The Department is concerned THE INSIDER, 7/08/08 over a potential shortfall in the Federal Highway Trust Fund, which annually directs millions to North Carolina’s DOT. High gas prices have led to less vehicle “create jobs.” Said Rep. David Hoyle (D usage and a decline in federal gas tax –Gaston), “So for us to put off some of revenue. A bill to transfer $8 billion from these projects that are on the board, I the nation’s General Fund to the Federal think would be fi scally irresponsible. We Highway Trust Fund is under are trying to build the things that will consideration by federal lawmakers. continue to make this state great.” Without the infusion, North Carolina’s ■ The budget-making process receives DOT could stand to lose as much as $300 harsh criticism for its lack of openness million in expected federal funds. from the N.C. Coalition for Lobbying ■ Legislative leaders determine that a and Government Reform. The coalition’s special session to address the State directory, Jane Pinsky, claims “the current Health Plan’s shortfall will not be session highlights the need for greater required. Recent estimates are revised openness and transparency and for upward to project a total loss between making additional improvements in the $264 million and $281 million by the budget process.” end of this fi scal year in June 2009. Jack Walker, the plan’s executive August administrator, says the plan can stay ■ State Health Plan administrators solvent until March by holding back announce that the plan is projected to payments to vendors. At that point, fall into defi cit by December, and grow however, something will need to be as high as $124.7 million by June 2009. done if the plan’s expenses are to be met. The shortfall has occurred because Options being discussed include raising revenue taken in by the plan trail premiums for spouse and dependent benefi ts paid. The unexpected losses led coverage and lessening benefi ts for

to the fi ring of the plan administrator in enrollees. 2008 session l CIVITAS INSTITUTE l 279 July. Lawmakers hope that plan ■ A rapidly declining economy provides administrators can fi nd enough savings tax revenue $70 million behind to keep the plan afl oat until legislators projections for the new fi scal year. The return to Raleigh in January 2009 to news prompts Gov. Easley to mandate address the issue. a 2 percent budget cut for select state ■ In a cost-cutting move, the State Health agencies. The cut will not apply to public Plan announces it is eliminating a education, Medicaid and student wellness plan in order to save roughly fi nancial aid programs. The cuts are $1 million. The wellness plan provided expected to provide roughly $200 incentives for participants to be million in savings. Rep. Mickey Michaux physically active or engage in other (D – Durham), senior co-chairman of health wellness activities. It is estimated the House Appropriations Committee, that only about 10,000 of the plan’s 650,000 members have participated. admits that the aff ected agencies will be aggressive than Easley’s ordered 2 able to absorb the spending reductions percent cuts of just a month ago. Making relatively easily. “Two percent is not matters worse, the projected $300 going to hurt agencies,” said Michaux. million shortfall in the State Health Program is not included in the $1.6 October billion estimate. ■ New estimates by the General ■ Easley declares that his mandatory cuts Assembly’s Fiscal Research Division peg are an eff ort to minimize any budget the revenue shortfall for the current hole incoming Gov. Bev Purdue (D) fi scal year to be $112.8 million below will inherit. “It’s a whole lot easier to be projections. Revenue collections for the Governor Santa than Governor Scrooge fi rst two months, in fact, are below and when the next governor comes in, if collections for the same time period I have held back too much then they’re the previous year. Conversely, budget- able to release that money to the makers had been expecting a 3 agencies and to projects and that would percent increase of revenue, setting be good for them,” said Easley. up a potential budget shortfall of $1 ■ Corporate tax collections for the fi rst billion or more. In light of this news, quarter of the new fi scal year indicate Senate Republican leader Phil Berger North Carolina’s economic woes may be (R – Rockingham) calls on Gov. Easley to worse than fi rst anticipated. Revenue take more extreme action than just his generated from corporate profi ts are 2 percent spending reduction for select down nearly 32 percent from the same agencies. “There is no question that the quarter of the previous year. Legislative Governor’s two percent reduction is too Economist Barry Boardman notes, “We’re little and, unless further steps are taken a little surprised that it’s down as much soon, we will fi nd that it is too late to as it is.” The drop is the sharpest decline avoid either substantial tax increases or since a 64 percent decrease in the fi rst curtailment of government functions,” quarter of fi scal year 2001-02, another said Berger. “Governor Easley should year marred by recession and a budget take further and eff ective action now to shortfall. curtail spending this fi scal year, before it is too late.” December ■ State agencies are doing their best to November cope with the budget cuts mandated by ■ Legislative economists release estimates Gov. Easley’s offi ce last month. “The main projecting the current year budget gap areas are obviously leaving positions to reach as high as $1.6 billion. The N.C. vacant, reducing travel and training costs Offi ce of State Budget and Management and eliminating purchase of equipment,” (OSBM) unveils a plan to “holdback” said Deputy State Budget Director funds from state agencies. The holdbacks Charlie Perusse. range from 1.5 percent to 5 percent of ■ A spokeswoman for the state’s public each agency’s budget. Furthermore, the schools, Vanessa Jeter, notes that she has plan puts pay-as-you-go capital projects “not heard anecdotally” about classroom on hold and dips into the state’s Rainy teacher positions being cut. Meanwhile, Day Fund. The OSBM plan is more Department of Juvenile Justice and l CIVITAS INSTITUTE l 2008 session 280 l CIVITAS Delinquency Prevention spokesman William Lassiter says, “We’re not cutting 2008 HEALTH & HUMAN SERVICES BUDGET the programs we have but we’re Total Appropriations $4.91 billion delaying the start of new ones across the state.” Major Items: Medical Assistance (Medicaid) $3,179 million ■ Gov. Easley’s offi ce issues a memo to Mental Health/D.D./Subst. Abuse: $743 million state department heads and chief Child Development $305 million fi nancial offi cers of all state departments, Social Services $222 million institutions and agencies asking each Public Health $189 million agency to develop a list of options for NC Health Choice $69 million potential spending cuts of 3 percent, 5 percent and 7 percent. Easley declares, “Reducing agency expenditures will be an essential component of providing a balanced budget to Governor-elect Perdue and the General Assembly.” Also included in the memo is advice regarding how state agencies can best formulate their “reduction strategies.” Included in the advice is the obvious notation that “Funding priority should be given to statutorily mandated or ‘core mission’ government services.” No comment is made as how to defi ne “core mission government services” versus non-core mission government services. 2008 session l CIVITAS INSTITUTE l 281 2008 Significant Tax Changes (Budget Bill Unless Noted)

Extend several targeted tax credits, including: the research and development tax credit until 2014, the low income housing credit until 2015, the state ports credit until 2014 and the small business health benefi t credit until 2010 Increase the amount of the state EITC (just created last year but not yet implemented) from 3.5 percent to 5 percent of the federal amount Create a property tax exemption for honorably discharged disabled veterans, exempting $45,000 of the appraised value from taxation Enact a sales tax holiday for energy effi cient appliances for the fi rst weekend of November Close a tax loophole by requiring “real estate investment trusts” to pay a franchise tax Create sales tax exemptions for baked goods sold by artisan bakeries and interior design services “provided in conjunction with the sale of tangible personal property” Allow fi ve percent of the purchase price of a manufactured home community to be deducted from state and federal taxable income Expand the renewable energy tax credit to include funds donated to units of local or state government to enable it to purchase, lease, or construct renewable energy property

2008 Other Revenue Sources & Actions

■ Reduce by $25 million the annual transfer from the Highway Trust Fund to the General Fund. Instead, the $25 million is directed to the Turnpike Authority. ■ Raise the newborn medical screening fee from $14 to $19 ■ Transfer more than $65 million from various funds – such as the Disaster Relief Fund, the Tobacco Trust Fund and the Disproportionate Share Reserve – to the General Fund ■ Increase annual fees from $250 to $2,000 on businesses fi ling to off er securities for sale for a period in excess of one year ■ No money set aside to the Rainy Day Fund l CIVITAS INSTITUTE l 2008 session 282 l CIVITAS 2008 Other Significant Changes

2008 EDUCATION FUNDING COMPENSATION ■ ENROLLMENT CHANGES State employees receive the greater of $1,100 ° Public Schools: 40,004 (2.8%) increase or a 2.75 percent salary increase ° Community Colleges: Data not yet available ■ Public school teachers, along with UNC system ° UNC: Data not yet available professors and community college instructors receive average pay increases of 3 percent TUITION & FEE INCREASES ■ $90 Million for ABC bonuses to public school ° Average increase of 0.2% for in-state and 1.4% teachers for out-of-state UNC students CAPITAL OTHER EDUCATION CHANGES ■ Authorizes $857 million in new debt – none of ° Authorize $523 million in Certificates of which is subject to voter approval Participation (COPs) to finance UNC capital ■ projects. None of the new debt will be subject More than $1.2 billion in future obligations is to voter approval included in the capital budget – the amount deemed necessary to complete the projects ° Provide $90 million for ABC bonuses earned being planned in this year’s budget throughout the 2007-08 school year ° Direct $19.75 million from the Education OTHER Lottery Reserve Fund to maintain a student/ ■ Expand the Job Development Investment Grant teacher ratio of 18:1 for grades K-3 (JDIG) program, a form of corporate welfare, by ° Appropriate an additional $35 million to $10 million annually for the next twelve years accommodate transportation fuel costs. Original fuel estimates when the biennial budget was crafted in 2007 were roughly half of current gas prices ° Devote $15 million to dropout prevention grants – up from $7 million last year ° Realize an unexpected $36.5 million in extra civil penalty revenues, which will be allocated to local education agencies on a per ADM basis via the State Public School Fund 2008 session l CIVITAS INSTITUTE l 283 TIMELINE: 2009-2015 INTRODUCTION

Budget defi cits, tax debates, historic election results and federal stimulus dollars dominated the two legislative sessions of 2009 and 2010.

Budget Woes Both legislative sessions were plagued by sizeable budget gaps due to prior unsustainable spending obligations and a drop in revenue due to the ongoing “great recession.” State agencies were hit with a steady diet of executive orders to reduce spending, as revenues in both fi scal years fell short of budgeted expectations.

Short-Term Fixes for Long-Term Problems To address the state’s budget problems, budget writers chose to rely on short-term revenue streams rather than implementing meaningful spending reform. Approximately $3 billion in federal stimulus funds, along with more than $2 billion in temporary tax revenue was used to plug a sizeable share of the state budget gap.

The systemic, long-term nature of Raleigh’s spending problem is revealed by an examination of historic spending patterns. During the 30 year period leading up to the 2009 – 2010 budget crisis, it is readily apparent that out-of-control state spending is the primary culprit. From budget years 1979 to 2009, state budget spending grew at a pace three times that of population growth, even after adjusting for infl ation.

Historic Election Night November of 2010 will go down in the history books as a landmark shift in political power both nationally and in North Carolina. Riding a wave of anti-Obama sentiment, Republicans made major gains in Congress and gained vital Senate seats as well. In North Carolina, Republicans won majorities in both chambers of the state’s General Assembly for the fi rst time in over a century. 2009-2015 l CIVITAS INSTITUTE l 285 General Assembly: 2009 session House Dems: 68 House Reps: 52 Senate Dems: 31 Senate Reps: 19 2009-10 BIENNIUM FY 2009-10; July 1, 2009 to June 30, 2010 Governor: Bev Perdue (D) s legislators returned to Raleigh in early A2009, they were greeted with news about The 2009 Long Session: ongoing massive budget shortfalls. Due to the Budget Bill SB 202/S.L. 2009-451 enduring national recession, state revenue was Passed Senate: April 9, 2009 still slumping and was worse than expected. The Passed House: June 13, 2009 2008-09 budget year saw revenue fall short of Conference Version Ratified: August 5, 2009 budgeted expenses by almost $2 billion. Signed by Governor: August 7, 2009 Newly-elected Gov. Perdue was forced to impose budget-cutting measures on state agencies in order to make ends meet. Perdue orders the state budget offi ce to hold back even larger Critics warn about the short-sighted nature of percentages of state agencies’ expected using temporary revenue sources to pay for appropriations than fi rst ordered by outgoing ongoing expenses. State budget writers are just Gov. Mike Easley. setting themselves up for a $3 billion structural budget defi cit when they attempt to write the Turning to the 2009-10 fi scal year budget that 2011-12 budget without the temporary lawmakers crafted in the 2009 session, budget revenues, they caution. writers were tasked with closing a gap between expected revenue and a continuation budget The ongoing recession continues to put added estimated as high as $4.6 billion. fi scal pressures on the state throughout 2009. By the end of the year, reports are produced A massive federal stimulus plan provided a showing that revenue for the fi rst half of the partial life line to state budget writers in the form 2009-10 budget year are falling behind of about $1.4 billion in federal funding to be estimates, prompting more budget cutbacks used to backfi ll state General Fund spending – from the Governor’s budget offi ce. Lingering mostly on Medicaid and public education high rates of unemployment put a strain on the state’s unemployment system, as North Carolina To plug much of the rest of the gap, lawmakers fi nds itself borrowing roughly $2 billion from the passed arguably the largest tax increase in state federal government to cover its unemployment history. More than $1 billion in new taxes were claims. introduced – mostly in the form of a one-cent increase in the statewide sales tax. Other tax January increases included a tax “surcharge” on ■ As new Governor Beverly Perdue (D) corporations and individual income tax rates, assumes offi ce, she is confronted taxes on alcohol and tobacco products, and with a growing budget defi cit. New taxes on digital products and on-line retail pur- projections estimate that state revenues chases. The sales tax increase and tax surcharges for the current fi scal year could fall were scheduled to be temporary – set to expire $1.6 billion short of the spending plan after two years, the same time the federal stimu- approved last session. Moreover, the lus funds would run out. projected budget gap for the coming fi scal year set to begin July 1 is nearly $3 l CIVITAS INSTITUTE l 2009 session 286 l CIVITAS DID YOU KNOW? From 1979 to 2009, North Carolina’s state budget more than tripled,

even after adjusting for inflation. 10-member Council of State. The move Moreover, inflation-adjusted spending was initiated by outgoing Gov. Easley late last year, and sold as a way to grew at a rate more than three times provide jobs during the ailing economy. Easley’s offi ce estimates that the the rate of population growth during construction projects will “create” more that time span. than 3,500 construction jobs and 25,000 jobs overall. State Treasurer Richard Moore, however, warns in the Offi ce of the State Treasurer’s annual debt billion. “I will not let it consume every aff ordability study that the added debt breath that I take for the next year – burden would max out the state’s although it could if one would let it borrowing capacity. Any further because it is fundamentally unbalanced borrowing, according to Moore, would and there are tremendous challenges place the state’s bond rating at risk. there,” Perdue said. ■ Gov. Perdue travels to Washington to ■ Exacerbating the state government’s plead with Congress and President-elect budget woes is the poor fi scal condition Barack Obama for federal “stimulus” of the State Health Plan (SHP). The SHP is money to help shore up North Carolina’s the health insurance program that state budget woes. Preliminary reports covers more than 660,000 teachers, suggest the federal government is state employees, retirees and their considering a spending package of dependents. Employees and retirees roughly $850 billion – a signifi cant share don’t pay any premiums for enrollment of which would go to state governments into the SHP – that expense is paid by to backfi ll spending on their programs. taxpayers. SHP offi cials estimate that the “This is the gift they can give me on be- plan immediately needs $300 million in half of North Carolina,” Perdue said. cash in order to pay its bills up through ■ A new report from the General March or April. Further projections by Assembly’s Fiscal Research Division SHP offi cials suggest the plan will need released near the end of the month an additional $500 to $550 million over reveals that the state’s budget situation the next two years to ensure it stays is even more dire than predicted just a current with its payments. One

few weeks ago. New estimates assert the 2009 session l CIVITAS INSTITUTE l 287 legislative option, which remains off the current fi scal year’s shortfall could reach table, would be to alter benefi ts or ask $2 billion. In response, Perdue orders state employees and retirees to pay a state agencies to reduce expenditures small amount of their premiums. Perdue even further. Outgoing Gov. Mike Easley spokesman David Kochman said Per- had administered a previous plan to set due “will be reaching out to legislative aside $1.2 billion in savings, requiring leaders, state employees, teachers and state agencies to cut back by as much retirees to work together on stabilizing as 5 percent. Based on the new revenue the plan.” Perdue’s offi ce, however, off ers projections, Perdue needs to fi nd even no specifi cs. deeper cuts. She orders state agencies ■ More than $700 million in debt-fi nanced to reduce expenditures by as much as 7 state building projects are approved percent. “The global recession has forced two months ahead of schedule by the our state to make tough fi nancial decisions,” Perdue says in a news release. ■ Despite the massive infl ux of federal “I will meet my constitutional obligation dollars to help balance the state budget, to balance the budget, and I will meet it Gov. Perdue is still disappointed at the responsibly.” amount. She had hoped for more funds for the state, but concedes “At this point in time, anything is better than nothing.” “I will not let it consume every ■ Gov. Perdue establishes a state agency to breath that I take for the next oversee the state’s disbursement of the federal funds. Dempsey Benton, former year - although it could if one Raleigh city manager and secretary of would let it because it is the Department of Health and Human Services, is chosen to lead the Offi ce of fundamentally unbalanced and Economic Recovery and Investment. there are tremendous Benton will earn $98,500 a year, and Perdue indicated that he is likely to be in challenges there.” the role no more than 18 months. –Gov. Bev Perdue on the state budget defi cit ■ Gov. Perdue orders state agencies to fi nd even deeper cuts to their budgets, asking them to cut back expenditures by February up to 9 percent in the remaining months ■ The American Recovery and of the current fi scal year. Last month, she Reinvestment Act (stimulus bill) is signed asked for reductions of 7 percent. Major into law. The bill totals $787 billion, and programs, however, are exempted from includes billions for states, grants this requirement. For instance, public for research projects, tax credits, schools are asked to reduce spending by infrastructure projects, food stamps and only 2 percent. “The state constitution unemployment benefi ts. North Carolina requires that I balance the state budget, is expected to receive roughly $6.1 and I will do that while protecting public billion in federal dollars via the education as much as possible,” Perdue stimulus bill over the next two budget says in a news release. Looking ahead, years. The largest share – about $2.35 estimates for the budget gap for the billion – will be directed toward coming 2009-10 budget year have risen subsidizing the state’s share of to $3.6 billion. Medicaid expenses. The bill also includes $1.2 billion for state public education, March largely to avoid teacher and staff layoff s. ■ Also included is $339 million for Gov. Perdue’s offi ce releases a partial list high-poverty schools, $334 million of cost-cutting measures being for special education, and $17 million undertaken by state agencies in light for Head Start. Funding for infrastructure of her request they reduce spending projects in North Carolina include $776 by as much as 9 percent to meet the million for highways and bridges, $131 current budget year’s dwindling million for mass transit, $66 million for revenues. The primary measures include water treatment, $72 million for sewers, delaying fi lling vacant positions, and $113 million for “weatherizing” limiting travel, reducing training and low-income homes. limiting purchases to only essential l CIVITAS INSTITUTE l 2009 session 288 l CIVITAS items. Other actions include shutting April down computers at night at the Cultural ■ The Senate releases its budget plan for Resources Department and requiring the coming fi scal year, and like Perdue’s park staff to handle lawn maintenance budget, it relies heavily on the short- at state historic sites (rather than term band-aid of federal stimulus funds contracting out the work). while avoiding meaningful spending re- ■ Gov. Perdue releases her budget form. The proposal totals $20.05 billion, proposal for the coming 2009-10 fi scal signifi cantly less on the surface than year. The spending total of $20.98 billion Perdue’s plan, but the diff erence is in includes $1.7 billion in federal stimulus how the plans account for federal dollars – primarily targeted for Medicaid Medicaid stimulus funds. When expenses and public education. Given a factoring back in the federal Medicaid budget projection of $20.38 billion for dollars as Perdue did in her budget, the actual expenditures in the current fi scal Senate plan comes to more than $20.9 year – Perdue’s proposal would increase billion – almost an identical spending year-over-year expenditures by $600 total as Perdue’s plan. million (3 percent). ■ The most substantial diff erences ■ Among the spending reductions between the Senate and Perdue’s included in Perdue’s plan is $238 million budget proposals revolve around public labeled “truth in budgeting.” This education, taxes and state workers. The program would fund state agencies Senate plan would increase class size by according to actual fi lled positions, two students per class, for a savings of eliminating the long-time practice of $322 million. Teachers would receive no state agencies keeping vacant positions across-the-board pay increase, but on their budget rolls. Agencies would instead receive an experience-based keep the extra payroll money they step increase. Other state employees received for unfi lled positions and would receive no pay raise – as in Per- redirect the monies elsewhere until they due’s budget. The Senate plan allows for fi lled the vacant positions. House $500 million in tax hikes, but provides no Speaker Joe Hackney (D-Orange) specifi cs for which taxes would be objects to this idea, saying: “It doesn’t adjusted. The Senate budget plan is leave the state much margin or much estimated to lay off 712 state workers

wiggle room.” while keeping 910 positions vacant and 2009 session l CIVITAS INSTITUTE l 289 ■ Another part of Perdue’s budget unfunded throughout the year. Senate balancing act includes tax and fee budget writers opted not to follow increases. Taxes on a pack of cigarettes Perdue’s “truth in budgeting” technique would rise from 35 cents to $1.35, and for vacant positions. Rather, they allowed the purchase of alcohol would require an for more state agency fl exibility to additional 5 percent surcharge. Perdue determine how they are to reduce also proposes an increase in the annual expenditures. license fees on professionals from $50 ■ Perdue reacts negatively to the growth to $200. All told, the new taxes and fees in class size contained in the Senate would total $525 million in their fi rst budget plan. Perdue spokesman David year. Kochman says, “The Senate made some good investments in what we know of its budget so far, but at this point in while at the same time creating new time Governor Perdue is troubled by the taxes to raise more revenue than ever proposed increase in class size.” State before.” Senator and former teacher Linda Garrou ■ Perdue issues another executive (D-Forsyth) admits the class size increase order designed to help balance current was “a tough decision for me to make.” year state budget expenditures to the But Garrou claims the change would be lowered level of revenues being a temporary fi x and that the reduced collected by the state. The order includes need for teachers could be met mostly a mandatory unpaid furlough of state through attrition rather than forced employees equal to 0.5 percent of their layoff s. pay. This means that teachers and other ■ Details regarding the Senate’s potential state employees will see reductions in tax increase package become clearer their paychecks totaling 0.5 percent of in Senate Finance Committee meetings. their annual pay, to be taken out of their Members of the Committee claim to checks in May and June. In return, desire a signifi cant overhaul of the state’s workers will be allowed to take tax system. Committee co-chair Dan additional time off . Perdue also orders Clodfelter (D-Mecklenburg) says that state agencies to reduce spending by 7 doing so is not an easy task. “Getting percent for the remainder of the fi scal people interested in a major reform year. Further measures by Perdue to when they’ve got plenty of money balance the budget include tapping the sloshing around is a diffi cult thing to state’s Rainy Day Fund, and using federal do,” Clodfelter said. The tax reform plan stimulus dollars ahead of schedule. includes extending the state sales tax to include many services, in order to May better refl ect the more service-oriented ■ While waiting for the House to craft its modern economy. Other changes budget proposal, special interest groups include dropping the state corporate tax turn up the heat to protect their bud- rate from 6.9 to 4.5 percent, and lower- getary interests. The N.C. Association of ing personal income tax rates while Educators begins to rally their members changing how state taxable income is to voice their objections to the coming defi ned to mirror the federal defi nition. state budget they claim has the The overall goal is lowering rates while potential to cut more than 10,000 broadening the base. The reform education jobs. NCAE urges members to package also includes increases to sin call for emergency meetings with state taxes on tobacco and alcohol. Estimates lawmakers from their district, especially predict the tax overhaul would – once House members still deliberating their fully implemented – result in a net fi nal budget plan. increase in taxes of $1.1 billion. ■ Republicans are quick to criticize the tax The mandatory unpaid furlough Gov. reform plan. “North Carolina Democrats Perdue issued earlier this year runs up are trying to run a classic scam on N.C. against some judicial resistance. taxpayers: the bait and switch,” said state Specifi cally, about 20 North Carolina GOP chair Linda Daves. “Pretend to be judges are refusing to comply with the reducing taxes by slight increments de facto pay cut Perdue ordered for state employees. “I personally think we have a l CIVITAS INSTITUTE l 2009 session 290 l CIVITAS brave governor,” said District Court Judge than any other agency. Spending in the Lloyd Gentry of Caswell County. “She House plan totals $19.97 billion, but takes 3 percent of all state employees’ that doesn’t include $1.4 billion in checks in May and June. I respectfully federal stimulus money. With the disagree.” Reasons off ered by the stimulus money included, the House resistant judges include the need for plan totals $21.2 billion –more than an independent judiciary and also that both the Senate and Perdue plan. they simply couldn’t take the furlough in ■ The most noteworthy component of the the allotted time due to their busy work House plan is its tax increase package load. totaling more than $860 million – ■ The state Senate introduces legislation signifi cantly more than the $500 negating a planned decrease in the state million in planned tax hikes in the Senate gas tax. In 2006, North Carolina capped plan. Unlike the Senate budget plan, the its state gas tax to ensure it remains House includes specifi cs for their below 29.9 cents per gallon. Under the intended tax increase. The most Senate’s proposed bill, that cap would signifi cant tax changes are an increase become a fl oor, meaning that the state to the top marginal personal income tax gas tax would not be allowed to drop rate and an increase and expansion of below 29.9 cents per gallon. The state services liable to paying the statewide gas tax is composed of both a fl at rate sales tax. and a variable rate. The variable rate is ■ Under the House plan, North Carolina’s calculated as a percentage of the top marginal personal income tax rate average price of gas, so as gas prices rise would increase to 8.5 percent, up from so too does the tax. Estimates project the 7.75. The new rate would rank North gas tax changes contained in the Carolina’s as 7th highest in the legislation would cost motorists another country and far exceed the top rate $67.5 million over the next two years. among southeastern states. Personal income tax rates are especially relevant June for small businesses, because the ■ The House approves its budget plan majority of small businesses are legally for the coming fi scal year. Included organized in such a way that they are in the plan is substantial tax and fee subject to the individual income tax.

hikes along with a curious decision to Indeed, North Carolina’s lowest marginal 2009 session l CIVITAS INSTITUTE l 291 reduce public education spending more rate is already as high as – or higher – than every other southeastern state’s highest marginal rate on small FY2009 -2010 HEALTH & HUMAN SERVICES BUDGET businesses. Understandably, critics decry Total Appropriations $3.9 billion this aspect of the House’s tax hike Major Items: package as especially damaging during Medical Assistance (Medicaid) $2,318 million an economic recession. Estimates peg NC Health Choice $77 million the cost of raising the top marginal Mental Health/D.D./Subst. Abuse: $664 million personal tax rate at a quarter billion Child Development $257 million dollars annually. Social Services $208 million ■ The House’s plan for sales taxes goes Public Health $161 million against the Senate’s tax reform Central Management & Support $75 million committee recommended path of 292 l CIVITAS INSTITUTE l 2009 session July budgetbill. The resolution callsfor resolution planonJune30inorder ■ lowering therate onthisexpandedtax “expand thebasewhilelowering the ■ ■ agenciesare essentiallyheldeven to GeneralGovernment withadecrease of education. largestThe cutisin next federal stimulusfundsfor public fi Interestingly, theHouseplanreduces teacher assistantswould beeliminated. Ananalysis ofthefi acontinuing State lawmakers enact Similarto budgetproposal, theSenate resolution issetto expire onJuly15. 2008-09 state budget. This continuing not to exceed 85percent oftheexpiring spending levels to continue atarate by thefailure tonecessary ratifya of thenewfi scal year. ismade The act expenditures asofJuly1,thefi to authorize thecontinuation ofstate in thefi rst year alone. cost taxpayers anestimated $430million House changesto thesalestaxwould penny.sales taxrate by aquarter The base, theHouseplanraisesstate digital downloads. Butinstead of repairs, and warranties, courier services suchas sales taxto applyto services rate.” Their planwould expandthestate Carolina reveals thatruralcounties are of federal stimulusspending inNorth increase. current year expenditures orseeaslight 4.6 percent, whiletherest ofthe decrease amongstate agencies. This seven percent –thelargest percentage current budgetyear appropriations by public educationfundingrelative to remain thesame, butthird grade students. Classsizes for grades K-3 would size ingrades four through 12by two the Houseplanincreases average class gure even includes$400millionin rst several months rst day resolution ispassedonJuly31. budgetdeal, athird continuing spendingto 84percent ofthe2008-09 ensure fundingofstate government continuing resolution onJuly15to inplace. Lawmakers passedanother Senateto work outabudgetdealto budgetwriters from theHouseand ■ ■ ■ agreed-upon tax package. The new tax agreement. She claimsthatdueto writers to come to afi : Observer “Federal fundsallocated Negotiationsare ongoingbetween Making negotiations even more diffi Making Perdue expresses herfrustrationatthe the endofJulyarrives withstillno level andissetto expire onJuly31.As operations. The resolution limits year beganonJuly1withnobudget present to Gov. Perdue. The newfi budget thatincludesthenewly is Perdue’s hintingthatshewould veto a failure budget ofHouseandSenate million intotal newtaxes. The revenue is plan beingnegotiated includes$980 come to consensus,” saidPerdue. Assemblythe General to step upand “losing” outon$5millionaday. “I need in theinevitabletaxhikes, thestate is continuing resolution alongwithadelay includedinthe spending reductions According to theRaleighNews& when calculated onaper-personbasis. benefi ttingmore thanurban counties, Guilfords.” andthe going to helptheMecklenburgs mountains andinthecoasts. That’s not the Interior isspendingmoneyinthe the federal funds: of Department “The with overseeing thedisbursementof According to DempseyBenton, charged County and$252inDurhamCounty.” per-person share fallsto $284in Wake up to state $328for resident. every The andReinvestmentRecovery add Act through June30under theAmerican nal budget scal cult 2009 session l CIVITAS INSTITUTE l 293 2009-2010 scal year ation. lies pay all those taxes,” Berger said. Berger those taxes,” all lies pay budget bill into law on August 7. When fac- 7. on August law budget bill into state the stimulus dollars, in federal toring $20.4 billion. Itbudget totals also includes in state tax increases one of the largest cuts, the cries of draconian Despite history. budget still marks an increase this year’s spending of 83 percent in per capita state after adjusting for – even 30 years over infl largely to $605 million in stimulus funds for in stimulus funds for $605 million to largely em- and other state Teachers education. increase no pay receive however, ployees, the fi signs Perdue Gov. assistant and teacher Teachers on middle class families but support “Working fami- tax. in the sales an increase ■ ■ budget, thanks in the spared positions are August intervention into the not-yet approved approved intervention the not-yet into on it and “Either she was in tax package. or she wasn’t changed her mind, also went Berger not a good situation.” it’s in Perdue’s a bit of hypocrisy note on to she would questioning why comments, tax increase oppose an income derived largely from a 2 percent surcharge surcharge a 2 percent from largely derived tax brackets along on all personal income with a one-cent in the statewide increase on tobac- on taxes sales tax and increases “Who and alcohol. co Perdue’s Republican leaders questioned said Senate Republican consulted,” “Either way, of Eden. Phil Berger Leader in these trying thinks, in the world times tax can raise income you families, for working middle class families and for conference at a news said Perdue families?” ■ 294 l CIVITAS INSTITUTE l 2009 session teachers andteaching assistantsand education. “I thinkthepeopleofthis signing onto oneofthelargest taxhikes retailers. corporations andtop income earners. “surcharge” isalsoimposedon taxpayers $804millionayear. Atax dollars, thebudgetrelies onmore than budgeted for thestate’s Medicaid program. stimulusdollars, $867million,are ■ ■ ■ In confl In additionto thefederal In stimulus alltheremaining Virtually federal North Carolina’sNorth economy, hasbuilt good leadership. It’s what’s growing state wantpublicschools to have toits minimalreductions public however, defends thebudgetby touting this budgetshouldbeproud.” Perdue, No oneassociated withthepassage of that wasusedto sign thisyear’s budget. you’ll seeanyone clamoringfor thepen chairman Tom Fetzer says, “I don’t think in thestate’s history. RepublicanParty on digital downloads andinternet million more innewtaxes are assessed alcohol and tobacco and$11.8 products; in newtaxes isimposedoncigarettes, on higherincomes. Another$69million begin at2percent andriseto 3percent $100,000. The income tax surcharge will over $60,000andcouples earningabove will beassessedonindividualsearning tax liability. The income taxsurcharge be forced to pay 103percent oftheir Under thenewlaw, corporations will tostate cost salestax,expected increase inthe these istheone-cent $1 billioninnewtaxes. Largest among doesn’t wantto bephotographed in private. Criticssay thisisbecauseshe decides to sign thebudgetbillinto law fi budget, including726thatare currently state positionswillbeeliminated inthe in thebudget.Anestimated 2,191 lled. ict with typical tradition, Perdue withtypical ict September October employees upsetaboutlayoff percent. Ayear andahalflater, the unemployment rate standsat11 Carolina’s herstatements North Association Perdue remarked, are “There meetingfor theState Employee oftheeconomy. At aGreensboro ■ ■ ■ education.” public, astheyunderstandwhat’s gone to North Carolina’s to North current system ofABC for budgetary opportunities effi panelsheassembled to examine assumptionwillhelpmakebudget- for projections thesecond year ofthe In anattempt to In reassure state Gov. Perdue theBudget Reform instructs Similarlyrosy –expectations –andfaulty percent. unemployment rate willstandat11.3 ball proves abitcloudy. At thetimeof ter for state employees.” Perdue’s crystal state, for thecitizens we and bet- serve, it willgetbetter,” shesaid. “Better for our in front ofus. And, you canrest assured, we have amountainofchallengesright rays ofhopeaheadfor oureconomy, but sounds anoptimistictone onthestate the absence ofpay raises, Gov. Perdue on, will support theinvestment in on, willsupport Carolina’sNorth future. Ibelieve the stores. The system isoverseen by the and Accountability Commission, a lower revenue thanexpected levels. budget writers are faced withmuch writing more diffi to thecurrent fi scal year. Suchan for the2010-11budgetyear compared increase instate revenue of3.2percent biennial budgetjustpassedassumean showsThe thatrevenue report are revealed inaFiscal Research report. ciencies, to study possiblechanges cult next summerwhen cult next s and 2009 session l CIVITAS INSTITUTE l 295 ve scal out a gure cant meet rising to In order t checks. health insurance er consumers a revenue shortfall fi entire the a revenue for Bev Gov. Charlie Perusse, said year,” repayment plan. repayment unemployment claims, North claims, unemployment Carolina since the feds from has been borrowing Experts the estimate February. only fi this time, At end of the year. than North more borrowed have states no have in the state Lawmakers Carolina. this money will be paid back.plan how because of the state, for Fortunately the loans included clauses attached to are stimulus plan, there in the federal on the debt due payments no interest which buys of 2011, until the beginning fi additional time to the state both Virginia and New Jersey win their and New Jersey Virginia both GOP victoryThe in these two elections. creates Democratically-leaning states as pundits a political buzz nationwide as an indictment the results of interpret the Obama presidency far. thus states several of unemployment, rates sums of massive borrow to forced are to government the federal money from sending out unemployment continue benefi of Representatives passes historic health passes historic of Representatives Major of legislation. components care requiring mandate the bill include a some sort have to of health all citizens a signifi coverage, insurance companies can off er, and the er, can off companies options. coverage government in governor for Republican candidates the nation still struggles with high As House the U.S. In major national news, budget director. Perdue’s the $2 billion by will reach borrowing ■ ■ ■ greater expansion of Medicaid, restrictions on what health insurance of health insurance establishment off to designed state in each “exchanges” mandatory with comply options that December

cient scal in below ow ts in the future. The The in the future. ts several states, many than projections. The revenue stream is 1.5 stream revenue The projections. short in percent of what was planned for $95 million – but the budget – roughly Gov. by measures proactive thanks to be suffi should the revenue Perdue, returns on the fund’s investments. investments. on the fund’s returns investments the fund’s from Revenue and of its income, 60 percent comprises the pension fund sustained substantial “State downturn. losses in the economic will need to and local governments agency meet state Into August, needs. reduce agencies to state ordered Perdue “The 5 percent. by their expenditures in place already has measures governor if there’s balance we that will ensure retirement fund is supported a by retirement as of the end of 2008 was 99.3 percent as of the end of 2008 was 99.3 percent out pay fully to of the amount projected benefi retirement the state’s pension fund fell below the below pension fund fell the state’s According last year. fully-funded level year, revenue projections are running 1 projections are revenue year, Fiscal projections. below percent off still better off 10 percent 8 to already of which are projections. Alcohol Beverage Control Commission Commission Control Beverage Alcohol The local governments. and run through with has been plagued of late system reports salaries and of unreasonable nepotism. fl to continue revenues State reports that Janet Cowell Treasurer State rst quarter of the fi the fi Through increased budget for to continue keep to the system” to contributions warns. Cowell it solvent, worker of state combination funds and taxpayer contributions, rst time this has it is the fi Cowell, to funding level The 1997. happened since Barry chief economist Research that North notes is Boardman Carolina ■ ■ ■ November ■ In a Christmas Eve session, the U.S. can’t doom another generation of Senate approves the massive healthcare Americans to soaring costs and eroding overhaul bill. President Obama praised coverage and exploding defi cits.” The the action: “With today’s vote, we are bill must fi rst go through House-Senate now incredibly close to making health negotiations to iron out diff erences, and insurance reform a reality in this then get fi nal approval from each country,” he said after the vote. “Our chamber before being sent to the challenge, then, is to fi nish the job. We president’s desk.

2009 Significant Tax Changes (Budget Bill Unless Noted)

S.L. 2009-108 changes the state gas tax ceiling into a fl oor. The state gas tax can now no longer drop below 29.9 cents per gallon Create a tax “surcharge” on upper-level income earners. A two percent extra charge is levied against the tax liability of single fi lers earning over $60,000 and married fi lers earning above $100,000. The extra charge increases to 3 percent for single fi lers earning above $150,000 and married fi lers earning above $250,000. Is scheduled to expire at the beginning of the 2011 tax year Create a 3 percent tax surcharge on corporate income. Is scheduled to expire at the beginning of the 2011 tax year Increase the statewide sales tax by a penny, from 4.75% to 5.75%. Is scheduled to expire on June 30, 2011 Extend sales tax to online click-through sales and digital products Increase tax on beer, wine and liquor Increase tax on cigarettes and tobacco products

2009 Other Revenue Sources & Actions

■ Transfer $38 million from various “special” state funds ■ Transfer $5 million each from both the Health & Wellness Trust Fund and the Tobacco Trust Fund ■ Transfer $24 million from the Capital and Repair and Renovations accounts ■ Projects an additional $150 million in business taxes to be collected through a “revenue compliance initiative” ■ $47 million in increased Justice & Public Safety fees l CIVITAS INSTITUTE l 2009 session 296 l CIVITAS 2009 EDUCATION FUNDING ENROLLMENT CHANGES 2009 Other Significant Changes ° Public Schools: -11,652 (0.7 percent) decline (change due to new starting age for COMPENSATION kindergarten ■ No pay raises for teachers or state employees in ° UNC: +6,630 (3 percent) increase the 2009-10 budget ° Comm. Colleges: +10,635 (4 percent) increase ■ In April of 2009, Gov. Perdue orders an unpaid TUITION & FEE INCREASES furlough to all state employees and teachers ° Average tuition increase of 4.3 percent and 3.1 equivalent to ½ of one percent of their annual percent for full-time in-state and out-of-state pay UNC students FUTURE BUDGET CONCERNS ° Average tuition increase of 17 .5 percent for ■ in-state and 2.6 percent for out-of-state The heavy reliance on temporary revenue, full-time community college students rather than sensible budget cuts, to balance the budget will likely result in a substantial structural OTHER EDUCATION CHANGES deficit of $3 billion or more when the temporary ° K-12 state appropriations decline from $7.8 revenue sources (temporary taxes, federal billion (2008) to $7.4 billion stimulus funds) run out in 2011-12 ° $225 million funding decrease to LEAs OTHER ° Provides $139 million to protect K-3 teaching positions ■ The state appropriation to the Clean Water ° Reduces funding for 100 programs, eliminates Management Trust fund is cut in half to $50 funding for 23 programs million, but that is offset by $47 million in federal stimulus funds sent to North Carolina for that ° Budget includes no salary increase for teachers purpose ° $44 million to UNC to meet expanded enrollment ° $23 million more in student financial aid ° Increases UNC tuition by lower of 8 percent or $200. ° Provides $9 million increase to nursing, dental and radiology technology and vocational/ technical programs. ° Eliminates 19 positions. 2009 session l CIVITAS INSTITUTE l 297 As part of the FY 2009-10 budget, North Carolina North Carolina’s lawmakers introduced more than $1 billion in new taxes. Indeed, of the three major taxes 2009 Tax Hikes typically imposed at the state level – income, sales and corporate – North Carolina managed Unique in to raise all three. Specifically, the sales tax was increased by a penny, and lawmakers created a Southeast “tax surcharge” to be levied onto the corporate tax and personal income tax of single filers earning above $60,000 and married filers earning above $100,000.

State lawmakers insisted that these steps were necessary to balance the budget. Apologists justify the tax hike by claiming that “everyone else is doing it,” and therefore North Carolina’s economic competitiveness will not be harmed. That’s not true.

A report from the National Council of State Legislatures (NCSL) shows that among southeastern states, North Carolina stands virtually alone in its decision to impose massive tax hikes to balance its 2009-10 budget.

Recall that North Carolina raised all three major state taxes – sales, corporate and income. By comparison, no other southeastern state raised even one of the three major taxes in 2009.

The most significant tax raiser among other southeastern states was Florida, with about $1.2 billion in new taxes – almost all of that by virtue of a cigarette tax hike. Another billion was raised from increased vehicle registration fees. Bear in mind, Florida has no income tax. The other southeastern states imposed little or no tax increases on its citizens. States that did raise taxes merely introduced minimal, targeted tax increases – while not raising any of their major tax rates. Meanwhile, Georgia, Louisiana and South Carolina refrained from raising any taxes whatsoever.

Conversely, North Carolina imposed a laundry list of new taxes, including: a higher sales tax ($803 million), corporate and personal income tax surcharges ($196 million), higher “sin taxes” ($69 million), and the new “Amazon” and digital taxes ($12 million).

These developments showed that North Carolina’s decision to impose massive tax increases to balance its budget was rather unique among states in the region. Aside from Florida, which was blasted by the bursting of the housing bubble, the next most significant tax hike in the southeast was a $200 million increase in hospital assessments in Alabama – a paltry amount when compared to North Carolina’s billion dollars in new taxes. Why did North Carolina resort to such measures when virtually the rest of the southeast didn’t? north carolina’s 2009 tax hikes unique in southeast 2009 tax hikes INSTITUTE l north carolina’s 298 l CIVITAS General Assembly: 2010 session House Dems: 52 House Reps: 67 (1 Ind.) Senate Dems: 19 Senate Reps: 31 2010-11 BIENNIUM FY 2010-11; July 1, 2010 to June 30, 2011 Governor: Bev Perdue (D) he 2010 session picked up where the last Tone left off : daunting budget gaps and a The 2010 Short Session: struggling economy. The beginning of the year Budget Bill SB 897/S.L. 2010-31 brings news of North Carolina’s unemployment Passed Senate: May 20, 2010 rate reaching a 34-year high of 11.2 percent, Passed House: June 4, 2010 with few signs that improvement is coming Conference Version Ratified: June 30, 2010 any time soon. Signed by Governor: June 30, 2010 Once again, state revenue lags behind expectations, meaning that state agencies must fi nd ways to reduce spending below November of 2010 featured historic election what they budgeted. A massive federal health- results, both nationally and in North Carolina. care overhaul bill was approved in March, At the state level, Republicans took control of creating great both chambers of the General Assembly for uncertainty in the private sector of the econo- the fi rst time in over 100 years. On the national my and also in state capitals as they are unsure level, in what many consider an indictment on of the bill’s implications – especially on their the Obama administration, Democrats suff er the Medicaid programs. largest loss of Congressional seats in more than 70 years. When setting out to revise the second year of the two-year budget plan passed in the January previous year, budget writers faced another ■ 2010 begins with news that a special multi-billion dollar gap. Fortunately for them, Department of Revenue initiative to there was another $1.6 billion in federal stimu- settle millions in disputed corporate lus dollars available to help fi ll that gap. Once taxes has yielded greater than expected again, however, state lawmakers neglected any results. Actual collections exceed meaningful spending reform and relied heavily expectations by nearly $300 million. on the temporary sources of federal funds and

Thanks to the extra revenue, state 2010 session l CIVITAS INSTITUTE l 299 temporary taxes – both revenue sources that revenue collections are now ahead of won’t be available for them the following year. schedule. ■ Just a few months into the 2010-11 fi scal year, N.C. Department of Health and Human Gov. Perdue already recognized the fact that all Services Secretary Lanier Cansler warns the reliance on short-term revenue is setting a legislative committee that the state’s the state up for a massive structural defi cit the HHS budget may be $250 million short following year. By September, her budget by the end of the fi scal year. Cansler offi ce issues a memo requesting that state blames the potential shortfall on agencies submit suggested budget cuts of up higher-than-expected enrollment and to 15 percent to help guide the budget process federal roadblocks to cost-saving for writing the 2011-12 budget. Such a request measures to the state’s Medicaid sys- suggests that state budget offi cials have begun tem. “Trying to right this ship is one of to recognize the signifi cant hole they have dug the most diffi cult things I’ve ever done,” for themselves. Cansler said. Key budget writer Mickey Michaux (D-Durham), however, grilled ■ Revenue for the fi rst half of the fi scal Cansler as to why the HHS budget wasn’t year is found to be off by $35 million. The living up to its expectations. “You came shortfall comes in spite of the spike in to us last year. We put your fi gures in the revenue realized by the Department of budget. Now you’re telling us the Revenue’s special initiative on business numbers we put in the budget for you taxes that yielded hundreds millions are not going to happen,” Michaux said. more than expected. The news is met ■ North Carolina’s unemployment rate with great pessimism from lawmakers. reaches a 34-year high of 11.2 percent. “It would not surprise me if it (the The rate is above the national average current year budget gap) hit $600 of 10 percent. According to fi gures [million] or $700 million,” said Sen. David from the N.C. Employment Security Hoyle, (D-Gaston) co-chairman of the Commission, North Carolina has lost Senate Finance Committee. “But $500 248,000 jobs since the beginning of the million seems like a given.” recession in December 2007. “I’m absolutely sure the unemployment rate March has not topped out,” said Wells Fargo ■ North Carolina receives word that it will economist Mark Vitner in Charlotte. not receive any grant money from the “Layoff s have slowed, but the hiring rate federal government’s “Race to the Top” is at an all-time low right now.” grant competition. The U.S. Department ■ Gov. Perdue reassures critics that her of Education solicited applications from budget offi ce is taking all the necessary states, and awarded a total of $600 steps to ensure the budget is balanced million to winners Tennessee and by the end of the fi scal year. “We are Delaware. North Carolina applied for going through every piece of state $469 million, and made it to the fi nal 16 government,” Perdue said in a statement. of states being considered. Gov. Perdue “We don’t have enough information says that she is disappointed in the to continue to cut. We need to fi nd decision, but encouraged by North programs that have outlived their Carolina’s showing in the evaluation purpose so we can use those funds process. “Our fi rst round application was to do the things we need to do in the strong - North Carolina was in the fi nal 21st century.” 16 applications out of 41 - but only two states were ultimately chosen,” Perdue February said.”We clearly made a strong showing, and with more than $3 billion ■ North Carolina’s Medicaid budget gets a up for grabs in June, we will be back,” she bit of relief from the federal government. added. The feds determine that North Carolina’s share of payments due is $400 million, ■ Advocates of charter schools blame the not the $553 million previously failure to be awarded any Race to the Top estimated. The news comes on the heels funds on the state’s refusal to change of state HHS director Lanier Cansler’s the law capping charter schools at 100. announcement that the Medicaid system Education Secretary Arne may end up being $250 million short this Duncan has publicly stated his support year. for charter schools. States were awarded points in the grant process based in part

l CIVITAS INSTITUTE l 2010 session 300 l CIVITAS upon how well states promoted charter DID YOU KNOW? Sixty-eight percent of voters believe it is more important to cut taxes to create jobs and stimulate the economy, versus only thirteen percent who think an increase in A mandate that all citizens, with a few specifi c exceptions for low government spending is a better remedy. income people, must attain Those that prefer tax cuts outnumber insurance coverage either through a government program or an those who believe in more government insurance plan. spending by more than fi ve to one. More mandates on the products insurance companies can off er, such as forcing them to cover people with pre-existing conditions, and schools. Duncan says that charter school not allowing much variation in the policy was a “piece of the equation” for premiums insurance companies can the grants but was not the determining charge for customers of varying ages factor. and medical backgrounds. ■ Gov. Perdue announces a new state An expansion of the eligibility initiative with IBM to crack down on threshold for the federal and Medicaid fraud. A software system will state-funded Medicaid program. be used to scan the records of 60,000 Under the new legislation, people health care providers and 2 million state earning up to 133 percent of the residents enrolled in the system to fi nd federal poverty level will be eligible. fraud and abuse. In exchange for running Medicaid costs are shared by the the program, IBM will receive 10 percent federal and state governments. of all the fraud money recovered by their Medicaid expansion is expected software system. “It is pretty evident to to cost the states billions of us that we have to do more to root out dollars. Once fully implemented, the waste and crack down on the people some estimates place the price tag that we know are out there who are on North Carolina’s share of abusing the system,” Perdue says. “I think expanded Medicaid programs to be we are going to save tens of millions of as high as $600 million annually once dollars.” fully implemented. ■ President Obama signs into law the “Patient Protection and Aff ordable Care Government subsidies provided for those purchasing health insurance.

Act,” also referred to as Obamacare. The 2010 session l CIVITAS INSTITUTE l 301 legislation weighs in at more than 2,000 Assistance is provided for house- pages and has generated signifi cant holds earning up to four times the controversy and debate. Critics charge federal poverty level – about $88,000 that the mandate requiring all individu- for a family of four. als to purchase or enroll in insurance Substantial new taxes, in large part coverage represents a serious infringe- to pay for the subsidies, as well as ment of individual liberty, and that even the growing expenses of Medicaid the lawmakers voting for the bill did not and Medicare. A new Medicare read or understand the entire content of payroll tax of 3.8 percent is to be the bill. As House Speaker Nancy Pelosi applied to investment income, and declared “We have to pass the bill so you also to high income earners. can fi nd out what is in it.” Highlights of the bill include: New state-based insurance “ex- year’s unpaid furlough. It also eliminates changes” established by 2014. The roughly 600 state positions – mostly exchanges would off er insurance vacant. “This budget helps us set the options that comply with the man- table for the new normal,” Perdue told datory services required by the new reporters. Obamacare legislation. They would ■ In a curious display of priorities, also enable individuals seeking in- Governor Perdue’s recommendations surance to join with others in a larger would cut funding for K-12 education purchasing pool. and public safety, while expanding spending on all other state agencies. April Even after factoring in nearly $55 ■ A revised revenue forecast is presented million in federal stimulus funds, the by the General Assembly’s Fiscal Governor’s plan reduces funding for Research Division. In spite of the earlier public education by more than $260 business tax collection initiative, million – or roughly 3.5 percent – for current fi scal year revenue collections the 2010-11budget. Among these have dipped to nearly $400 million reductions is an additional $135 million below expectations. Projections for the Local Education Agency (LEA) “fl exibility coming 2010-11 budget year are adjustment.” This would be in addition similarly dour. A downward adjustment to the $225 million reduction enacted of $703 million - $19.7 billion to $18.9 bil- in last year’s budget. Similarly, the lion - is revealed to budget writers, mak- Governor’s budget proposal also reduces ing their task even more challenging. the budget for Justice and Public Safety by 3 percent. ■ Gov. Perdue releases her budget plan ■ for the coming fi scal year. Total Conversely, every other state agency’s spending on state programs included in budget would be expanded under the Governor’s proposal comes to $20.67 Perdue’s plan. The agency with the billion. This includes $19.15 million in largest such increase would be Natural state spending itemized in the budget, and Economic Resources, which would $1.04 billion in federal funds replacing expand by 7.3 percent, followed by a 4.4 state funding already embedded in last percent increase for HHS (once federal year’s budget bill (but counted as cuts), funds are included). and $578 million in additional federal ■ The Governor avoids another round of funds mostly dedicated to cover rising tax increases in her plan, but proposes Medicaid costs. Subtracting $101 $75 million worth of new Department of million from the total to set aside Motor Vehicle fees. The new fees would into the Rainy Day Fund means the Gov- be dedicated to fi nancing Perdue’s idea ernor’s budget amounts to $20.67 billion of a North Carolina Mobility Fund, which in real spending. The total is nearly $300 is dedicated to fi nancing projects “of million more than the current year’s statewide and regional signifi cance that spending total (including federal relieve congestion and enhance mobility stimulus funds). Perdue’s budget across all modes of transportation.” includes a set aside of more than $123 ■ Critics raise concerns over the long-term million for a small salary step increase for implications of Perdue’s proposal, saying teachers and monies to repay teachers she once again refuses to implement

l CIVITAS INSTITUTE l 2010 session 302 l CIVITAS and state employees lost wages from last meaningful spending reform or make ■ State employees receive no pay raises tough budgetary decisions. Her reli- under the Senate plan, and local public ance on more than $1.5 billion of non- education offi cials are granted exibility fl recurring federal stimulus funds and $1.3 to deal with their reductions with unpaid billion in temporary tax revenue to help furloughs for teachers and staff . balance the 2010-11 budget likely sets ■ Similar to Gov. Perdue’s budget up North Carolina for a major state bud- recommendations, the Senate’s plan getary crisis in 2011-12. Absent those reduces planned spending on two signifi cant sources of funding, state public education and public safety, while budget writers will be facing a revenue increasing spending on virtually every hole of $2.8 billion when they recon- other state agency. vene next year to craft the 2011-12 state ■ The Senate’s plan would decrease budget. In a nationwide survey, econo- appropriations on public education by mists project the economy to continue $219 million relative to the spending to be very sluggish well into 2011. Such plan fi rst established last year in the realities suggest slow revenue growth (if state’s two-year budget. Similarly, any) for FY 2011-2012. More than likely, Justice and Public Safety spending any revenue growth will fall well short of would decline by $83 million in the being able to replace the loss of stimulus Senate’s 2010-11 budget proposal. Most funds and temporary tax revenues. of the cuts in JPS would come from corrections. May ■ Conversely, Community Colleges, the ■ The Senate approves its state budget UNC system, Natural and Economic plan for the coming fi scal year. Total Resources and Health and Human spending on state programs in the Resources (aided by federal funds) each Senate plan comes to $20.59 billion, would see a bump in appropriations. slightly less than the Governor’s plan. Meanwhile, General Government would Total spending includes $18.99 billion see a minor cut of 1.3 percent. outlined in the state budget, plus $1.04 ■ The largest planned spending increase billion in federal funds replacing state by the Senate would occur in Natural funds (but counted as cuts), and $561 and Economic Resources, whose million in additional federal funds added budget would expand by 9.4 percent.

this year and dedicated primarily to the The increase would come mostly from 2010 session l CIVITAS INSTITUTE l 303 state’s Medicaid program. The $20.59 an increase in the state Commerce billion in state spending would mark a Department expenditures on “economic $200 million increase over the budgeted development” measures. real spending of $20.4 billion (including ■ The Senate budget plan follows Gov. federal funds) included in the current Perdue’s lead in targeting North Carolina 2009-10 budget. Indeed, compared to small businesses for tax relief. The 2008-09 actual appropriations of $19.65 Senate’s proposal, however, diff ers billion, the Senate’s proposal would greatly from Perdue’s. The Governor’s increase state spending over a two year targeted tax relief featured a set of period by nearly one billion dollars – ineff ective tax credit gimmicks and re- roughly 4.8 percent – during the bates, without any change in the actual “greatest recession since the Great tax rates faced by entrepreneurs in the Depression.” Tar Heel State. In contrast, the Senate’s Carolina suff ers from double-digit budget plan includes a reduction in the unemployment. Most of those positions top marginal tax rate paid by businesses would come in the form of staffi ng needs fi ling the individual income tax form. for a new women’s prison and a central Nearly all small businesses in North Caro- prison hospital and mental health facil- lina, and most businesses generally, are ity. The UNC system would also add more organized as a “pass-through” business than 200 new positions for maintenance and pay taxes according to the individual and security staff for additional buildings income tax schedule rather than corpo- being put to use. rate taxes. The Senate’s plan, therefore, ■ The House plan raids $127 million of would in eff ect be a tax rate cut on a lottery proceed to preserve a reported signifi cant number of small businesses 1,600 teacher positions. This amount is throughout the state. Early estimates $90 million more than contained in the suggest that about a quarter million Senate’s proposed budget. Under the North Carolina businesses would receive House proposal, teacher and state a break from this tax cut. employee salaries remain frozen for the second straight year. In addition, June the House plan does not include the ■ The N.C. House approves its proposed “payback” for last year’s unpaid furlough spending plan for 2010-11, which contained in Gov. Perdue’s budget. technically includes appropriations ■ Similar to the Governor’s plan, the House totaling $18.9 billion, but that doesn’t budget off ers some targeted tax credits tell the whole story. Like the Perdue and for small businesses in an attempt to Senate budget plans, the $18.9 billion create jobs. The plan includes a $250 does not count $1.04 billion in credit for small businesses for each American Recovery and Reinvestment employee earning under $40,000 they Act (ARRA) – the federal stimulus act provide health insurance for. Also – funds already embedded as cuts via included is a credit for small businesses last year’s two-year spending plan. That of $1,000 for each job added and is money counted as a “cut” in the state maintained for three years. In other budget, but backfi lled by federal dollars. words, the credit would work out to $333 The House’s recommended adjustments per new employee per year. Such small, for 2010-11 include another $579 targeted tax breaks are not likely to sway million in “cuts” that are also merely the hiring decisions of business owners. funding shifted to the feds. The $579 Furthermore, even if the tax credit for million includes $490 million in Medicaid hiring new workers lives up to the dollars not yet approved by the U.S. General Assembly’s full expectations, Congress, so that money may not only 7,200 new jobs would be created. actually materialize. All told, spending By comparison, North Carolina has lost on state programs including the federal more than 250,000 jobs since January of funding comes to about $20.5 billion in 2008. the House budget, down slightly from ■ For the fi rst time since 2003, North the Senate’s approved spending plan. Carolina’s governor signs the state ■ In contrast to the Governor’s proposal, budget into law before the start of the the House Budget would add 861 fi scal year. All told, once federal

l CIVITAS INSTITUTE l 2010 session 304 l CIVITAS full-time state positions; even as North stimulus funds backfi lling state programs are accounted for, the 2010-11 state writers include the new debt to fi nance budget spends $20.6 billion. The fi nal repair and renovations of state buildings budget most closely resembles the and to purchase equipment for the UNC House budget plan as it adds 864 and Community College systems. The full-time state employees – mostly use of Certifi cates of Participation allows in new prison facilities and staffi ng for the debt to be issued without voter new UNC buildings. Spending is reduced approval. North Carolina voters have for public education and public safety, been denied a vote over new state debt but increased for every other major since 2000. category save one. The budget for ■ Reaction to the budget is predictably Natural and Economic Resources partisan. Republicans say the budget expands by 11 percent. Once federal didn’t cut spending suffi ciently, and sets funds are factored in, the Health and the state up for a massive budget gap Human Services budget increases by 4.4 next year when $3 billion in federal percent. stimulus funds and temporary state ■ Following the House budget’s lead, the taxes will no longer be available. “What fi nal state budget raids $121 million in happens next year when that $3 billion North Carolina Education Lottery funds problem is sitting there staring us in the to preserve an estimated 1,600 teacher face?” Sen. Phil Berger, the Senate positions. minority leader said. Democrats defend ■ Included in the fi nal budget is $34 their decisions and dismiss concerns million designated for a targeted tax over future budgetary issues “We came credit intended to encourage job growth down here this year to face the longest among North Carolina small businesses. recession since the Great Depression. The temporary refundable credit will Whatever happens next year, we’ll face amount to 25 percent of a business’s that too,” said Sen. Martin Nesbitt unemployment insurance liability. The (D-Buncombe). credit would be limited to businesses with annual revenue of less than $1 I am in favor of cutting taxes million, and expire at the end of 2011. under any circumstances and ■ The new budget does not include any pay raises for teachers and state for any excuse, for any reason,

employees. The budget does authorize whenever it’s possible. 2010 session l CIVITAS INSTITUTE l 305 local education authorities to implement furloughs of state-funded teachers and –Milton Friedman staff ers in order to meet their exiblefl spending reduction. The budget also July authorizes UNC colleges the same option ■ Finance Committee members receive a for staff reductions. report stating that the amount of ■ Also included in the budget is delinquent taxes owed to the state authorization of $175 million more in exceeds the $800 million shortfall non-voter approved state debt. In spite budget writers had to close when of warnings from the state Treasurer’s crafting the state budget last month. “I offi ce that the state has “substantially didn’t realize it was that high,” says Rep. exhausted its General Fund debt Paul Luebke, (D-Durham) chair of the capacity until FY 2012,” state budget House Finance Committee. “It’s defi nitely money that we could use.” ■ Gov. Perdue publicly signals her intent to August consider privatizing a sizeable share of ■ North Carolina wins a $400 million grant the state government’s information from the U.S. Department of Education in technology operations. Research the federal government’s second round released by Perdue’s offi ce reveals that of “Race to the Top” grants. The state was spending on IT functions totals more one of ten winners, and will receive the than $1 billion annually. Perdue’s budget award over four years with the intent reform commission suggested asking a to raise test scores, lower high school consultant to study the state’s IT dropout rates and ensure students operations and recommend options for graduate high school better prepared cost savings. “The goal is to move for college or careers. The three primary aggressively toward an improved IT uses of the grant funding, according the infrastructure that will lower costs, Raleigh News & Observer, are “money to reduce complexity and redundancy, recruit and retain quality teachers and improve the utilization of resources and administrators; a turnaround plan for increase security,” Perdue wrote. low-performing schools, and handheld ■ Perdue signs legislation enacting modest devices that would allow teachers to reforms to the state’s Alcoholic Beverage continuously track students’ progress.” Control Boards. The law is designed to Gov. Perdue was excited about the news. curb excessive salaries, eliminate poorly “North Carolina’s children today are one run stores and reduce corruption in the step closer to being guaranteed the best system. The move comes on the heels education possible - something every of several embarrassing stories about child deserves,” she said in a statement. the ABC, including managers earning “This grant will give us the resources to $200,000 per year and others receiving more aggressively implement our plan lavish gifts from liquor companies. to ensure that all of our children Harsher critics of the ABC system had graduate ready for a career, college or hopes of privatizing the entire system, technical training.” but Perdue stopped well short of that, ■ The Department of Revenue reveals a although she indicated she is still open 15-year backlog of tax refunds owed to to studying that option. North Carolina North Carolina taxpayers. Thousands is one of 19 states to fully control liquor of state returns have been fl agged for sales. errors, several of them due to ■ Perdue states that she has already begun overpayment. Many of these marked weighing options for balancing next returns, some dating back to 1994, have year’s budget. “This time next year, North been collecting dust with no follow up Carolina will have a balanced budget,” by the Department of Revenue. “If the she said. “If that requires privatizing state owes anyone money, we will get pieces of state government, I believe the it to them, even if we have to ask the General Assembly will have the courage legislature to change the law in order to and folks across the state will do what do it,” assures Perdue spokesman Mark they need to do to stand up and make Johnson. For those returns in which it is sure that North Carolina’s core missions found the taxpayer owes more money, are carried on.” the three-year statute of limitation will be observed and the taxpayer will be

l CIVITAS INSTITUTE l 2010 session 306 l CIVITAS relieved of their payment. ■ The federal government enacts ■ Amid all the budget-cutting concerns, legislation providing billions for state some sizeable pay raises to top Medicaid programs. According to the education administrators raise eyebrows. federal stimulus bill passed last year, Department of Public Instruction chief the federal government was to pick up academic offi cer Rebecca Garland saw a a larger share of the Medicaid tab. But salary hike of 7.2 percent, bringing her these added payments were in doubt annual pay to $152,000. Furthermore, as the U.S. Senate was wavering in its Garland’s deputy, Angela Quick, received support for this provision. North Carolina a raise of 6.9 percent, bringing her salary budget writers are relieved, as they won’t to $130,000. DPI superintended June have to resort to any contingency plan Atkinson defended the raises by stating to compensate for the loss of more than that these positions recently assumed $500 million in federal Medicaid funds greater responsibilities and duties due they were expecting through the end of to the elimination of a deputy this fi scal year. superintendent position.

September October ■ Offi ce of State Budget and Management ■ In an eff ort to make government leaner head Charlie Perusse sends a memo to and more effi cient, Gov. Perdue state agencies instructing them to put in announces new standards for state rules writing plans detailing how they would and regulations. Part of the new initiative cut 5 percent, 10 percent and 15 percent is launching a new website for residents from their budgets. According to the to suggest specifi c rules they ndfi memo, agency heads should look for particularly burdensome and “underperforming programs, unnecessary. Perdue also will establish a unnecessary services and redundant committee to examine existing and employees.” The agency responses proposed rules to ensure they “make will then be used as a basis for sense” and don’t hinder businesses. recommended cuts to next year’s ■ The General Assembly’s Fiscal Research budget. State offi cials are concerned Division begins warning budget about the lapse of $3 billion in writers about the 2011-12 budget that temporary revenue from the federal they will need to craft in the coming

stimulus monies and the temporary spring. In addition to the $3 billion in 2010 session l CIVITAS INSTITUTE l 307 taxes enacted last year. Republican expiring temporary revenue, the State leaders are encouraged by such a Health Plan will need an additional $572 proactive measure coming from the million over the next biennium to cover governor’s administration, but also expenses. Other spending pressures will hopeful for even more. “I am certainly include expanding Medicaid enrollment, encouraged that [Perdue] is thinking as well as growing student populations about the size of the real problem that in K-12, community colleges and the we’re facing,” said Sen. Phil Berger, senate UNC system. minority leader. “I hope that she’ll take ■ State Alcoholic Beverage Commission an additional step and look at this year’s (ABC) Chairman Jon Williams tells the spending level.” state government Budget Reform and Accountability Commission that the number of local ABC boards suff ering enjoy a 67-52 edge over Democrats, with fi nancial losses during the year one independent who typically outnumbers those realizing a profi t by caucuses with the Republicans. Even with more than a two-to-one margin. Williams 68 votes, however, House Republicans fall blames the losses, in part, on higher a few members short of the 3/5 majority alcohol taxes enacted last year as needed to override a gubernatorial veto. eating into the system’s overall On the Senate side, Republicans gain a 31- profi ts. Over the summer, legislation 19 majority; large enough for an override. was passed to allegedly streamline In all, roughly 2.7 million votes were cast budgeting for local ABC boards and in the Tar Heel state in the 2010 elections – enhance performance standards. Gov. which amounts to 43 percent of registered Perdue has claimed she will consider voters. privatizing the ABC system, but has yet ■ “We are going to govern in a diff erent way,” to act. promises Rep. Paul “Skip” Stam (R-Wake), the current House minority November leader, at the GOP victory party in ■ State agency responses to Gov. Perdue’s Raleigh. “We’re going to govern in a budget offi ce request for recommended frugal way, in a responsible way.” spending cuts of up to 15 percent are few and far between. Among the few actually submitted are some from the FY2010-2011 HEALTH & HUMAN SERVICES BUDGET state’s community college system. Rec- Total Appropriations $3.9 billion ommendations include a tuition increase Major Items: of $10 per credit hour, 1,000 teacher lay- Medical Assistance (Medicaid) $2,368 million off s and a reduction of course selections. NC Health Choice $88 million Some observers question if the nature of Mental Health/D.D./Subst. Abuse: $705 million the recommended cuts represent Child Development $234 million agencies’ best eff orts at reducing Social Services $193 million redundancy or an attempt to garner Public Health $157 million political sympathy. “Obviously both on Central Management & Support $71 million the federal and state level, on occasions like this, agencies understand some of the things they do are less valued by ■ Democrats are conciliatory and the public than others,” says N.C. State recognize that their ruling majority had to political science professor Andy Taylor. come to an end sometime. “In serving the “It makes sense to put the more valued people, you understand a day like this may services on the chopping block to make come,” says Sen. Marc Basnight (D-Dare), the public aware that they will have a Senate leader for the past 18 years. “You tangible impact.” are hopeful that the change is benefi cial, ■ In a historic election night, Republicans new ideas, diff erent thoughts. This is only ride a national wave of voter disgust what the people want, so that means it is with big government and big spending good.” politicians. Republicans gain control of both chambers of the state’s General Assembly for the fi rst time in more than a

l CIVITAS INSTITUTE l 2010 session 308 l CIVITAS century. In the state House, Republicans ■ “It was just a wave,” House Speaker Joe frankly not saving money. Some of the Hackney (D-Orange) says about the larger ones had not gotten the message signifi cant shift in power both in the that there was a budget problem.” Stam state and nationwide. “I was here for the adds that the new Republican leadership national Republican wave in 1994, and in the General Assembly is prepared to this is like that.” grant Perdue emergency budget ■ On the national level, many observers authority to help alleviate the current say the election results are an indictment budget crisis. on President Obama’s performance. The ■ Perdue suggests that she is still open Democratic Party’s loss of 63 House seats to several ideas to help the state fi ll its is its worst in 72 years. Democrats lose 5 budget gap, but not open to more tax seats in the Senate, but retain the hikes. One issue on the table is majority. For North Carolina, Senator allowing for legal video poker, which Richard Burr (R) retains his seat, and all could produce signifi cant tax revenue but one incumbent Congressman wins to the state. She is also awaiting results re-election. The one incumbent falling is from a consultant’s report on privatizing Bob Etheridge (D), who loses to the state’s ABC system. “I have believed newcomer Renee Ellmers (R). North for a long time there has to be real Carolina’s contingent now consists of 6 examination of privatization,” Perdue Republicans and 7 Democrats. says. “I’m not quite there. I need to know ■ President Obama worries that the what its worth. I need to know what its election results are a signal that he has worth to the taxpayer. I need to know lost touch with the American public. what kind of damage it would do to local “There is an inherent danger in being governments.” in the White House and being in the bubble,” Obama says.”The responsibilities of this offi ce are so enormous, and so many people are depending on what we do. In the rush of activity sometimes, we lose track of the ways that we connected with folks that got us here in the fi rst place.” 2010 session l CIVITAS INSTITUTE l 309 December ■ Gov. Perdue orders state agencies to reduce their budgets by another 2.5 percent. The savings are to be realized through a hiring freeze and tighter control on raises, travel and non-essential purchases. The move is seen as a proactive measure in anticipation of actual revenues once again falling short of budgeted revenues. “I’m delighted she did it,” says Rep. Paul “Skip” Stam (R-Wake). “Some of the agencies were 2010 Significant Tax Changes (Budget Bill Unless Noted)

Create a temporary credit for small business equal to 25% of the companies’ unemployment insurance tax liability. Small business is defi ned as those with gross receipts of $1 million or less. The credit applies only to 2010 and 2011 taxable years Extend sunset for a number of targeted tax credits, including rehabilitation projects, interstate passenger air carrier, aviation fuel for motor sports events Temporarily allow the state’s estate tax to lapse

2010 Other Revenue Sources & Actions

■ Transfer $5.4 million from the Health and Wellness Trust Fund ■ Transfer $14 million from the motor fl eet services fund ■ Increase Justice and Public Safety fees by $14 million ■ Collect an additional $110 million from a Department of Revenue settlement initiative ■ Create the N.C. Mobility Fund with $39 million diverted from the Turnpike Authority; the Fund is established initially to fi nance the widening and improvement of the I-85 corridor north of Yadkin bridge l CIVITAS INSTITUTE l 2010 session 310 l CIVITAS 2010 EDUCATION FUNDING ENROLLMENT CHANGES 2010 Other Significant Changes ° Public Schools: +10,552, an increase of 0.7 percent COMPENSATION ° UNC System: -595, decline of 2 percent ■ Teachers and state employees receive no pay ° Comm. Colleges: +2,475, increase of 1 percent raise again in the 2010-11 budget, and they do not receive any reimbursement for the unpaid TUITION & FEE INCREASES furlough Perdue imposed on them in 2009 ° UNC: Average tuition and fees up 15.3 percent ECONOMIC DEVELOPMENT EXPANSION for in-state students and 6.8 percent for out-of- state students. ■ The 2010-11 budget includes expansions ° Comm. Colleges: Average tuition and fees to several “economic development” causes, up 10.9 percent for in-state students and 1.8 including: an additional $12.5 million to the One NC Fund, $1.5 million to Perdue’s “Main St. percent for out-of-state students. Solutions” program and $5 million to the state’s OTHER EDUCATION CHANGES regional economic development commissions ° State appropriations, $7.08 billion, down from $7.4 billion in 2009 CAPITAL ° Transfers $442 million from Education Lottery ■ Authorizes $175 million in non-voter approved to support 1,600 teaching positions Certificates of Participation debt to finance UNC ° Reduces Department of Public Instruction and Community College equipment and repair funds by 15 percent ($2 million). and renovations of state buildings ° Includes no raises for teachers OTHER ° Directs UNC to reduce combined spending ■ The department of Forest Resources yields $1.5 by $70 million and gives campuses flexibility million in revenue from selling some of its air on where to cut. fleet ° Allows campuses to raise tuition by $750 ■ The state spends $8 million to open and staff to help meet budget shortfall. two new women’s prison hospital facilities ° Gives UNC additional $5.6 million to address needs of expanded enrollment ° Directs Comm. Colleges to reduce combined spending by $15 million per year. ° Provides an additional $81 million to pay for additional 33,000 students. 2010 session l CIVITAS INSTITUTE l 311 General Assembly: 2011 session House Dems: 52 House Reps: 68 Senate Dems: 19 Senate Reps: 31 2011-12 BIENNIUM FY 2011-12; July 1, 2011 to June 30, 2012 Governor: Bev Perdue (D) he 2011 legislative session ushered in a TRepublican majority in both chambers of the The 2011 Long Session: North Carolina General Assembly for the fi rst Budget Bill SB 200/S.L. 2011-145 time in more than a century. The new leader- Passed House: May 4, 2011 ship was swept into offi ce largely riding a na- Passed Senate: June 4, 2011 tional wave of discontent over the Democratic Conference Version Ratified: June 4, 2011 majorities at the national level combined with Vetoed by Governor: June 12, 2011 frustration here in North Carolina over the state’s economic struggles. North Carolina’s economy Veto Overriden by Legislature: June 15, 2011 was hit harder than most states in the recent recession, and its unemployment rate continued to be among the top fi ve in the nation through- considerable debate. In spite of the House’s out the year. actions to cap the tax, the Senate refused to take up the issue and allowed the tax to increase as The new majority promised more fi scal restraint, the calendar turned to 2012. and most importantly, no new taxes. Those topics proved to be a major issue in the 2011 January budget process, as temporary taxes approved ■ Gov. Perdue rules out any meaningful two years prior were slated to expire along with reform to the state’s Alcoholic Beverage the hundreds of millions of federal “stimulus” Control system. Plagued by scandals revenue. This combination of expiring revenue of reported outrageous salaries and streams presented state budget writers with nepotism, a serious study was conducted another multi-billion dollar budget hole that examining various ways for the state needed to be balanced. to loosen its grip on the sale of liquor. The option under most consideration 2011 also became an historic year as it saw the – selling the system’s assets along with fi rst ever gubernatorial veto of a state budget licenses to private concerns – would in North Carolina, followed quickly by the fi rst yield the state a one-time windfall of legislative override of a budget veto. The budget $300 million. “The juice just is not worth override is only the second time in state history the squeeze for the people of this state,” any vetoed bill has been overridden. said Perdue. ■ As the new legislative session Fiscal realities quickly began to set in early in the approaches featuring a Republican year, as 2011 opened with discussion about state majority in both the House and Senate employee layoff s, possible privatization of the for the fi rst time in more than a hundred state’s Alcoholic Beverage Control system and years, House Speaker Thom Tillis legislation to utilize various state funds to help (R-Mecklenburg) and Senate leader Phil fi nance general government operations. Berger (R-Rockingham) discuss a few of their goals. Included among those Taxes continued to be an issue at the end of are more open government, reducing 2011, as the state’s adjustable gas tax received legislative staff costs, empowering l CIVITAS INSTITUTE l 2011 session 312 l CIVITAS state agency heads with discretion North Carolina’s fi scal house in order,” over how to reduce their costs and said House Speaker Thom Tillis. “The new reducing business regulations. Berger majority in the General Assembly did not also suggests that reducing the state create this budget shortfall, but we were government workforce will be a elected to fi x it.” necessary step in helping to balance the state budget. “Layoff s will be part of the “The spending targets solution,” Berger said. “How big a part remains to be seen.” announced today come at a time when decisive action is “Layoff s will be part of the required to put North Carolina’s solution,” Berger said. “How big a fi scal house in order,” said part remains to be seen.” House Speaker Thom Tillis. “The February new majority in the General ■ Gov. Perdue unveils her biennial budget Assembly did not create this proposal that spends $19.9 billion in the coming fi scal year. The most attention- budget shortfall, but we were grabbing aspects of Perdue’s plan elected to fi x it.” are her intention of keeping ¾ of the “temporary” penny sales tax enacted ■ Gov. Perdue vetoes a bill passed by the two years ago along with the elimination legislature that would have utilized funds of nearly 10,000 state positions, 3,000 from various pots of money in order to of which are currently fi lled. The tax address the state’s budgetary shortfall. extension would cost roughly $825 The bill is intended to proactively million. Republican leaders in the address an anticipated $2.4 billion legislature naturally criticized Perdue’s shortfall in the coming fi scal year by tax proposal. “The governor would take reducing some spending from this $800 million out of the pockets of North year’s budget and sweeping up some Carolinians in order to balance this dollars from various state funds – largely budget,” said Senate leader Phil Berger. including monies used for various “It’s time for government to tighten its “economic development” programs. belt.” Perdue objects largely because she does 2011 session l CIVITAS INSTITUTE l 313 ■ Republican leadership in the House not want to forego any of the money she and Senate hand out their spending claims is vital to job creation in the state. targets to their respective appropriations Lawmakers are also anxious to use the committees. The spending targets funds to pay for tax refund checks owed create a goal for the level of spending to state taxpayers. and provide guidance on where to look for savings. The total spending target March of $17.6 billion is signifi cantly less than ■ House Republican leaders propose the $19.9 billion budget plan recently an exceedingly rare move – turning released by Gov. Perdue. “The spending down federal government funds. The targets announced today come at a time funding in question is a total of $461 when decisive action is required to put million in federal grants for improved train service from Raleigh to Charlotte. May Republicans are leery of how much ■ The Senate unveils their approved in future operation and maintenance budget plan, which totals $19.4 billion, costs the state will be strapped with. “I slightly more than the House plan but just don’t think we should be creating still $500 million less than Gov. Perdue’s another unsustainable system for the budget proposal. Like the House plan, citizens of North Carolina to bear the the Senate does not include the ¾ cent fi nancial burden on,” said Rep. Ric Killian sales tax hike proposed by Gov. Perdue. (R-Mecklenburg). Should North Carolina Unlike the Governor and House plans, reject the funding, it would follow the however, Senate budget writers opt not lead of Ohio, Wisconsin and Florida, who to include a reduction to the corporate collectively turned down $3.6 billion in income tax rate. Instead they propose a federal grants for rail projects. tax credit for small businesses along with ■ The Senate votes along party lines, a slight drop in the individual income 31-19, to override Perdue’s veto of the tax rates coupled with an expansion of legislative bill utilizing various pots the income tax base. State employees of money to help balance the state would not receive a pay raise in the budget and ensure tax refunds are paid in a timely manner – a measure vetoed by Perdue late last month. The House FY2011-2012 HEALTH & HUMAN SERVICES BUDGET subsequently fails to override Perdue’s Total Appropriations $4.495 billion veto. Major Items: Medical Assistance (Medicaid) $2,958 million April NC Health Choice $79 million ■ House budget writers approve their Mental Health/D.D./Subst. Abuse: $666 million $19.3 billion budget proposal for FY Child Development $266 million 2011-12. Five Democrats crossed party Social Services $186 million lines to join the unanimous Republican Public Health $190 million votes in favor of the spending plan. The House plan spends $600 million less than Perdue’s budget proposal, and does not Senate proposal, and the Senate budget include any tax increase. As in Perdue’s would eliminate nearly 20,000 state budget, state employees would receive government positions, with as many as no pay raise, and an estimated 18,500 13,000 of those being teachers assistants. state positions would be eliminated in The Senate does, however, include $62 the House plan – compared to roughly million to add 1,100 teaching positions 10,000 in Perdue’s plan. The House plan to bring down the teacher student also includes a $255 million reduction ratio. Also diff erent from the House in funding for teacher assistants in and Governor’s budget proposals is the grades K-3, a reduction of roughly half Senate’s inclusion of a new system of of that type of funding. Also included merit pay for state employees – including is more than $92 million in new fees teachers. and fee increases, such as an increase in ■ Legislation making changes to the the home foreclosure fee and new and State Health Plan that covers most state higher fees to be imposed on coastal employees becomes law. For the fi rst

l CIVITAS INSTITUTE l 2011 session 314 l CIVITAS ferries. time, state employees and retirees will DID YOU KNOW? At 38.9 cents per gallon, North Carolina’s state gas tax as of Jan. 1, 2013 will be fi fth highest in the nation. The state gas tax is an adjustable rate based upon the are overblown given the tiny fraction wholesale price of fuel, as gas prices rise of a diff erence in funding for public education between the budget Perdue so too does the state gas tax. vetoed and her own budget plan. The state budget passed in spite of Perdue’s veto allocates $7.46 billion to public pay a share of the premium costs for education, compared to $7.6 billion in enrollment into one of the SHP plan Perdue’s plan. Indeed, the fi nal budget options. Several out of pocket expenses includes full funding for K-3 teacher such as co-pays are increased slightly assistants and provides more than $60 by the legislation as well. Employees million in new spending to fi nance and retirees enrolled in the more reductions in K-3 class size – something comprehensive “80/20” plan will now not included in Perdue’s plan. need to pay about $21 a month toward enrollment into the SHP. Enrollment July into the less comprehensive and less ■ Wake County Superior Court Judge expensive “70/30” plan will still be free to Howard E. Manning Jr. issues an order employees and retirees. The move comes stating that the state cannot create any on the heels of reports that the SHP is barrier to prevent at-risk children from facing a half billion dollar shortfall in the enrolling in the state-funded Pre-K coming biennium. program (formerly known as More at Four). The newly passed state budget June reduced funding for the program by ■ For the fi rst time in state history, a North 20 percent, and created a co-pay for Carolina governor vetoes the budget those children not deemed to be “at bill approved by state lawmakers. Then, risk.” “This case is about the individual by a 31-19 vote in the Senate and a 73 right of every child to have the equal to 46 margin in the House, the General opportunity to obtain a sound basic Assembly fi nalizes the rstfi veto override education,” Manning explained in the of a state budget. The primary source of order. Conversely, House Speaker Thom confl ict between Perdue and legislators Tillis stated: “I am disappointed in today’s is a ¾ cent increase in the state sales tax order from Judge Manning. The court

that Perdue wanted. A temporary, one- ruling is unclear in key places and may be 2011 session l CIVITAS INSTITUTE l 315 cent sales tax increase approved two incorrect as a matter of law.” years ago expires at the end of this fi scal ■ The state’s Program Evaluation Division year and Perdue didn’t want to see any releases a report recommending signifi cant drop off in revenue due to the consolidating several smaller community expiration of the tax. colleges by merging them with larger, ■ Perdue especially focuses her objection nearby colleges in order to save more to the legislative budget in regards than $5 million annually. Naturally, the to public education spending. Upon State Board of Community Colleges refl ection, critics say the Governor’s unanimously passes a motion opposing comments that the state budget the proposed consolidation. State amounts to the legislature “turning lawmakers don’t act on the report’s its back on education” that will “cause recommendations, but feel it has generational damage to this state” triggered a necessary conversation. August and bulk buying deals with other states ■ Gov. Perdue’s offi ce issues a statement are among the cost-saving measures. that the governor intends to develop a “State government must be streamlined plan to accommodate all eligible 4-year- and nimble, fi nding every savings that olds to the state’s Pre-K program. This we can, just as families and businesses announcement comes in the wake of across the state are doing,” says Gov. Judge Howard Manning’s decision that Perdue. the state cannot exclude any children deemed “at-risk” from the program. “State government must be Perdue’s offi ce, however, admits there streamlined and nimble, fi nding simply isn’t suffi cient resources such as staff and facilities to accommodate every every savings that we can, just four year old labeled at-risk. Last year, as families and businesses enrollment in the program was roughly 32,000, while estimates place the total of across the state are doing,” “at-risk” four year olds at 65,000. says Gov. Perdue. ■ Standard & Poor’s, one of the nation’s premier credit rating agencies, downgrades the U.S. government’s credit October rating in an unprecedented move. U.S. ■ Due in large part to projected savings government debt will now be rated that haven’t materialized, North AA+, a step below AAA. The move will Carolina’s Medicaid program will fi nd likely prompt higher interest rates on itself in a $139 million hole this year. government issued debt, making it more According to DHHS Secretary Lanier expensive for the federal government Cansler, the shortfall is the result of to borrow money. In light of this action, budgeted savings that are “unreasonable there are growing concerns among and unobtainable.” Major shortfalls state and local governments regarding include: rate reductions to service their credit ratings. In North Carolina, providers written into the budget that the State Treasurer warns that the state did not receive federal government government has reached its maximum approval and savings by Medicaid’s debt load – to borrow more in the near managed-care program falling well short future would threaten the state’s coveted of expectations. AAA credit rating. ■ A report by the legislature’s top economist shows that tax revenue for September the fi rst three quarters of the scalfi ■ Gov. Perdue announces a new project year are running about 3.5 percent designed to streamline and improve above projections. The slight surplus how the state government purchases translates into between $135 and $145 more than $4 billion worth of goods million in extra unanticipated funds each year. The plan will implement for state coff ers. Barry Boardman, lead recommendations from a private economist for the General Assembly’s consulting fi rm, and is hoped to save Fiscal Research Division and presenter of $30 million a year. Greater collaboration, the revenue data, calls the tax collection more training for purchasing agents fi gures “a wickedly odd report” that l CIVITAS INSTITUTE l 2011 session 316 l CIVITAS “seems to be defying gravity.” Boardman’s Angeline Sligh tells legislators “I feel surprise is due to North Carolina’s like I’ve done a good job leading the continued double-digit unemployment program. I would give myself an A.” Rep. rate. Budget writers crafted their revenue Justin Burr (R- Stanly) disagrees. “If this projections based on an anticipated was the private sector, someone would unemployment rate between 9 and have been let go long ago,” says Burr. 9.5 percent. “If we stay in double-digit Burr also labels the project a “money pit.” unemployment numbers…it would be a very diffi cult feat for us to run a surplus,” says Boardman.

November ■ The state House approves a bill that would prevent the state gas tax from rising on Jan. 1, but the Senate leaves Raleigh without voting on the bill. As a result, North Carolina motorists can expect a nearly 4 cent spike in the gas tax as 2012 begins. The new tax is expected to rise to 38.9 cents per gallon, which would rank North Carolina’s rate fi fth highest in the nation. North Carolina’s gas tax is calculated using a formula based on the wholesale price of fuel, and adjusts every six months. As fuel prices rise, so too does the gas tax.

December ■ An audit of a state project to design and implement a new computer system for processing Medicaid claims reveals massive cost overruns and delays. The state contract with Computer Sciences 2011 session l CIVITAS INSTITUTE l 317 Corp. for the new program totaled $265 million, but actual costs are running close to $500 million and the project is on pace to be completed 22 months later than originally promised. The federal government is expected to pick up 90 percent of the new system’s costs, but the state’s price tag is still signifi cant and the delays have caused great frustration among state lawmakers. In spite of the results of the audit, head of the Medicaid Management Information Systems offi ce 2011 Significant Tax Changes (Budget Bill Unless Noted)

Small business tax relief tax package, exempts the fi rst $50,000 in business income for start-up and small businesses having gross receipts less than $825,000.

2011 Other Revenue Sources & Actions

■ Earmark $185 million for the state’s Savings Reserve Account and $125 million for the Repairs and Renovations Reserve Account from excess revenue carried over from last year

■ Transfer of $199 million from the Highway Fund to the General Fund to compensate for the switching of fi nancial responsibility of the State Highway Patrol

■ Increase judicial fees by $62 million

■ More than $136 million is diverted from 11 various state funds to the help balance the General Fund. Funds being aff ected include: Highway Trust Fund, Golden LEAF, Parks & Recreation Trust Fund, Health and Wellness Trust Fund and several others l CIVITAS INSTITUTE l 2011 session 318 l CIVITAS 2011 EDUCATION FUNDING 2011 Other Significant Changes ENROLLMENT CHANGES ° Public Schools: +5,323 (0.36% increase) COMPENSATION ° Community Colleges (Curr. Programs) -8,716 ■ No pay raises are included for state employees (2.5% decrease) ■ ° UNC System - 1,422 (0.64% decline) State employees and retirees now must pay about $21/mo. for enrollment into the more TUITION & FEE INCREASES comprehensive of two coverage plans offered ° UNC: Average increase of 8.6% for in-state by the State Health Plan. Several out of pocket students and 5.2% for out-of-state students expenses such as co-pays are increased slightly as well. (S.L 2011-85) ° Comm. Colleges: 17.9 percent increase in tuition for in-state students; 4.6 percent increase for out-of-state students OTHER EDUCATION CHANGES ° Final budget agreement adds $250 million to original budget legislation ° $61.7 million to add 1,100 teachers to reduce class size ° $124.2 million increase to management flexibility reduction for LEAs ° $414 million reduction for UNC System ° $446.9 million transferred from lottery to state 2011 session l CIVITAS INSTITUTE l 319 General Assembly: 2012 session House Dems: 52 House Reps: 68 Senate Dems: 19 Senate Reps: 31 2012-13 BIENNIUM FY 2012-13; July 1, 2012 to June 30, 2013 Governor: Bev Perdue (D) he Republican majority in the state Tlegislature reconvened in 2012 to tweak the The 2012 Short Session: second year of the two-year budget they passed Budget Bill HB 950/S.L. 2012-142 last year over Gov. Perdue’s veto. For the second Passed House: May 30, 2012 straight year, the House and Senate would need Passed Senate: June 14, 2012 to override the Democratic governor’s veto. Conference Version Ratified: June 21, 2012 The largest source of disagreement between Vetoed by Governor: June 29, 2012 Perdue and the legislature stemmed from public education funding. Veto Overridden by Legislature: July 2, 2012

Because past budget writers chose to fund ongoing education obligations with temporary Carolina Republicans have controlled both federal stimulus dollars and temporary tax hikes, chambers of the General Assembly along with state lawmakers have had to reduce public the Governor’s offi ce in nearly 150 years. education spending to refl ect fi nancial reality. Gov. Perdue, however, proposed to reintroduce January a $760 million sales tax increase to prop up ■ Assistant Commerce Secretary Lynn the infl ated level of government spending. Holmes is questioned in a state Republican leaders in the General Assembly committee meeting regarding the $2.6 staunchly opposed any tax increases and off ered billion hole in the state’s unemployment a budget that balanced without any tax hikes. insurance fund. The state has had to borrow that amount from the federal In spite of the fact that the legislative budget government to keep up with benefi t appropriated 99 percent of the amount Perdue claims. “The crux of the matter is that included in her own budget proposal on public 2009 was the insolvency and nothing education, Perdue vetoed their budget plan for was done from that period forward,” said the second straight year. Also for the second Sen. Bob Rucho, R-Mecklenburg and a consecutive year, the legislature garnered committee co-chairman. “That’s not a enough votes to override Perdue’s veto. good way to run a business and very simply that is why we’re sitting in the With her announcement that she will not run for $2.6 billion hole.” The debt will require re-election, Perdue opened up the Democratic higher unemployment insurance taxes in fi eld for candidates to oppose the Republican the future – placing an additional burden candidate, former Charlotte Mayor Pat McCrory. on employers. McCrory lost to Perdue narrowly in their 2008 ■ North Carolina’s state tax revenues are race. The Democrats settled on Lt. Governor ahead of schedule for the fi rst half of the Walter Dalton. 2011-2012 fi scal year. The latest fi gures show revenues coming in $60 million Election night saw a McCrory victory and above projections, with above-expected Republicans strengthen their majorities in both corporate and franchise tax collections chambers. The results mark the fi rst time North leading the way. l CIVITAS INSTITUTE l 2012 session 320 l CIVITAS ■ In the middle of the month, Gov. tax – which I have always opposed – is Perdue announces that a key plank both excessive and discriminatory,” Perdue of her re-election strategy would be said in a news release. “It is unjust for the to bring back a three-quarters of a General Assembly to balance their budget penny increase in the state sales tax, on the backs of coastal working men and estimated to cost taxpayers more than women.” Perdue adds that she intends to $800 million annually. By the end of the impose a 12-month moratorium on the month Perdue, whose approval ratings new tolls and orders the state Department are among the lowest of all sitting of Transportation to fi nd spending Governors, announces she will not run reductions to off set the foregone revenue. for re-election. March “The crux of the matter is that ■ Waivers issued by State Schools 2009 was the insolvency and Superintendent June Atkinson to 91 of the state’s 115 school districts will exempt the nothing was done from that majority of North Carolina public school period forward,” said Sen. Bob students from a requirement passed in last Rucho, R-Mecklenburg and a year’s budget mandating an additional 5 days of school. School district leaders committee co-chairman. “That’s cited additional costs and short notice for not a good way to run a business reasons they opposed the extra class time requirements. Legislative leaders say they and very simply that is why we’re will not oppose the waivers. “If we saw sitting in the $2.6 billion hole.” they were trying to circumvent the law, we’d put a stop to it,” said state Sen. Jerry February Tillman (R – Randolph) co-chairman of the ■ “The slow recovery, in combination with Senate Education Committee. “We’re not the reduction of the state sales tax rate, at that point.” Lawmakers said they will has resulted in another year of no debt likely take up the issue in May when the capacity.” That’s the quote from the latest General Assembly reconvenes. debt aff ordability study issued by State ■ An advertising campaign citing the fact Treasurer Janet Cowell. In short, the that 2,000 additional state-funded school

study recommends the state not issue teachers were fi nanced by the 2011-12 2012 session l CIVITAS INSTITUTE l 321 any additional debt for the 2012-13 fi scal budget stirs up criticism and controversy. year in order to avoid a possible credit N.C. Real Solutions, an educational rating downgrade. The treasurer’s offi ce campaign funded and produced by the recommends the state keep its annual North Carolina chapter of Americans debt service payments below 4 percent for Prosperity and the Civitas Institute, of annual General Fund expenses. Any focuses the public’s attention on this additional borrowing this year, according fact in a series of television and radio ads to the report, would exceed that limit. across the state. Critics have to concede ■ Gov. Perdue announces she is issuing an that the data was factually correct, but executive order to block new and higher complained that it may be misleading tolls on coastal ferries included in the because it doesn’t refl ect losses of FY 2011-12 state budget and scheduled federally- and locally-funded teachers. N.C. to take eff ect in April. “This new ferry Real Solutions counters by stating those losses are a result of the short-sighted programs. Since its inception in 2006, the reliance on temporary federal stimulus NCEL has generated about $2.35 billion funds, and that the 2011 legislature did for North Carolina public education. an admirable job to fi nd the state funds ■ A collection of 25 local public school to save those 2,000 teaching positions superintendents discuss the impact of that otherwise would have been the 2011-12 budget on their districts at eliminated. The advertising campaign a special meeting of the State Board of gets the attention of Gov. Bev Perdue, Education in Durham. School leaders who claims it “distorts the truth” and calls decry the reductions in funding. “Our for the ads to be pulled off the air. children deserve better,” declares the retiring superintendent of McDowell “If we saw they were trying to County schools. State Rep. Bryan circumvent the law, we’d put a Holloway (R- Rockingham), chair of the House Education committee, however, stop to it,” said state Sen. Jerry said the meeting was largely a partisan Tillman (R – Randolph) event, calling the State Board of Education “just a partisan group – they co-chairman of the Senate do all her (Gov. Perdue) bidding.” Education Committee. “We’re not at that point.” ■ The State Department of Transportation FY2012-2013 HEALTH & HUMAN SERVICES BUDGET unveils new or higher tolls for several Total Appropriations $4.68 billion coastal ferries – rates that they will not Major Items: actually be collecting. The 2011-12 Medical Assistance (Medicaid) $3,101 million state budget included a provision for NC Health Choice $82 million the new tolls to begin being collected Mental Health/D.D./Subst. Abuse: $696 million on April 1, but Gov. Perdue issued an Child Development $263 million executive order instructing DOT not to Social Services $177 million actually collect the new tolls. There are Public Health $169 million confl icting legal opinions regarding Perdue’s authority to block the tolls. May April ■ Gov. Bev Perdue releases her FY 2012- 13 state budget proposal, a spending ■ An historic Mega Millions jackpot of plan amounting to roughly $21 billion. $640 million provides a substantial spike The plan, which adjusts the second year in North Carolina Education Lottery of the two-year budget plan approved collections. Estimates suggest the NCEL last year, most notably includes a three- netted more than $20 million in revenue quarter-cent increase in the statewide from that specifi c Mega Millions game sales tax that would cost taxpayers alone due to the intense demand for an estimated $760 million. Perdue tickets for the huge prize. About half attempts to sell the tax hike as a means of the lottery ticket revenue goes to to avoid further spending reductions prize payouts, with more than a third of to public education. Legislative leaders revenue going to fund various education are not impressed with Perdue’s plan. l CIVITAS INSTITUTE l 2012 session 322 l CIVITAS DID YOU KNOW? Average state tax revenue collections per person in North Carolina ballooned by a stunning 300 percent in the last 30 years upon local districts from $503 million to - nearly twice the rate of CPI (average $170 million. House budget writers are infl ation) growth. That means the average aided by a surplus of revenue collections state tax bill of a Tar Heel taxpayer is now of more than $200 million along with unused pots of money in other state funds. a full four times higher than it was just ■ The House unveils its fi nal budget three decades ago. proposal of $20.3 billion, which is about $600 million less than Gov. Perdue’s total spending plan. Unlike Perdue’s plan, the Similarly, per capita state spending grew House budget includes no tax hike. The by 265 percent in that time span, growing House proposal also includes a one-time $250 bonus for state employees and at a pace 100 percentage points higher teachers, and an extra fi ve days vacation than the cost of living for workers, but eliminates $121 million as measured by CPI. from a reserve set aside for performance pay initiatives as well as reducing $62 million from the scheduled contribution to the state pension system. ■ Lt. Governor and former State Senator “We must break state government’s Walter Dalton wins the Democratic habit of throwing money at problems primary and will face Republican Pat and adopt innovative solutions and McCrory in this year’s gubernatorial race. meaningful reforms,” said Senate leader Dalton beat out former U.S. Representative Phil Berger (R-Rockingham). “The cycle Bob Ethridge to earn the nod. of irresponsible taxing, borrowing and spending must stop.” June ■ The Senate takes its turn at crafting a “We must break state state budget plan for FY 2012-13. Overall, government’s habit of throwing the Senate plan appropriates about $130 million less than the House plan. To money at problems and their credit, the Senate budget resisted adopt innovative solutions use of temporary revenue sources to fund permanent expenditures. The 2012 session l CIVITAS INSTITUTE l 323 and meaningful reforms,” said Senate’s action stands in sharp contrast Senate leader Phil Berger to the House’s use of $227 million in nonrecurring funds to pay for ongoing (R-Rockingham). “The cycle of expenses, which sets a bad example and irresponsible taxing, borrowing demonstrates an inability to make tough decisions. The Senate intends to utilize the and spending must stop.” “Performance Pay” funds to help fi nance $160 million set aside for “Compensation ■ State House budget committees are Increases and Personnel Flexibility.” These busy fi nalizing spending proposals to be increases include a 1.2 percent pay raise included in their fi nal spending proposal. for state personnel, excluding public The Education Committee agrees to school personnel. As for teachers and reduce the discretionary cut imposed other public school employees, the Senate plan sets aside $84 million for local to Perdue’s veto statement: “First and school districts to use for pay raises or to foremost, their budget does not invest retain personnel. By comparison, recall enough resources in education.” But that the House budget would spend $79 many observers fi nd Perdue’s objections million to distribute a one-time, across over public education funding puzzling, the board $250 bonus to permanent in light of the fact that her own budget teachers and state-funded employees. proposal appropriated just one percent ■ The shortfall in state funding for more money toward schools. Medicaid is larger than earlier anticipated. According to the acting Responding to budgetary critics, secretary of DHHS, the hole is likely to be Rep. Bryan Holloway (R-Stokes) $75 million deeper than the $206 million estimated just last month. Legislative asks “If you don’t like this budget, budget writers consider the issue a “cash what’s your answer; more tax management” problem and consider granting Gov. Perdue’s offi ce authority to increases?” raid several designated state trust funds July to cover the shortfall. ■ A pair of technical corrections bills ■ The state legislature agrees to a fi nal altering the state budget are signed into budget proposal to send to Gov. law, and include a few notable changes. Perdue’s desk for approval. The budget One such change is an additional fi ve is approved 71-45 in the House and days of bonus leave for state employees, 30-15 in the Senate, support that would including public school teachers and be strong enough for the three-fi fths university and community college majorities needed to override a Perdue employees, to be used in FY 2012-13. veto. Perdue vetoed the legislative Another provision is the extension for budget last year but that veto was another year of a tax credit off ered to overridden. The fi nal budget proposal fi lm production companies lmingfi in restores $251 million in funding to K-12 North Carolina. The credit had been set education from the reductions approved to expire on Jan. 1, 2014. last year, and includes a 1.2 percent pay ■ raise to teachers and state employees. Also included in the technical corrections The legislative budget spends $727 is a delay in the collection of tolls million less than Perdue’s budget plan, for coastal ferries. Last year’s budget but does not include the three-quarter included a provision establishing new of a penny increase in the state sales and higher tolls on several ferries, which tax that was projected to cost taxpayers was set to be implemented as of April $760 million. Responding to budgetary 2012. The tolls proved to be a bone of critics, Rep. Bryan Holloway (R-Stokes) contention for Gov. Perdue, who ordered asks “If you don’t like this budget, what’s NCDOT to not collect them. State your answer; more tax increases?” lawmakers disputed Perdue’s authority to circumvent this requirement, but ■ Perdue vetoes the legislative budget, the tolls never were implemented. The and the legislature overrides Perdue’s technical corrections bill moves the veto for the second straight year. Perdue implementation of new tolls to take justifi ed her veto largely on the basis of eff ect July 2013.

l CIVITAS INSTITUTE l 2012 session 324 l CIVITAS public education funding. According August of the tax burden we now have,” Dalton ■ The two gubernatorial candidates, explained. “His plan would absolutely kill Democrat Walter Dalton and Republican small businesses.” Dalton, however, fails Pat McCrory, spar over the issue of state to explain how reducing or eliminating taxes. McCrory has accused Dalton of taxes on small business income would agreeing “with Beverly Perdue and … harm them. he wants to increase the sales tax in ■ Gov. Perdue signs a bill exempting newer North Carolina – on you – by 15 percent.” cars from annual emissions inspections. Dalton had supported Perdue’s proposal Vehicles three years old or newer will no earlier this year to increase the state longer need to undergo the inspection sales tax by a penny, a move that would starting in 2014. The emissions test have cost taxpayers $850 million. But cost car owners $16.40. All vehicles will in a recent interview, Dalton insists he continue to be required to pass yearly would not include a sales tax increase safety tests in order to renew their in his fi rst budget plan should he be registration. elected. In turn, Dalton attacks McCrory’s remarks that suggest McCrory would September prefer to reduce personal and corporate ■ The Fiscal Research Division of the income taxes and possibly make up that legislature releases a report showing that revenue with an expanded sales tax. revenue collections through the fi rst two “He has talked about the redistribution

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months of the 2012-2013 fi scal year are ■ Mississippi Gov. Phil Bryant declares running $26 million below the budgeted that his state will reject the Medicaid revenue target. expansion included in the Obamacare ■ The House Select Committee on Legacy law. In spite of the federal government Costs from the State Health Plan, fi nancing most of the expansion, several Pensions and Employment Security states are declaring that the state Commission meets to discuss the share of the expansion would be too fi nancial condition of these programs. expensive, and would come with too The numbers don’t look promising. many strings attached. “While some State debt is in excess of $7 billion (not people say Obamacare will come as an counting interest payments), the state economic boost with ‘free’money, the pension plan has an unfunded liability reality is simple: No money is free,” said of $3.7 billion, the state owes $2.5 billion Bryant, a Republican. “Since when did the to the federal government for money federal government ever give free money borrowed to cover unemployment without asking for something in return?” insurance benefi ts and the State Health Mississippi joins Florida, Louisiana, Plan has accumulated $30 billion in Georgia, South Carolina and Texas on unfunded liabilities for state retiree the list of states whose governors have health insurance benefi ts. The $43 billion stated they will reject the Medicaid in total debt and liabilities works out to expansion. nearly $10,500 for every worker in the state. November ■ A report issued by the State Auditor October determines that state Commerce ■ The state legislature’s Program Evaluation Department offi cials failed to Division issues a report stating that suffi ciently monitor $80 million in the North Carolina Railroad should state funds earmarked for specifi c begin sharing its revenue with the state organizations, including the N.C. Rural government. The NCRR is operated as a Economic Development Center and private entity, but is owned by the state N.C. Biotechnology Center. The audit government. It hasn’t paid the state any suggested that Commerce offi cials did dividends since 2006, but is ordered not follow up to ensure the funds were by law to reinvest any profi ts in capital used for their stated purposes. improvements. The report estimates ■ Former Charlotte Mayor Pat McCrory the NCRR could provide the state with (R) defeats Lt. Gov. Walter Dalton (D) to roughly $55 million over the next decade become the fi rst Republican governor in – but NCRR representatives claim such North Carolina in 20 years. Republicans a move would reduce the amount it can also increased their majorities in both invest in further track improvements. chambers of the General Assembly, ■ In the last state-level unemployment winning super majorities in both the report before next month’s elections, House and Senate. McCrory’s victory North Carolina’s unemployment rate ensures Republican control of North drops by one-tenth of a percentage point Carolina’s House, Senate and Governor’s to 9.6 percent in September. The rate still mansion for the fi rst time since 1870. places North Carolina at 5th highest in l CIVITAS INSTITUTE l 2012 session 326 l CIVITAS the nation. 2012 Significant Tax Changes (Budget Bill Unless Noted)

Cap the state gas tax for a year at 37.5 cents per gallon, the variable rate was projected to be at least a penny per gallon higher without the cap

Extend for another year a tax credit targeted specifi cally toward television and movie production. The credit had been set to expire Jan. 1, 2014. (S.L. 2012-194) 2012 Other Revenue Sources & Actions

■ Direct appropriation of $123 million into the savings reserve account taken from unappropriated year end balance from end of FY 2011-12

■ Transfer of $45 million from the One NC Fund to General Fund

■ Transfer of $8 million above traditional annual transfer from Highway Fund to General Fund

■ Divert $6.75 million of annual tobacco settlement funds typically going to Golden LEAF to General Fund

■ Reverse measure passed in last year’s budget bill to begin collecting new and higher tolls on coastal ferries, delaying their implementation until July 2013 (S.L. 2012-145)

December would signifi cantly bolster the state’s job ■ The Revenue Laws Study Committee and income growth. The study was based issues its recommended plan to pay on a plan being developed by legislative back $2.8 billion the state borrowed leaders, and expected to be introduced from the federal government to cover as legislation in the 2013 session. The tax unemployment benefi ts. The proposal reform proposal would be designed to includes increases in unemployment be revenue neutral largely by expanding insurance taxes along with a reduction the sales tax base to goods and services

in the maximum amount of benefi ts currently not subject to the tax. 2012 session l CIVITAS INSTITUTE l 327 payable to recipients along with a reduction in the maximum number of weeks recipients can receive benefi ts. The proposal would pay off the debt three years earlier than the current repayment schedule, and avoid far more drastic tax increases on employers. ■ A study by the consulting fi rm Arduin Laff er & Moore Econometrics suggests that a plan to eliminate North Carolina’s personal and corporate income taxes 2012 EDUCATION FUNDING 2012 Other Significant Changes ENROLLMENT CHANGES ° Public Schools +11,802 (0.8 percent increase) COMPENSATION ° Community Colleges -5,053 in traditional ■ Salary increase of 1.2% for state employees, curriculum students (a 2% decrease); overall including teachers enrollment: -7,970 (1.5 percent decline) ■ The $121 million set aside in last year’s budget ° UNC System + 865 (0.4 percent increase) for a merit pay program for state workers is TUITION & FEE INCREASES seized and spent in the General Fund ° UNC Average increase of 8.6% for in-state students and RETIREMENT ° 5.2% for out-of-state students ■ A 1% cost-of-living (COLA) increase is provided ° Comm. Colleges: 3.7 percent increase in tuition for state retiree pension benefits rate for in-state students, 0.9 percent increase for out-of-state students ° Other Educational Changes ° Legislature adds $91.7 million to total education spending over last year. ° Provides $71 million to reduce the LEA flexibility reduction to $360 million. ° Provides $29.7 million in need-based financial aid for UNC students. ° Appropriates $27 million to implement The Excellent Public Schools Act. ° Adds $5 million for NC Back-to-Work program for Community College students. l CIVITAS INSTITUTE l 2012 session 328 l CIVITAS General Assembly: 2013 session House Dems: 43 House Reps: 77 Senate Dems: 17 Senate Reps: 33 2012-13 BIENNIUM Governor: FY 2013-14; July 1, 2013 to June 30, 2014 Pat McCrory (R)

he beginning of 2013 saw the swearing-in of The 2013 Long Session: Tnew Gov. Pat McCrory, the fi rst Republican Budget Bill SB 950/S.L. 2013-360 governor of North Carolina in 20 years. McCrory’s election enabled Republicans to enjoy majorities Passed Senate: May 23, 2013 in both legislative chambers and the governor’s Passed House: June 13, 2013 mansion for the fi rst time since the reconstruc- Conference Version Ratified: July 25, 2013 tion era. Signed by Governor: July 26, 2013

Tax reform stepped into the spotlight, with talk of eliminating personal and corporate income taxes altogether from the state tax code, while shifting the revenue burden to a broad-based January sales tax. While stopping short of such sweep- ■ With the inauguration of Pat McCrory, ing measures, the actual tax reform signed into North Carolina sees the swearing-in of law was nevertheless recognized by national its fi rst Republican Governor in 20 years, groups as the most signifi cant state tax reform in and marks the fi rst time since the Recon- decades. Reductions in the personal and corpo- struction era that North Carolina has a rate income tax rates were the cornerstone of Republican governor at the same time as the reform package that was projected to net a Republican majorities in both chambers signifi cant cut for North Carolina taxpayers. of the General Assembly. At his inauguration, McCrory insists that state govern- The 2013 state budget was passed a few weeks ment will begin to live within its means, into the fi scal year, and featured a modest declaring that rising taxes cause “more spending increase overall, with Medicaid cost pain to families and small businesses increases receiving much of the additional fund- on Main Street.” ing. Moreover, the budget included signifi cant McCrory also pledges to make state changes to teacher tenure, with measures to government more effi cient and unwind the use of tenure in favor of short-term customer-friendly. 2013 session l CIVITAS INSTITUTE l 329 contracts and a move toward merit-based com- ■ The state Board of Transportation au- pensation. thorizes increases on fi ve state ferry toll routes. The General Assembly had last The year ended with revenue collections coming year ordered the toll hikes in order to in ahead of the prior year’s pace. generate an additional $5 million in revenue from users. Two state ferry tolls were exempted from the tolling, prompting board member Mike Alford of Jacksonville to declare: “If you’re going to toll one, toll all of them.” February I believe we should set a vision ■ State budget writers are predicting some for exactly what income taxes wiggle room in this year’s state budget, while cautioning fi nances will still be should look like and put that out tight. Early estimates are projecting a 3 there. Let’s start by reducing or percent revenue growth over last year, but most of that will be consumed by eliminating the corporate income growth in Medicaid and state retiree tax, reducing the personal income benefi t costs. Gov. McCrory’s offi ce projects they will release a budget plan by tax, eliminating some of these mid-March, after which the Senate will exemptions and broadening the take a fi rst crack at crafting a spending base where it makes sense. proposal. ■ Reforming North Carolina’s tax code is House Speaker Thom Tillis shaping up to be a top legislative priority (R-Mecklenburg), February 2013 this session. Meetings and discussions among House and Senate members have begun in earnest, although no bill March has yet been presented. Sen. Bill Rabon ■ “Changing policy through our budget.” (R-Brunswick), a co-chairman of the That’s how Gov. Pat McCrory describes Senate Finance Committee, says “We are his fi rst state budget proposal. McCrory’s meeting every day two or three times plan would increase year-over-year with diff erent folks going over diff erent spending by nearly half a billion dollars plans and ideas,” in reference to meeting while not raising taxes. Most of the policy with representatives from the governor’s “changes” are focused on education. Total offi ce and House. “Our goal is to do away General Fund expenditures for fi scal year with taxes that are problems to business 2013-14 under McCrory’s proposal would and economic growth.” be $20.6 billion, up 2.2 percent over the ■ House Speaker Thom Tillis (R-Mecklen- current year’s authorized spending total burg) adds, “I believe we should set a of $20.16 billion. vision for exactly what income taxes In addition to not raising taxes, Mc- should look like and put that out there. Crory’s 2-year budget plan aggressively Let’s start by reducing or eliminating sets aside funding in the state’s savings the corporate income tax, reducing the reserve account, dedicates signifi cant personal income tax, eliminating some monies to repair state-owned buildings, of these exemptions and broadening the and issues no new debt. base where it makes sense.” McCrory’s spending plan allocates funds for the hiring of 1,800 additional teachers, while modestly reducing funding for teacher assistants. Another major funding priority in McCro- ry’s budget is shoring up North Carolina’s Medicaid program. The budget increases the line item for Medicaid by $185 million in FY 2013-14 and by $390 million l CIVITAS INSTITUTE l 2013 session 330 l CIVITAS the following year. The budget also sets April aside $90 million a year over the next ■ A new Department of Revenue report two years into a Medicaid risk reserve. shows that 102 sales tax exemptions McCrory’s budget plan, however, un- amount to $3.1 billion in tax breaks. The fortunately continues the policy of report is the topic of discussion among targeted government privileges and legislators considering expanding the taxpayer handouts to select companies. sales tax base as part of broader tax For instance, the Governor’s budget plan reform measures. By eliminating exemp- allocates $9 million to the One North tions, supporters say, the code becomes Carolina Fund, and another $14 million fairer and the added revenue would help to the Job Maintenance and Capital De- enable tax rate reductions. velopment (JMAC) program. ■ Details of a comprehensive tax reform ■ McCrory’s budget would transfer roughly plan crafted and pushed by Sen. Bob $275 million in state funds that would Rucho (R-Mecklenburg), a chairman of traditionally have gone to various dedi- the Senate Finance Committee, begin cated trust funds and divert them to the to emerge. Eliminating sales tax exemp- General Fund. These funds involve dedi- tions on consumer purchases, lowering cated funding for items such as tobacco- personal and corporate income taxes dependent communities, state parks and and enacting a new business license fee old tire disposal. to replace current franchise taxes are all State budget director Art Pope labels key features of Rucho’s plan. The overall the move a “restructuring” of how the strategy is to shift North Carolina’s tax funds are spent, moving the decisions code from one heavily reliant on income to the General Assembly and away from taxes to a largely consumption-based unelected political appointees who head code. “In a consumption-based tax, every up the dedicated trust funds. Pope tells time a product is bought or sold, it cre- reporters this move will help ensure that ates business income, it creates gross taxpayer dollars are spent “with true domestic product activity, and it creates transparency for the greatest and high- jobs,” Rucho says. est needs of the state, rather than having tens of millions of dollars going to third- party organizations.” 2013 session l CIVITAS INSTITUTE l 331

FY2013-2014 HEALTH & HUMAN SERVICES BUDGET Total Appropriations $4.99 billion Major Items: Medical Assistance (Medicaid) $3,462 million NC Health Choice $68 million Mental Health/D.D./Subst. Abuse: $699 million Child Development $254 million Social Services $175 million Public Health $144 million Central Management & Support $74 million DID YOU KNOW? The average annual growth rates for those states without a personal ■ The Senate releases its $20.6 billion income tax exceeded the growth rate spending plan, which would mark a of all other states by 0.7 percentage 2.3 percent increase over current year’s points per year between 1992 and spending, but comes in $17 million less than Gov. McCrory’s proposed budget. 2001, and by 0.5 percentage points Signifi cant proposals include: lifting the between 2002 and 2011. cap on student class size for grades K-3 while granting LEAs more fl exibility over how to assign teachers, moving the State Bureau of Investigation to the Depart- ment of Public Safety and a $340 million May increase to cover rising Medicaid costs. ■ Senate leader Phil Berger (R-Rocking- The Senate plan also includes a section ham) releases details of a tax plan soon paving the way for reforms to the state’s to be introduced by the Senate. The plan Medicaid program, including the intro- would mark a signifi cant shift in the tax duction of managed care organizations code from being heavily income tax-de- to off er competing coverage options for pendent to being more reliant on con- enrollees. sumption taxes. “This is a huge change in ■ The House unveils its own tax reform the way North Carolina taxes its citizens, plan, one that would change the mul- the way North Carolina generates its rev- tiple personal income tax brackets to enue to fund services that government one fl at rate of 5.9 percent coupled with provides,” said Berger. a sizeable standard deduction. The state The details of the plan include: scrap- sales tax would be broadened margin- ping the multi-tiered personal income ally, but signifi cantly less than the Senate tax code that tops out at 7.75 percent plan, and include repair services, service in favor of a fl at rate of 4.5 percent over contracts and movie and other enter- the course of three years, lowing the tainment tickets. The local sales tax rate corporate income tax from 6.9 percent to would also be lowered slightly, and the 6 percent, eliminating the state’s death corporate income tax would drop from tax, and expanding the sales tax base 6.9 percent to 5.4 over the course of sev- to about 130 currently exempt services eral years. while slightly lowering the sales tax rate. Rep. David Lewis (R-Harnett), chair of the Projections say the new tax plan would House Finance Committee, added that net a $250 million net tax cut in its fi rst the tax changes would result in a net tax year, growing to $1 billion by the third cut, projected to be roughly $1.4 billion year. over fi ve years. Berger also states that he believes “our current tax system cannot be fi xed by nibbling around the edges. It’s time for our state’s leaders to take a courageous stand and implement true tax reform. This is a plan that will get our state headed in the right direction.” l CIVITAS INSTITUTE l 2013 session 332 l CIVITAS 2013 EDUCATION FUNDING The House budget also includes $1.2 ENROLLMENT CHANGES billion over two years to accommodate ° Public Schools: +11,802 (0.7%) increase growing Medicaid costs. The House ° UNC System: -535 (0.2% decline) proposal is 100 pages shorter than the ° Community College -21,475 (4 percent decline) Senate’s plan, and reportedly includes TUITION & FEES signifi cantly fewer policy proposals. In ° UNC System – Resident Undergraduate: Increase education, the House plan would rein- 6.1%; Non-resident Undergraduate: Increase 2.7% state a salary supplement for teachers ° Community Colleges Curriculum Tuition – In-State who have attained a master’s degree or Students - Increase $2.50/credit hour to $69.00/ Ph.D, and also restore class size limits for credit hour; an increase of 3.8%; Out-of-State grades K-3; both of these measures are Students – Increase $2.50/credit hour to $261.00/ opposite to the Senate’s plan. Moreover, credit hour, an increase of 1.0% the House plan includes $50 million of funding for a proposed Opportunity OTHER EDUCATIONAL CHANGES Scholarship Act, which would be a two- ° $7.86 billion appropriated for public schools; a year pilot program off ering taxpayer decline of $116 million from previous year monies to qualifi ed low-income students ° Reduces total funding for Teacher Assistants by to attend schools of their choice. The 21% in 2013-14 provision receives praise from Parents for ° Additional $13 million for testing and teacher training for Excellent Public Schools Act Educational Freedom in North Carolina, Reduces State Support for Department of an advocacy group supporting school Public Instruction by 1.8 percent (approximately choice measures. Organization President $780,000) Darrell Allison says in a statement that ° $10.2 million appropriated for merit pay for the group “is extremely pleased that teachers state leaders continue to support the ° $1.02 billion total spending for Community possibility for low-income and working- Colleges, up $16.1 million from previous year class children across North Carolina to ° $2.58 billion total spending for UNC System, down access schools that could meet their $126 million from previous year academic needs.” ° $65.6 million UNC “management flexibility ■ The Senate releases a revised tax plan, reduction” (cuts to be taken at campus’ discretion) making updates to the one fi rst released in May. This one would eliminate the corporate income tax by 2017 and replace 2013 session l CIVITAS INSTITUTE l 333 June the current progressive personal income tax system featuring rates of 6, 7 and ■ The House releases its budget plan, 7.75 percent with one fl at rate of 5.25 which totals $12 million less that the percent. Several sales tax exemptions Senate plan and roughly $30 million less would be eliminated, but far fewer than than Gov. McCrory’s plan. The House’s the Senate’s earlier tax reform proposal. spending proposal joins the Senate’s Most notably, the Senate scrapped plans plan by including no scheduled pay for expanding the sales tax base to food raises for state government workers, and prescription drugs. “We have deleted in contrast to McCrory’s proposal to both of those from this plan,” says Sen. provide them with a 1 percent increase. Bill Rabon (R-Brunswick), co-chair of the In lieu of a pay hike, the House budget Senate Finance Committee. includes 5 additional paid days off . July reform – historic tax reform – that will ■ Lawmakers in both chambers, along spur economic development, create jobs with Gov. McCrory’s offi ce, come to an and put more money into the pockets of agreement on tax reform. The measure is hard-working North Carolinians.” hailed by supporters as a long overdue ■ The House and Senate come to an agree- overhaul of a tax code that has largely ment over a $20.6 billion state budget been in place since the 1930s. “We’ve plan, which is signed by Gov. McCrory on done something that no legislature has July 26. “Together, members of the House done since the Great Depression,” House and Senate have carefully crafted a plan Speaker Thom Tillis said during a news that smartly invests in key priorities like conference. “Everybody’s tried to take a education and public safety while fulfi ll- bite of this apple, but they fell short being our shared commitment to fi scal cause they lacked the courage and they responsibility and accountability in state lacked the commitment to getting in a government,” said Senate President Pro room and working out their diff erences.” Tempore Phil Berger (R-Rockingham). The general aim of the reform package is The budget spends roughly 2.5 per- to begin to shift the tax burden from percent more than last year’s budget, and sonal and corporate income taxes to the includes an additional $1.5 billion over sales tax. The three existing brackets in two years to cover rising Medicaid costs. the personal income tax will be replaced Among the most notable measures in with one fl at rate of 5.8 percent in 2014, the budget deals with teacher pay and dropping to 5.75 percent beginning in tenure. The long-used teacher tenure sys- 2015. A signifi cant standard deduction tem is replaced by a system of short-term will replace several itemized deductions, contracts, and $10.2 million is set aside for instance $15,000 for a married couple to be used for merit-based pay raises. fi ling jointly. Analytical projections from Moreover, the opportunity scholarship the nonpartisan fi scal research staff program is slated to begin in the second shows that taxpayers ranging from the year of the biennial budget. top to the bottom of the income scale The budget also includes a provision en- will receive tax relief under the plan. abling the executive branch to begin to On net, the reforms are estimated to craft a plan to reform the state’s Medicaid result in a tax cut of $500 million over plan. its fi rst two years and $2 billion over vefi While including no pay raises for state years. The state’s death tax is repealed in employees, the budget does provide an the bill, and a tax exemption for social additional fi ve paid leave days for work- security income is preserved. ers. The budget issues no new debt while The corporate income tax rate will drop setting aside another $230 million in the from 6.9 percent to 5 percent in 2015, state’s Rainy Day Fund. and if certain revenue thresholds are met the rate will drop to 4 percent in 2016 and 3 percent in 2017. The sales tax base will expand slightly, now to include services like repairs to tangible goods and movie and entertainment tickets. Gov. McCrory praised the reform package: “Our tax reform plan is not just a tax l CIVITAS INSTITUTE l 2013 session 334 l CIVITAS cut here and there but meaningful tax 2013 Significant Tax Changes

Tiered individual income tax structure with rates as high as 7.75% eliminated and replaced with a fl at 5.8% tax rate for 2014, and 5.75% for 2015. A larger standard deduction of $7,500 of income for singles and $15,000 for married fi lers is created, while eliminating some itemized deductions

Social Security income remains fully exempt from state income tax

Corporate income tax reduced to 6% (from 6.9%) in 2014 and 5% in 2015 (rate scheduled to fall to 4% in 2015 and 3% in 2016 if certain revenue targets met)

Eliminates the $50,000 business income deduction

Repeals the state estate tax (aka the death tax) for deaths after Jan. 1, 2013

Places a cap of $45 million on the sales tax refund nonprofi t entities (including most large hospitals) can claim. This cap would not impact any nonprofi t organizations at the time of its passage

Sales tax on manufactured homes raised 2.75% to the state rate of 4.75%

Repeal “back-to-school” sales tax holiday, and Energy Star appliance sales tax holiday

Repeal state franchise tax on electricity and sales of piped natural gas, those items now subject to general state sales tax rate

Privilege tax on admission to live entertainment, movies, and amusements replaced by the general sales tax rate

Service contracts and warranties on tangible goods added to the sales tax base

2013 session l CIVITAS INSTITUTE l 335 August ■ The North Carolina Rural Economic Development Center agrees to transfer ■ A provision in the state budget creates $100 million in state funds to the state’s NC GEAR, the Government Effi ciency and Department of Commerce, which will Reform commission, to take a compre- take over the management of 421 exist- hensive review of state government ing grants formerly awarded to the Rural operations. The budget appropriates $2 Center. The Center is working on how million for the project, with a fi nal report to transition to a smaller organization in slated for Feb. 2015. light of having its state appropriations The report is expected to include recom- eliminated. The organization’s mission mendations for how state government had been to use the state and federal can perform many of its functions in a tax dollars it receives and provide grants more effi cient manner; however, there for infrastructure improvements in the is no requirement for the legislature to state’s rural counties. adopt the recommendations. The Rural Center was embroiled in controversy when it was found by auditors September that the organization failed to regularly ■ A provision in the state budget places a verify that its grant recipients were using ban on nonprofi t organizations from us- the funds for its intended purposes, and ing state tax dollars “to pay for lobbying that its leadership received exorbitant or lobbyists,” but this rule may not be as salaries. clear as it seems. Hundreds of nonprofi ts across the state receive state tax dollars, October with many receiving funds from a mix of ■ Thirty-fi ve state employees will be af- tax dollars from varying state agencies fected by the transfer of some Commerce along with private donations. Oversight Department activities to a private non- over such a signifi cant number of orga- profi t group. The Economic Development nizations will present diffi culties, as will Partnership of North Carolina is expected trying to defi ne what “lobbying” means. to begin functions in early 2014. The new The director of public policy and advo- private nonprofi t was created to assume cacy at the N.C. Center for Nonprofi ts, some of the state Commerce Depart- David Heinen, said his member groups ment’s corporate recruiting eff orts. Some have not raised concerns over the ban, of the workers currently employed in the saying, “I think it is a reasonable policy to Commerce Department will be trans- ask that state funds not be used to infl u- ferred to the new nonprofi t, and will no ence state policy.” longer receive state benefi ts like health "I think it is a reasonable policy insurance and pension benefi ts. to ask that state funds not be used to infl uence state policy." David Heinen, Director of Public Policy and Advocacy at the N.C. Center for Nonprofi ts discussing state budget provision banning nonprofi t organizations from using tax dollars to pay for lobbying eff orts. l CIVITAS INSTITUTE l 2013 session 336 l CIVITAS November ■ A state auditor’s report fi nds defi ciencies in North Carolina’s Biotechnology Cen- ter’s internal controls, as well as cases of noncompliance with auditing standards. Specifi cally, the report found that the Cen- ter failed to provide adequate oversight of their grant recipients. The Biotech Center’s state taxpayer support was cut in this year’s budget by 27 percent, reduced by $4.6 million from last year’s $17.2 million allocation.

December ■ State tax collections are up 2.4 percent compared to this time last year, according to a new report from the state controller’s offi ce, putting revenues $181 million ahead of pace from 2012. Increased sales tax collections make up $85 million of the increase, with corporate taxes $59 million up over last year and personal income tax collections higher by $47 million. ■ The state’s Program Evaluation Division tells legislators that the UNC system should improve its effi ciency as a means to combat rising college costs. The UNC System claims it has saved more than $100 million since implementing nearly a dozen effi ciency initiatives in 2006, but the Program Evaluation Division fi nds it should be doing more. The report looked at measures including total spending, 2013 session l CIVITAS INSTITUTE l 337 payrolls and number of students served to rate the effi ciency of the UNC campuses. 2013 Other Significant Changes

Compensation ■ Provides no pay raise for state employees, including teachers, but does add fi ve paid days off ■ Sets aside $56 million in FY 2014-15 in a reserve fund in anticipation of continued growth in retiree benefi ts costs

Rainy Day Fund ■ $232 million is set aside into the state’s Rainy Day Fund

Economic Development ■ Eliminates funding for the troubled Rural Economic Development Center, scheduled to be nearly $17 million this year, while instead allocating $11.3 million to create a new Rural Economic Development Division in the state’s Commerce department

Other ■ Closes out the NC Public Campaign Finance fund by transferring the remaining $3.5 million to general availability ■ Provides $1 million for the implementation of the Voter Information and Verifi cation Act (voter ID) ■ Creates a fund to compensate verifi ed victims of the state’s former eugenics program at a cost of $10 million l CIVITAS INSTITUTE l 2013 session 338 l CIVITAS General Assembly: 2014 session House Dems: 43 House Reps: 77 Senate Dems: 17 Senate Reps: 33 2014-15 BIENNIUM Governor: FY 2014-15; July, 1 2014 to June 30, 2015 Pat McCrory (R)

n eff ort to increase starting teacher pay The 2014 Short Session: Areceived unanimous support from both Budget Bill SB 744/S.L. 2014-100 legislative chambers and the governor’s offi ce, Passed Senate: May 31, 2014 eventually being included in the fi nal state bud- Passed House: June 13, 2014 get. Critics had been frequently pointing out that Conference Version Ratified: August 2, 2014 North Carolina’s starting teacher salary had been Signed by Governor: August 7, 2014 among the lowest in the nation.

The need to reform the state’s Medicaid system was also an issue that received agreement; however, there were diff erences between the chambers over what reform should look like. In January the fi nal budget, a declaration of intent to reform ■ A memo drafted by State Budget Direc- Medicaid was included, indicating there was still tor Art Pope asks state agencies to out- a lot of needed discussion regarding changes to line reductions in their agency’s budget the health insurance program for the poor. of at least 2 percent. The memo suggests that the Governor’s Offi ce is researching The fi nal budget, which was signed into law what needs to be done to accommodate about a month into the fi scal year, also in- pay raises for state employees. “These cluded one of the largest single-year pay raises net savings in appropriations, along with for teachers in the state’s history as well as the additional availability, may be applied creation of a fi lm production grant program that toward compensation increases for ruffl ed the feathers of fi lm lobbyists because it teachers and state employees, while fully was signifi cantly smaller than the expiring tax funding the state’s overall obligations credit it replaced. and future priorities,” Pope wrote in the memo. The memo comes at a time when

the Governor’s Offi ce is developing its 2014 session l CIVITAS INSTITUTE l 339 state budget plan. ■ Budget uncertainty for the state’s Medic- aid program may continue to be an issue, according to analysts for the General Assembly. State spending on the Medic- aid program is budgeted at $3.5 billion this year, but severe cost overruns have been the norm in recent years. Moreover, Medicaid is utilizing a new billing system which may cause unpredictable results. ■ Amazon, the online retail sales giant, will begin charging a sales tax for purchases made by North Carolina residents. North Carolina legislators have been lobbying March Amazon to begin collecting the tax for ■ New budget research fi nds that the Af- years, which they currently collect in 19 fordable Care Act (Obamacare) would im- other states. Because they have no physi- pose an additional $46 million in health- cal presence in North Carolina, Amazon care costs on the UNC System. Because of is not required to collect sales taxes on the provision in the law requiring employ- purchases made in the state. er coverage for all employees working more than 30 hours a week, the UNC sys- February tem will be required to cover nearly 9,000 ■ Legislative leaders announce their plan graduate assistants, visiting professors to increase teacher pay. Perhaps most and other personnel who work more than notable is the increase in starting teach- 30 hours a week but don’t qualify for the ers’ pay to $35,000 per year, up from state’s health plan. UNC Chief Operating the current rate of $30,800. Teachers in Offi cer Charlie Perusse derides this aspect almost all counties also receive a local of the law as “an unfunded mandate that’s salary supplement, one that ranges from coming down on us.” a few hundred dollars in more rural coun- ■ The Obamacare mandate is found to ties to several thousand dollars in more also impact more than 8,300 other non- highly populated districts. Teachers in permanent state employees, and would the sixth and seventh year would also cost about $45 million to fully comply. receive a pay boost, but salaries for more Options to avoid providing health cover- experienced teachers would see little age include cutting back on the work changes under the plan. Teacher groups hours of these employees or laying them have criticized North Carolina for hav- off completely. The Obamacare cover- ing one of the lowest starting salaries for age mandate is making it more diffi cult teachers in the nation. to make state budget projections for the ■ House leaders unveil their version of coming year. “It’s one reason we’re asking Medicaid reform, and it diff ers signifi - every department that reports to me and cantly from Gov. McCrory’s plan. McCrory every department throughout the state prefers reform that opens Medicaid to give us several scenarios because we coverage up to managed-care insurance don’t know the (budget) forecast, primari- plans. Meanwhile, the House’s proposal ly because of the health care act,” McCrory would allow for provider-led networks says. known as accountable care organiza- ■ McCrory sends a memo to state govern- tions to off er plans to enrollees. Under ment agencies preparing them for some the House plan, service providers would additional budget tightening. Prompting still be paid on a fee-for-service model, much of the concern is another projected but if they were to generate savings they cost overrun for the state’s Medicaid would get to keep the diff erence. Eventu- program – this time predicted to be as ally, the theory goes, this would enable high as $140 million. Stating that revenue Medicaid reimbursement rates to stabi- collections are on track this year, McCrory lize and fall over time. nevertheless writes “there is revenue uncertainty for the remainder” of the year. Recommended spending restrictions include most salary increases, limiting l CIVITAS INSTITUTE l 2014 session 340 l CIVITAS purchases and reducing travel expenses. 2014 EDUCATION FUNDING April ENROLLMENT CHANGES ■ State lawmakers begin crafting legislation ° Public Schools: +10,320 (an increase of 0.6 to create the state’s fi rst public-private percent) partnership to handle the state’s economic ° UNC System: + 1,731 (an increase of 0.8 percent) development eff orts. Questions being ad- ° Community Colleges: -10,591 (a decline of 2.1 dressed during the process center around percent; includes enrollment for Curriculum and issues like transparency, ethics and fund- Continuing Education) ing sources. One point of discussion is a provision to require the agency to raise $10 TUITION & FEE INCREASES million in private funds before it begins ° UNC Average Tuition increase: Resident operations. The partnership would include Undergraduate: +1.5%; Non-Resident the creation of a private non-profi t orga- Undergraduate: +7.4% nization that would assume most of the ° Community College – Curriculum Fees: In-State: responsibilities of marketing and recruiting +$2.50/credit hour to $71.50, an increase of 3.6 corporations to the state, leveraging the percent; Out-of-State: +$2.50/credit hour to state’s menu of targeted tax credits and $263.50/credit hour, an increase of 0.9 percent taxpayer handouts. ■ Gov. McCrory announces his intent to OTHER EDUCATION CHANGES extend the state’s historic preservation ° State appropriations for public schools $8.1 tax credit as part of his budget proposal. billion, a reduction of $58.8 million from 2013-14 The credit is awarded to specifi ed repairs ° $503.1 million to education from NC Education and renovations to properties determined Lottery to be “historic” according to bureaucratic ° $41.9 million to reduce class size in Kindergarten rules. According to current law, the credit is and first grade scheduled to expire at the end of this year. ° Reduces state General Fund support for NC DPI $5 million, a reduction of approximately 10 percent ° $1.4 billion for Comm. Colleges, an increase of May $24.4 million over previous year ■ Gov. McCrory releases his budget plan to ° $22 million for salary increases adjust the second year of the two-year ° UNC: $2.6 billion budget, up $29.4 million, over spending plan passed last session. The previous year proposal includes raises to all state em- ° $18 million for $1,000 salary increase for UNC ployees, including pay hikes ranging from 2014 session l CIVITAS INSTITUTE l 341 employees 2 to 4 percent for veteran teachers and an increase to $33,000 for starting teachers. Overall spending would rise 1.7 percent over the current year’s budget under Mc- Crory’s plan. Funding for K-3 teaching assistants would be maintained at the current year’s level which would not allow for hiring additional TAs to accommodate enrollment increases. “I believe that giving our current teachers and public school employees a pay increase is a higher priority than hiring additional assistants at this time,” McCrory says. The proposal also includes a 2 percent reduction for the UNC system. "I believe that giving our current cant number of these positions from the state budget, in large part in order to teachers and public school help fi nance the teacher pay raise. employees a pay increase is a higher priority than hiring June ■ Legislators approve a new “Film and additional assistants at this time." Entertainment Grant Fund” to provide Gov. Pat McCrory, in his budget proposal that taxpayer handouts to qualifying pro- includes pay raises for teachers but no funding to duction projects in North Carolina. A 25 add teacher assistants, May 2014 percent refundable tax credit for production is scheduled to expire at the end ■ Legislative analysts project a $445 mil- of this year. The state estimated it spent lion revenue shortfall for the current more than $60 million on the tax credits fi scal year ending June 30. A revenue in fi scal year 2012-2013, but the new shortfall occurs when actual revenue grant fund would be capped annually by collections fall short of revenue projec- lawmakers at an amount likely far lower tions made at the beginning of the fi scal than that. Lobbyists for the fi lm industry year, projections upon which the state naturally bemoan the expiration of the budget is based. Budget writers and tax credits and their replacement with a pundits are closely watching this year’s smaller program, while opponents of cor- tax revenue amounts because this is the porate welfare schemes are encouraged fi rst year since last year’s signifi cant tax by the step in the right direction, remain- reforms which lowered income tax rates ing hopeful that the grant program will and slightly broadened the tax base for ultimately be targeted for elimination in both income and sales taxes. Gov. Mc- future years. Crory’s offi ce states that the state has ■ House leaders unveil their proposal to nearly $600 million available to cover the tweak the second year of the biennial shortfall, coming from budget tightening budget passed last year. The House measures state agencies began imple- plan would spend around $21.1 billion, menting in March along with previously slightly less than the Senate budget. unspent reserves. Arguably the most controversial provi- ■ The Senate releases a $21.2 billion sion in the budget is one that would use spending plan for the coming fi scal year, lottery money to provide teachers a pay weighing in slightly more than Gov. Mc- raise, which would average 5 percent. Crory’s budget proposal. The plan allo- This stands in contrast to the Senate bud- cates $468 million to provide an average get’s proposed average 11 percent raise 11 percent pay raise for teachers while to be funded in large part with cut backs providing a $1,000 increase in salary to teacher assistant positions. Instead and benefi ts to state workers not in- of a salary increase, other state workers volved in public schools or the university would receive an additional 5 paid days system. The budget would also allocate off under the House plan. The House an additional $200 million for Medicaid proposal also includes a reinstatement costs, as well as funds to accommodate of an expiring tax credit for refurbishing an additional 1,000 pre-K slots. Teacher “historic” buildings, but does not reintro- assistants would receive a $233 million duce the state’s earned income tax credit l CIVITAS INSTITUTE l 2014 session 342 l CIVITAS reduction in funding, cutting a signifi - which expired last year. ■ Uncertainty over Medicaid costs and ■ The House gives unanimous support projected state lottery revenues are two to a bill changing how the state’s Med- key stumbling blocks preventing a state icaid program pays for services. Under budget from being approved before the the House plan, the traditional fee-for- July 1 beginning of the new fi scal year. service payment model would transition One option being fl oated, however, is for to set payments by patient. Provider-led legislators to leave town without com- networks, called Accountable Care Orga- ing to agreement over changes to the nizations, would form to provide medical second year of the two-year budget plan services, and if these networks provided passed last year. “Yes, we could go home care at costs below the per-patient and state government would continue reimbursement they would be allowed to operate. But I really believe that to keep the diff erence. The House’s plan members of the House and the Senate is similar to one previously fl oated by are going to be able to reach an accord,” Gov. McCrory’s offi ce, but is likely to meet says Rep. David Lewis (R-Harnett) of the resistance from the Senate, who releases situation. Technically, state government their own plan that would allow instead would operate under the second year of for managed care organizations to off er the biennial budget, but lawmakers are coverage options for Medicaid enrollees. hesitant to take this path in part because Medicaid reform is taking center stage as revenue projections have changed and rapidly rising costs have generated size- the availability of funds will turn out to able funding shortfalls in recent years. be diff erent than when the budget was Shifting to either the House or Senate passed last year. model would generate more predictable Medicaid expenses, and the move is July projected to rein in rising costs. ■ The new fi scal year begins without a ■ As legislators continue to work toward new budget deal in place, with state adjustments to the second year of the government operating according to an biennial budget that both chambers unadjusted second year of the biennial can agree to, Gov. McCrory threatens to budget plan. Major sticking points be- veto the latest Senate plan. “I will veto tween the House and Senate include the the latest Senate plan or any plan that size of and how to pay for teacher pay resembles it because I know of no fi nancial way we can go beyond the House

raises, teacher assistant positions and 2014 session l CIVITAS INSTITUTE l 343 Medicaid expenditures. Gov. McCrory proposal without eliminating thousands is largely siding with the House, going of teacher assistants, cutting Medicaid so far as to accuse Republican Senate recipients and putting at risk future core leaders of operating like the “old culture” state services,” says McCrory. The Sen- of state government. “We shouldn’t be ate plan includes an average 11 percent playing parliamentary maneuvers to teacher raise, but at the expense of many disallow senators from ... a transparent teacher assistant positions. The Senate and open vote on a very, very important plan also includes a proposal to generate issue, especially for teachers and educa- Medicaid savings by eliminating certain tors,” McCrory says. enrollees classifi ed as “medically needy.” 2014 Significant Tax Changes

Exempts 50% of the sale price of a modular home from the sales tax

Creates a new tax on e-cigarettes and vapor products at the rate of 5 cents per milliliter of the liquid used in such products

August September ■ Just over a month into the fi scal year, ■ State revenue for the fi rst two months Gov. McCrory signs the fi nal state budget of the fi scal year comes in slightly below that adjusts spending for the second projections, according to a new report. year of the biennial budget. Highlights Revenue for July and August total $2.91 include: an average 7 percent raise for billion, coming in $50 million – or 1.7 per- teachers, costing about $282 million; a cent – short of what was predicted at the salary increase for starting teachers to beginning of the fi scal year. State budget $33,000 per year; a 10 percent reduction director Lee Roberts, however, cautions to the Department of Public Instruc- that it is far too early in the year to glean tion; a declaration of intent to reform any meaningful trends from revenue the state’s Medicaid program; and the reports, saying the fi gures “just don’t tell creation of a new fi lm grant subsidy pro- us anything one way or another.” gram to replace the expired tax credit. ■ A change in the funding formula for public schools is causing concern for some educators. A provision in this year’s bud- FY 2014-2015 HEALTH & HUMAN SERVICES BUDGET get eliminates the automatic spending Total Appropriations $5.1 billion increase dedicated to paying for enroll- Major Items: ment growth. Since 1933, according to Medical Assistance (Medicaid) $3,688 million state law, student population estimates NC Health Choice $42 million have been built into the baseline budget Mental Health/D.D./Subst. Abuse: $680 million for public education funding levels. Edu- Child Development $224 million cation bureaucrats lament the change Social Services $189 million as signifi cant and paint the change as a Public Health $136 million backdoor way to begin expanding class Central Management & Support $73 million sizes, while some legislators downplay its signifi cance, noting that it is highly unlikely future budgets won’t fund enrollment growth. House Speaker Paul “Skip” Stam (R-Wake) says, “We always fund based upon student growth. I have never seen so much squealing about getting more money.” l CIVITAS INSTITUTE l 2014 session 344 l CIVITAS October December ■ Predictably, representatives from North ■ As the calendar year comes to a close, Carolina’s fi lm industry claim that the sky more details emerge about potential is falling for their industry as a result of the changes to the state’s sales tax distribu- replacement of the expired fi lm production formula. Under the current formula, tion tax credits with a much smaller grant 75 percent of local sales tax revenue is program. The new grant program is funded returned to the counties where the sale to the tune of $10 million, compared to the took place; the remaining 25 percent roughly $60 million in tax credits claimed is distributed to counties in proportion in that program’s last year. Johnny Griffi n, to their share of the state’s population. director of the Wilmington Regional Film “That will be a huge debate,” says Senate Commission says that “the word from LA Majority Leader Harry Brown (R-Onslow), was already doom and gloom and North “I think it’s something we ought to look Carolina is over.” When asked about the at” in 2015. Those mentioning the tax future of the grant program, Sen. Bob formula change say they believe it will be Rucho (R-Mecklenburg) says that legisla- one way to help economically distressed tors will need to review the program “and rural counties. see if it has created the long-term jobs that ■ Gov. McCrory continues his pleas to state anybody would like to get with any kind of lawmakers to reinstate the expired tax incentives program.” credits for projects that restore “historic” buildings. The governor folded the November credits into his budget proposal earlier ■ The state’s method of distributing sales tax this year, and receives support from the revenue collections takes center stage in House. He anticipates he will confront the General Assembly. Sen. Bob Rucho (R- resistance from the Senate on the credits, Mecklenburg), a fi nance committee chair, largely because the Senate’s vision for publicly discusses the possibility of shift- continued tax reform includes elimi- ing how sales tax revenues are distributed nating as many targeted tax credits as from one that is more point-of-sale to one possible. McCrory denies that this credit more heavily calculated by population. would harm that objective, saying “I do Under the current system, the majority of not believe the historic tax credit impacts the local portion of the sales taxes are sent the purity of our tax reform.” to the state, then returned to the counties 2014 session l CIVITAS INSTITUTE l 345 that collected the tax (point-of-sale). The change being discussed would implement a new formula that would instead see most of the local sales tax collections be distributed to the counties on a per capita basis. Under the new plan, rural counties that have virtually no retail sales will nevertheless at least receive a portion of total sales tax collections proportionate to the county’s share of the state’s population. 2014 Other Significant Changes

Compensation ■ Teachers receive on average a 7 percent pay raise, when including longevity pay, and most other state employees receive a $1,000 pay raise

Retirement Benefi ts ■ The budget includes a 1 percent “cost of living” increase for state retiree pensioners ■ The $56.4 million reserve for future benefi t needs set up just last year is eliminated, with these funds being transferred to general operations

Economic Development Program ■ A new, $20 million “Job Catalyst Fund” is created in the budget, which is another program that hands out taxpayer money to specifi c companies l CIVITAS INSTITUTE l 2014 session 346 l CIVITAS General Assembly: 2015 session House Dems: 45 House Reps: 75 Senate Dems: 16 Senate Reps: 34 2014-15 BIENNIUM Governor: FY 2015-16; July, 1 2015 to June 30, 2016 Pat McCrory (R)

015 saw one of the longest state budget The 2015 Long Session: 2battles in recent state history. By the time Budget Bill HB 97/S.L. 2015-241 Gov. McCrory signed the spending plan, roughly Passed House: May, 22, 2015 two and a half months of the new fi scal year Passed Senate: June 18, 2015 had expired. The extremely long session pushed Conference Version Ratified: September 18, 2015 frustration levels among legislators high, and Signed by Governor: September 18, 2015 generated criticism from observers questioning why two chambers run by majorities of the same party could take so long to come to a budgetary agreement.

Two main sticking points between the chambers January were overall spending levels and how to reform ■ Medicaid. The House plan would have spent The new calendar year begins with a signifi cantly more money overall than the plan report of a $200 million shortfall through off ered by the Senate, while the Senate plan the fi rst six months of the budget year, included many more legislative changes. marking about a 2 percent gap between projected revenue and actual revenue col- The fi nal budget included money set aside to lections. Legislative leaders, however, are fi nance the transition of the Medicaid program, not too worried. More than $800 million but still no fi nal say over how the program was in reserves help ease their concerns, as to be reformed. Income taxes were also lowered does the fact that much can change in the a little bit more, while the sales tax base was next six months. Moreover, actual budget slightly broadened. shortfalls in recent years have exceeded $2 billion. “We were able to deal with a $2.5 A running narrative advanced during the fi rst billion shortfall,” Senate leader Phil Berger half of 2015 by liberal critics of tax reform was said, referring to 2011. “If we end up with a 2015 session l CIVITAS INSTITUTE l 347 that the 2013 tax cuts slashed revenue to state situation where we are short from projec- government, starving it of much-needed re- tions, we’ll manage, and we’ll manage in sources. During the fi rst several months of the a way that will continue to move North year, revenue projections predicted a modest Carolina in the right direction, continue to shortfall of revenue. Such critics, however, had to move North Carolina forward.” change their tune when actual revenue collec- ■ A new study released by the State Treasur- tions ended up providing a revenue surplus in er’s Offi ce fi nds that the amount the state excess of $400 million. could borrow without jeopardizing its credit rating continues to grow. Total outstanding debt has been dropping steadily, helped by the fact that no new debt has been issued by the state in a half dozen years. The study’s fi ndings provides wel- ■ Leaders in the Senate Transportation come news to Gov. McCrory and other Appropriations Committee declare that legislative leaders considering proposing North Carolina is facing a transporta- new debt packages to fi nance transpor- tion funding “crisis.” “We’re looking at tation and other building projects. between a $30 billion gap just to stay ■ Film productions begin applying to up and a $90 billion gap to do what we North Carolina’s new fi lm grant program, need to do (over the next several years),” created in last year’s budget. The state’s says committee co-chair Sen. Bill Rabon former tax credit program expired and (R-Brunswick). “That is a crisis.” was replaced by the grant program, which is funded at $10 million. In the last year of its existence, the tax credit pro- "We’re looking at between a gram issued about $60 million in credits. $30 billion gap just to stay up and a $90 billion gap to do FY 2015-2016 HEALTH & HUMAN SERVICES BUDGET what we need to do (over the Total Appropriations $5.13 billion next several years)." Major Items: Sen. Bill Rabon (R-Brunswick), discussing trans- Medical Assistance (Medicaid) $3,737 million portation funding for the state, February 2015 NC Health Choice $13 million Mental Health/D.D./Subst. Abuse: $596 million Child Development $232 million March Social Services $183 million ■ Gov. McCrory’s offi ce releases its state Public Health $141 million budget proposal for the fi scal 2015- Central Management & Support $122 million 16 year. The plan spends $21.5 billion, would increase starting teacher salaries to $35,000, hire an additional 1,400 February teachers and order the UNC System to ■ Senate leaders introduce a proposal to fi nd 2 percent savings through effi cien- temporarily reduce the state gas tax, cies. The plan would also: increase Medic- then freeze it at a rate higher than what it aid spending by $287 million, spend $1.2 would otherwise be. The tax would drop million to pave the way for Medicaid on March 1 to 35 cents from the current reform that features Accountable Care rate of 37.5 cents per gallon. The new Organizations, set aside more than $30 rate of 35 cents per gallon would then million for several corporate welfare become the new minimum rate eff ective programs including the Job Develop- July 1. Legislators sell it as a tax cut, but ment Investment Grant fund, restore without this change the gas tax would the historic preservation tax credit and have dropped below 30 cents per gallon add another $47 million to the state’s on July 1. Part of the stated motivation Rainy Day Fund. Furthermore, McCrory’s for the change is to generate a more budget plan includes placing two bonds predictable revenue stream for transpor- on the ballot; a $1.2 billion bond for tation needs. transportation projects and a $1.4 billion bond for government building repairs

l CIVITAS INSTITUTE l 2015 session 348 l CIVITAS and renovations. 2015 EDUCATION FUNDING ■ The latest revenue report receives close ENROLLMENT CHANGES scrutiny as budget writers ramp up ° Public Schools: +17,338 (1.1 percent increase) discussions surrounding the crafting of ° Community Colleges: Figures not yet available the coming year’s state budget proposal. as of this publication General Fund revenue is found to be still ° UNC System: +2,672 (1.3 percent increase) below target, but closer to expectations than recent reports. March and April are crucial months for the revenue report TUITION & FEE INCREASES as they are the heaviest months for tax ° UNC: Average Undergraduate Tuition and Fees: fi lers, and the revenue department gets Resident Undergraduate: +4.3%; a much clearer picture of the amount of Non-Resident Undergraduate: +2.9% refunds fi lers are entitled to, which plays ° Community Colleges: Curriculum Tuition an important role in determining total will increase $4.00/Credit Hour to $76/credit revenue collections to the state. While hour for Residents; an increase of 5.5%; coming in at nearly $160 million below Non-Resident Curriculum Tuition will increase the target, revenues are still within the $4.00/Credit Hour to $268/Credit Hour; an 2.5 percent margin many budget writers increase of 1.5 percent consider to be acceptable.

OTHER EDUCATION CHANGES April ° $8.5 billion to public schools; $412 million more ■ Legislators pass a law altering the state’s than previous year gas tax. Initially, the tax will drop from its ° An additional $100 million to reflect more than current 37.5 cents per gallon to 34 cents 17,000 new students by July 2016. Beginning in 2017, the tax ° $141 million increase devoted to salary increases rate will adjust according to a new for- ° $1.06 billion for Comm. Colleges, +$20 million mula based on state population growth over previous year, $10 million for Salary and the general infl ation rate. While the increases immediate, short-term eff ect is a gas tax ° $2.7 billion for UNC; an increase of $117 million cut, as of July 1 of this year it will eff ec- over previous year tively be a tax increase. Under the current adjustable formula for the gas tax that is ° $27 million to pay for $750 bonuses to UNC tied to the price of gas, the gas tax would Employees be slated to drop to just under 30 cents a 2015 session l CIVITAS INSTITUTE l 349 ° $49 million for enrollment growth, 3,350 new gallon due to falling gas prices. “We now students have a gas tax that is based on North Carolina’s transportation needs instead of the unpredictability of the world oil market” says Gov. McCrory upon signing the bill into law. ■ Gov. McCrory’s offi ce is urging legislators to schedule a special election this No- vember for two bond referendums that would total up to $2.8 billion. McCrory has outlined details of the proposals, one of which would fund state government buildings and the other would fi nance roads and highway projects. Both bonds revenue will actually come in signifi cant- would total between $1.2 billion and ly above projections, the critics embar- $1.4 billion. The referendum would be rassingly reverse course and try to paint the fi rst chance North Carolina voters the surplus as bad news as well, saying have had the opportunity to vote on the additional revenue is coming out of state debt since 2000. the pockets of working-class and middle- class families. Conservatives are intrigued May by the liberals’ newfound concern for the North Carolina taxpayer. ■ North Carolina offi cially pays off the last of roughly $2.5 billion in debt to the fed- ■ The North Carolina House unveils its eral government. The state had borrowed budget plan. The proposal raises some the funds during the recession to cover eyebrows in large part due to the size- unemployment insurance benefi ts when able $1.3 billion increase in spending joblessness spiked. The payback comes over the current year, an aggressive several years ahead of originally sched- growth of 6.3 percent. By comparison, uled, thanks to reforms passed in 2013. Gov. McCrory’s budget proposal would Employers will see signifi cant tax relief increase spending by only 2 percent. due to the payoff . Under the repayment Senate Finance Chairman Bob Rucho plan set up by the federal government, (R-Mecklenburg) says the House bud- North Carolina’s unemployment insur- get spending increase “is defi nitely not ance tax rates were increased every year sustainable.” The House budget includes to help pay back the debt. Businesses a 2 percent salary increase for most state are estimated to save $280 million next employees, extends targeted tax credits year, with tax breaks growing to as much for specifi c industries including solar and as $700 million in 2017, compared to the technology data centers, and joins Gov. tax burden without the early repayment. McCrory’s proposal to reinstate the tax credit for historic preservation. Moreover, ■ What had for months been predicted to the House budget would raise starting be a revenue shortfall will turn out to be teacher pay to $35,000 and make no about a $400 million surplus for this fi scal changes to overall tax rates. year, according to a new Fiscal Research report. A revenue surplus means that actual revenue collections will turn out to June be higher than what was predicted at the ■ Legislative leaders from the House and beginning of the fi scal year. The report Senate come to agreement in opposition credits the surplus to “strong growth in to Gov. McCrory’s proposal of nearly $3 business income” and “higher income tax billion in new state debt. McCrory has payments” for 2014. Republican lawmak- been promoting a package of transporta- ers hail the new report as showcasing tion and building projects to be fi nanced the positive economic eff ects resulting through bond issues, with a desired ref- from their 2013 tax reforms. Liberal critics erendum for this November to allow for a of the tax reforms, however, fi nd them- vote on the new debt. Senate leader Phil selves in an awkward bind. When reports Berger says “I think there’s some interest throughout the year were projecting a in possibly fl oating a bond package, but revenue shortfall, critics blamed the 2013 it would be much less than $3 billion.” tax cuts for starving the state of much- House Speaker Tim Moore agrees, add-

l CIVITAS INSTITUTE l 2015 session 350 l CIVITAS needed revenue. Now that it appears ing that both House and Senate leaders believe bonds for state government and million transfer of funds from the Highway university campus buildings would be Fund to the General Fund is eliminated in more likely to get support in their respec- the Senate plan, keeping more transpor- tive chambers. tation funds dedicated to transportation. ■ The Senate presents their version of a On taxes, the Senate plan reduces further state budget plan, with spending com- the personal income tax rate from 5.75 ing in nearly $700 million below what the percent to 5.499 percent. House proposed. One of the biggest dif- ■ The House and Senate once again fail ferences is that the Senate sets aside $400 to come to an agreement on their state million more for reserve funds, making budget proposals before the start of the that money unavailable to fund current fi scal year. House leaders criticize the operations. The Senate also proposes ad- Senate’s plan for the signifi cant policy ditional income tax cuts, reducing further changes rolled into the budget, while the amount of operating funds. Total Senate leaders object to the amount of spending in the Senate’s plan comes to spending increase the House seeks. “There 1.8 percent more than current year bud- are obviously diff erences between the get fi gures, compared to the six percent approaches,” says Rep. Nelson Dollar (R- increase proposed by the House. The Sen- Wake), a senior co-chairman of the House ate plan includes an average four percent Appropriations Committee. He added he teacher pay raise, while also joining the expected the two chambers would “arrive House in proposing an increase in starting at a solution that is appropriate for the teacher pay to $35,000. The annual $216 citizens of North Carolina.”

2015 Significant Tax Changes

The sales tax base is broadened to include some services such as repair, maintenance and installation services to tangible property, such as autos

Drops state personal income tax rate to 5.499 percent by 2017, down from the current

5.75 percent. The standard deduction will be increased slightly (for example from $15,000 2015 session l CIVITAS INSTITUTE l 351 to $15,500 to married fi ling jointly), and the tax credit for medical expenses is reinstated

Changes corporate tax formula to a “single sales factor,” estimated to save businesses on net tens of millions in taxes

Introduces a new tax credit for improvements to historic buildings, a previous credit program had expired in 2014

Sets the previously adjustable state gas tax at a rate of 35 cents per gallon for Jan. 1 2016 – June 30, 2016, then 34 cents for the following six months. Low gas prices mean that without this law, gas prices would have dropped signifi cantly lower than these set rates. After 2017, gas prices will increase annually by a rate tied to infl ation and population growth July next year. The rate had been 6.9 percent ■ In the onset of a new fi scal year begin- before the reforms, and was lowered to 6 ning without a budget plan in place, percent in 2014 and 5 percent in 2015. legislators pass a continuing resolution ■ As July winds down with still no state to fund the functions of state govern- budget agreement in place, legislators ment. The resolution keeps spending begin to publicly say that the August levels steady from those approved in 14 deadline established in the continu- last year’s budget, and has an expiration ing resolution may not be met. Budget date of August 14. The resolution does uncertainty is felt especially hard in the include, however, a provision to increase public schools, who are making plans beginning teacher salary to $35,000 a and hiring decisions for the coming year year, a measure both chambers and the without fully knowing how much fund- Governor had included in their budget ing they will be receiving. “The districts proposals. are on a wait-and-see basis,” says N.C. ■ A new report from the legislative Fiscal School Boards Association executive Research Division paints a less fl attering director Ed Dunlap. “They don’t know picture of the benefi ts to rural coun- how many teaching positions or teacher ties from the Senate’s proposed plan to assistant positions they’re going to have shift sales tax revenue distribution from to fi ll. It’s really a guessing game.” Frustra- a largely point-of-sale formula to one tion between the two chambers contin- based largely on population counts. The ues to build. Senate Rules Chairman Tom tax distribution shift is being sold as a Apodaca is critical of House leadership boon to rural counties, but the newly for holding public hearings to air out released fi gures show the change in sales diff erences between the two chambers tax revenue to be negligible, if otherwise plans, while refusing to meet directly nonexistent. Sen. Michael Lee (R-New Ha- with the Senate leadership. “They’re too nover) says that he “strongly disagrees” busy going over our budget to sit down with the proposed sales tax change. “I with us and discuss the diff erences -- I don’t think it survives as currently writ- guess they haven’t found those out yet ten. I think it will change.” -- and negotiate and move forward,” Apodaca says. “I’d like to encourage the ■ The fi nal tally for state revenues for the House appropriations team to join with fi scal year completed June 30 shows a the rest of us, and let’s get home before surplus of $445 million, and triggers an Labor Day.” additional cut in the corporate income tax rate. The additional funds come as welcome news to budget writers who continue to attempt to work out their diff erences in state budget proposals. DID YOU KNOW? Extra funds mean more priorities from both chambers can be funded in the At $1,124, North Carolina’s per capita budget. Moreover, a trigger mechanism state personal income tax collections included in the 2013 tax reform stipu- rank 14th highest in the nation, and lated that if revenue collections exceed a certain threshold the state’s corporate higher than any other southeastern income tax rate would continue to fall – state aside from Virginia. l CIVITAS INSTITUTE l 2015 session 352 l CIVITAS specifi cally from 5 percent to 4 percent (as of FY 2013 calculations) August ■ More than two and a half months into ■ The House fi nance committee approves a the fi scal year, a budget agreement is $2.8 billion bond proposal that has several fi nally approved. Totaling $21.74 billion, similarities, along with a few diff erences, the spending amount is $620 million to the bond package being promoted by more than last year, marking an increase Gov. McCrory. The House bill includes a of 3.1 percent. The budget includes tax $2.46 billion bond for government build- changes that are projected to result in ings, schools and local water infrastructure. a net tax cut of $400 million over the Another $400 million would be devoted to next two years, featuring a reduction in transportation. The House bill would place the personal income tax rate from 5.75 their bond proposal on the November bal- percent to 5.499 percent along with a lot. Critics of the bill point out that school slight expansion of the sales tax base construction and water infrastructure to include some services and repairs to projects are traditionally funded locally. tangible property. The much-discussed “Those seem to me to be projects that are overhaul to how sales tax revenues are more traditionally locally funded projects,” distributed does not make it into the says Rep. Dan Bishop (R-Mecklenburg). fi nal budget, but there is a provision to dedicate the majority of the added rev- ■ As August 14 passes with still no state enue generated by the newly taxed ser- budget plan in place, state legislators ap- vices to rural counties. Also, $30 million is prove yet another continuing resolution appropriated to expand the fi lm produc- to keep funding the operations of state tion grant fund, while the state tax credit government. Failure to pass a budget this for renewable energy facility construc- far after the July 1 beginning of the fi scal tion is allowed to expire. The budget sets year draws criticism from the Democrat aside $225 million over two years to help minority, while Republican leaders assure fi nance a reform of the state’s Medicaid observers that a fi nal agreement is just program, although details of how the around the corner. Another resolution is program will be reformed are not includ- passed extending funding until August 31. ed. Specifi cs are to be laid out in separate As the end of August approaches with still legislation. All state employees are given no budget deal reached, a third resolution a one-time, $750 bonus. Additional funds is passed, this one extending funding until are included to raise starting teacher Sept. 18. pay from $33,000 to $35,000 (most local districts add supplemental salary to the 2015 session l CIVITAS INSTITUTE l 353 September state salary), as well as to expand the ■ The House and Senate approve legislation school choice voucher program. placing a bond referendum on the ballot ■ Gov. McCrory kicks off what is expected with the March presidential primary. The to be a major promotional push backing total debt of the bonds will come to $2 the $2 billion bond package that vot- billion. Most of the borrowed funds will be ers will decide upon in March. In spite devoted to UNC System and community of including no money for transporta- college buildings, with most of the balance tion projects, the bond package is being going to fund local water infrastructure called “Connect NC”, and some with and state parks. The fi nal amount is shy of experience in previous campaigns for Gov. McCrory’s earlier request, but McCrory statewide bonds are saying this cam- will end up signing the bond legislation paign could spend up to $6 million to into law in October. $8 million. McCrory says that a team is currently being assembled, adding that ranking in the Foundation’s State Busi- “We’re going to be traveling throughout ness Tax Climate Index from 7th worst the state to educate people on the in- to 16th best in the nation. The report, vestment in the future of North Carolina.” however, does urge North Carolina to do more. Recommended improvements include continuing to eliminate tar- "We’re going to be traveling geted tax credits geared toward specifi c businesses or industries, elimination of throughout the state to educate the state’s franchise tax and continued people on the investment in the broadening of the sales tax base. future of North Carolina." December Gov. Pat McCrory discussing the “Connect NC” ■ bond proposal, October 2015 State revenues are trending above projections thus far in the fi scal year, according to a new report by the State Controller’s offi ce. Through November, November income tax revenues are up 11 percent ■ A new report released by the Washington compared to the same months last year, D.C.-based Tax Foundation praises North contributing to a $602 million overall Carolina’s tax reforms in recent years. increase in tax revenue. State budget of- “North Carolina’s eff orts in 2013 resulted fi cers are encouraged by the early news, in one of the most meaningful state tax as revenue are coming in above projec- reforms in the last twenty years,” says tions, but caution that it is early in the Scott Drenkard, a Tax Foundation econo- fi scal year and much can change. mist and contributor to the report. The 2013 reforms boosted North Carolina’s

2015 Other Significant Changes

Compensation ■ All state employees will be given a one-time bonus of $750 in this year’s budget. No across-the-board pay raises are included. Additional funds are included in the budget to boost starting teacher pay from $33,000 to $35,000

Savings ■ A total of $600 million is set aside in the state’s Rainy Day Fund ($200 mil) and the Repair and Renovations fund ($400 mil)

Other ■ Funding for driver’s ed programs is switched to nonrecurring this year, with funding beginning the following year to be supported by civil fi nes and forfeitures l CIVITAS INSTITUTE l 2015 session 354 l CIVITAS APPENDIX 356 l CIVITAS INSTITUTE l appendix Absence: Exc. Noes: Senator(s): Ballance; Basnight; Albertson; Senator(s): Ayes: Democrat Ayes: 26 Noes:8 Not:0 Exc. Absent:2 Exc. Vote: 0 Total Votes: 34 SENATE VOTE Absence: Exc. Representative(s): Noes: Representative(s): Ayes: Democrat Ayes: 63 Noes:53 Not:0 Exc. Absent:4 Exc. Vote: 0 Total Votes: 116 HOUSE VOTE APPROPRIATIONS ACT OF2001 BUDGET BILL VOTES: 2001-2015

Senator(s): Hoyle; Martin, R Hoyle;Senator(s): Martin, Swindell; Wellons Robinson;Shaw, Rand; Odom; Plyler; L;Soles; Kinnaird; Lucas; Miller; Martin, W; Metcalf; Hagan;Harris;Jordan; Kerr; Garrou; Gulley; Clodfelter; Cunningham; Dalton; Dannelly; Weiss;Warwick; Womble; Wright; Yongue Tucker;Underhill; Wainwright; Warner; Warren; Saunders; Smith;SPEAKER;Sutton; Tolson; Redwine;Rogers; Nesbitt; Nye; Oldham;Owens; Miller; Luebke; McLawhorn; Michaux; McAllister; Jarrell; Insko; Jeff Hurley; Hunter; Holliman; Hill; Haire; Hall;Hensley; Hackney; Easterling; Edwards; Fitch; Fox; Gibson;Goodwin; J.; Culpepper; Cunningham; Dedmon;Earle; Church; Coates;McIntyre; Cole; Cox; Crawford, Barefoot;Baddour; Boyd- Bell;Blue;Bonner; Representative(s): Adams; Allen; Alexander; None None None us; Lucas; Republican Republican None Senator(s): Moore; Shaw, Horton; Garwood; R Foxx; Allran;Ballantine;Berger; Senator(s): None Senator(s): Sherrill Representative(s): Morris; Holmes;McMahan; G. West;C.; Wilson, Wilson, Teague; Thompson; Walend; Walker; Weatherly; Starnes; Shubert; Sexton; Russell; Setzer; Morgan; Pope;Mitchell; Preston; Rayfi McComas; McCombs; Miner; Justus; Kiser; Howard; Hilton; Harrington; Hiatt; Johnson; Gulley; Gray; Ellis; Esposito; Gillespie;Grady; Eddins; Dockham; Davis; Decker; Daughtry; Crawford, M.;Creech;Carpenter; Culp; Clary; Capps; Blust;Bowie; Brubaker; Barnhart; Representative(s): Allred; Barbee; Arnold;Baker; Representative(s): Buchanan eld; appendix l CIVITAS INSTITUTE l 357 eld; Russell; eld; None Senator(s): None Senator(s): Ballantine; Berger; Carpenter; Webster Hartsell; Foxx; R Shaw, Senator(s): Moore; Representative(s): Allred; Arnold; Baker; Barbee; Allred; Representative(s): Culp; M.; Creech; Crawford, Capps; Blust; Bowie; Daughtry; Decker; Davis; Dockham; Eddins; Gillespie; Grady;Ellis; Esposito; Gray; Gulley; Johnson; Hilton; Holmes; Howard; Harrington; Justus; Kiser; McMahan; McCombs; Mitchell; Rayfi Preston; Morris;Morgan; Pope; Thompson; Teague; Setzer; Sherrill; Shubert; Wilson, C.; Wilson, West; G. Walker; Barnhart;Representative(s): Buchanan; Starnes McComas; Brubaker; Clary; Carpenter; Representative(s): Weatherly Hiatt;Walend; Miner; Sexton; Representative(s): Republican Republican None McAllister; McLawhorn; Luebke; us; Lucas; Senator(s): Soles Clark; Clodfelter; Cunningham; Dalton; Dannelly; Dalton; Cunningham; Clark; Clodfelter; Martin, Lucas; Hagan; Kerr;Garrou; R; Lee; Reeves; Miller;W; Odom; Plyler;Martin, Purcell; Wellons Robinson; Warren; Thomas; Swindell; Representative(s): Bell; Hunter Representative(s): Representative(s): Adams; Alexander; Allen; Adams; Representative(s): Bonner; Blue; Boyd- Baddour; Barefoot; Crawford, Cox; Cole; McIntyre; Coates; Church; Easterling; Earle; Cunningham; Culpepper; J.; Gibson; Goodwin; Hackney; Haire; Fox; Edwards; Hall; Hensley; Hill; Holliman; Hurley; Insko; Jarrell; Jeff Michaux; Miller; Oldham; Owens; Nye; Nesbitt; Smith; SPEAKER; Redwine; Rogers; Saunders; Tucker; Underhill; Wainwright; Tolson; Sutton; Willingham; Warwick; Weiss; Warren; Warner; Yongue Wright; Womble;

Absence: Exc. Exc. Ayes: Senator(s): Albertson; Basnight; Carter; Ballance; Kinnaird Noes: Senator(s): Total Votes: 33 Votes: Total 0 Vote: Absent: 3 Exc. 26 Noes: 7 Not: 0 Exc. Ayes: Democrat SENATE VOTE SENATE Not Voting: Representative(s): Dedmon Representative(s): Exc. Absence: Noes: Representative(s): Total Votes: 105 Votes: Total 0 Vote: Absent: 9 Exc. 46 Not: 6 Exc. 59 Noes: Ayes: Democrat Ayes: HOUSE VOTE HOUSE APPROPRIATIONS ACT OF 2002 ACT APPROPRIATIONS 358 l CIVITAS INSTITUTE l appendix Noes: Senator(s): Basnight;Clodfelter; Albertson; Senator(s): Ayes: Democrat Ayes: 25 Noes:19 Not:0 Exc. Absent:0 Exc. Vote: 0 Total Votes: 44 SENATE VOTE Absence: Exc. Representative(s): Voting: Cunningham Not Noes: Representative(s): Luebke Ayes: Democrat Ayes: 76 Noes:39 Not:3 Exc. Absent:2 Exc. Vote: 0 Total Votes: 115 HOUSE VOTE APPROPRIATIONS ACT OF2003

Queen; Rand; Shaw; Soles; Swindell; Soles; Shaw; Queen; Rand; Thomas Moore; Purcell;Kinnaird; Lucas; Metcalf; Malone; Kerr; Hargett; Holloman; Hoyle; Jenkins; Dorsett;Garrou; Hagan; Dalton; Dannelly; Representative(s): Earle Yongue Warren; Weiss;A.; Womble; Williams, Wright; Sutton; Tolson;Saunders; Wainwright; Warner; Parmon; Nesbitt;Nye; Owens; Ross; Miller; Rapp; Jones; Lucas; McLawhorn; Michaux; McAllister; Jeff Insko; Holliman; Hunter; Haire; Hall;Harrell; Hill; Goodwin; Hackney; Butterfi Dickson;England;Farmer-Culpepper; Decker; Church; Coates;Carney; Cole; Crawford; Bordsen; Bonner; Allen, G.;L.;Bell;Black; Representative(s): Adams; Allen,B.; Alexander; eld; Fox; Goforth; Gibson;Glazier; None us; Johnson,C.; Republican Republican Smith; Stevens; Tillman; Webster Foxx; Sloan; Pittenger; Rucho;Shubert; Hartsell; Bingham; Blake;Brock; Carrington; Forrester; Allran;Apodaca;Ballantine;Berger; Senator(s): None Senator(s): Representative(s): Wood Sexton Representative(s): Clary; West;C. Wilson, Stam;Starnes; Setzer; Rhodes; Walend; Walker; Moore; Munford; Pate; Preston; Rayfi Ray; Mitchell; McMahan; McCombs; McHenry; Holmes;Johnson,L.;Justus;Lewis;Hilton; Eddins;Ellis;Frye; Gillespie;Gulley; Dockham; Blust; Bowie; Capps; Creech; Culp; Daughtry; Representative(s): Allred; Barbee;Blackwood; Wilson, G. Morgan; Sauls;Sherrill;Stiller; Williams, K.; LaRoque;McComas; Miner; McGee; Kiser; Howard; Justice; Daughtridge; Gorman;Grady; Brubaker; Representative(s): Barnhart; Baker; eld; appendix l CIVITAS INSTITUTE l 359 Senator(s): None Senator(s): Allran; Apodaca; Berger; Bingham; Horton; Pittenger; Forrester; Blake; Brock; Tillman; Shubert; Sloan; Smith; Stevens; R Shaw, Moore; WhiteSenator(s): Webster; Senator(s): None Hartsell Senator(s): Foxx; Representative(s): Baker; Barbee; Barnhart;Representative(s): Brubaker;Bowie; Clary; Daughtridge; Culp; Grady; Gillespie; Gorman; Frye; Hilton; Howard; Justus; Kiser; Johnson, L.; Justice; Lewis; McGee;McComas; Miner; Mitchell; Moore; Ray; Sauls; Preston; Pate; Munford; Morgan; West; Setzer;Stiller; Steen; Sherrill; Starnes; G. Wilson, K.; Williams, Blackwood; Blust; Allred; Representative(s): Dockham; Creech; Gulley;Capps; Eddins; Ellis; eld; Rhodes; Sexton; Stam; McHenry; Rayfi Wood Walker; Walend; C. Wilson, Holmes; Representative(s): Daughtry;Representative(s): LaRoque; McMahan Republican Republican Luebke; Jones; Lucas; us; Johnson, C.; eld; Fisher; Fox; Gibson; Glazier; Goforth; Fox; eld; Fisher; Dalton; Dannelly;Dalton; Hagan; Dorsett; Garrou; Jenkins; Hunt; Hoyle; Hargett; Kerr; Lucas; Queen; Rand; Soles; Swindell; Nesbitt; Purcell; Thomas Senator(s): Malone Senator(s): Holloman Representative(s): Adams; Allen, B.; Allen, G.; Allen, Allen, B.; Adams; Representative(s): L.; Bell; Black; Carney; Bonner; Bordsen; Churc Culpepper; Crawford; Cole; h; Coates; Farmer- Dickson; England; Cunningham; Butterfi Hackney; Holliman; Hunter; Hall; Harrell; Haire; Insko; Jeff McLawhorn; Michaux;McLawhorn; Miller; Owens; Nye; Wainwright; Tolson; Rapp; Ross; Sutton; Parmon; Williams, A.; Womble; Weiss; Warren; Warner; Yongue Wright; McAllister; Saunders Representative(s):

Not Exc. Senator(s): Moore Noes: Senator(s): Voting: Absence: Democrat Democrat Ayes: Senator(s): Albertson; Basnight; Clodfelter; SENATE VOTE SENATE 38 Votes: Total 0 Vote: Absent: 3 Exc. 21 Noes: 17 Not: 1 Exc. Ayes: Total Votes: 109 Votes: Total 0 Vote: Absent: 7 Exc. 18 Not: 4 Exc. 91 Noes: Ayes: Democrat Ayes: HOUSE VOTE HOUSE Not Exc. Absence: Alexander; Earle; Goodwin; Hill Representative(s): APPROPRIATIONS ACT OF 2004 ACT APPROPRIATIONS Decker Noes: Representative(s): Voting: 360 l CIVITAS INSTITUTE l appendix Votes: Pair Absence: Exc. Voting: Not Noes: Senator(s): Basnight; Atwater; Albertson; Senator(s): Ayes: Democrat Ayes: 28 Noes:20 Not:0 Exc. Absent:0 Exc. Vote: 0 Total Votes: 48 SENATE VOTE Representative(s): Faison; Martin Noes: Ayes: Democrat Ayes: 61 Noes:59 Not:0 Exc. Absent:0 Exc. Vote: 0 Total Votes: 120 HOUSE VOTE APPROPRIATIONS ACT OF2005

Senator(s): Senator(s): Weinstein (R;N) (D; Y) <-> Jacumin None Senator(s): WeinsteinSenator(s): Swindell;Soles; Thomas Nesbitt;Purcell; Snow; Malone; Shaw; Rand; Kinnaird; Lucas; Kerr; Holloman; Hoyle; Jenkins; Dorsett;Garrou; Graham;Hagan; Dannelly; Berger, D.; Boseman;Clodfelter; Cowell; Dalton; Yongue Weiss; Williams; Wilkins; Womble; Wray; Wright; Tolson;Underhill; Wainwright; Tucker; Warren; Parmon; Pierce; Ross;Saunders;Sutton; Rapp; Nye; Owens; Miller; McLawhorn; Michaux; Jones; Jones, Ed;Lucas; Luebke; McAllister; Jeff Insko; Holliman;Hunter; Harrison; Hill; Haire; Harrell; Goodwin;Hackney; Goforth; Farmer-Butterfi Culpepper; Cunningham; Dickson;Earle;England; Church; Coates; Cole; Coleman; Crawford; Allen, L.;Bell;Black(SPEAKER);Bordsen; Carney; Representative(s): Adams; Allen,B.; Alexander; None eld; Fisher; Gibson;Glazier; us; Republican Republican Senator(s): Jacumin Senator(s): None Senator(s): Presnell; Smith;Stevens; Tillman; Webster Hunt;Pittenger; Horton; Goodall; Hartsell; Blake; Brock; Brown; East;Forrester; Garwood; Allran;Apodaca;Berger,Senator(s): P.; Bingham; None Senator(s): Vinson; Walend; Walker; West; Wilson Wiley; Sherrill;Stam;Starnes;Steen; Stiller; Setzer; Pate; Preston; Rayfi Ray; Moore; Morgan; McMahan; McComas; McGee; Langdon;LaRoque;Lewis; Justus; Kiser; Holmes;Howard;Holloway; Johnson;Justice; Hollo; Hilton; Gulley; Frye; Gillespie;Grady; Eddins;Folwell; Dollar; Dockham; Daughtry; Cleveland; Culp; Current; Daughtridge; Clary; Blust;Brown;Blackwood; Capps; Brubaker; Representative(s): Allred; Almond;Barnhart; Representative(s): None eld; Rhodes; Sauls; eld; Rhodes; appendix l CIVITAS INSTITUTE l 361 None Walend eld; Rhodes; Setzer; Stam; Starnes; Senator(s): Garwood; Stevens Hartsell; Presnell; Bingham; Blake; P.; Senator(s): Allran; Berger, East; Forrester; Brunstetter; Brown; Brock; Smith; Goodall; Hunt; Jacumin; Pittenger; Webster Tillman Senator(s): Apodaca; Senator(s): None Representative(s): Allred; Barnhart; Allred; Clary;Representative(s): Grady;Daughtridge; Eddins; Johnson; Howard; Morgan; Moore; LaRoque; McComas; Justice; West; Walker; Ray; Stiller; Sherrill; Steen; Pate; Wiley; Wilson Almond; Blackwood; Blust; Representative(s): Current; Culp; Cleveland; Capps; Brown; Daughtry; Gillespie; Gulley; Frye; Dollar; Folwell; Hilton; Holloway; Hollo; Holmes; Justus; Kiser; McGee; McMahan;Langdon; Lewis; Preston; Rayfi Representative(s): Brubaker; Dockham;Representative(s): Sauls; Vinson Republican Republican eld None Ed; Lucas; us; Jones; Jones, None Senator(s): None D.; Bland; Boseman; Clodfelter; Cowell; Dalton; Dalton; Cowell; Bland; Boseman; Clodfelter; D.; Dannelly; Graham; Hagan; Dorsett; Garrou; Jenkins; Malone; Nesbitt; Kerr; Lucas; Kinnaird; Rand; Shaw; Snow;Purcell; Soles; Swindell; Weinstein Senator(s): Holloman; Hoyle Y); (D; Senator(s): Apodaca (R; N) <-> Hoyle Representative(s): Miller Representative(s): Representative(s): Adams; Alexander; Allen, B.; Alexander; Allen, B.; Adams; Representative(s): Carney;(SPEAKER); Bordsen; Allen, L.; Bell; Black Crawford; Coleman; Cole; Coates; Church; Faison; Dickson; Earle; England; Cunningham; Gibson; Glazier; Goforth;Fisher; Goodwin; Hackney; Harrison; Hill; Holliman; Harrell; Haire; Hunter; Insko; Jeff Martin;Luebke; McAllister; Michaux; McLawhorn; Rapp; Ross; Pierce; Owens;Nye; Parmon; Underhill; Tucker; Tolson; Saunders; Spear; Sutton; Wilkins; Williams; Weiss; Warren; Wainwright; Yongue Wright; Wray; Womble;

Not Voting: Ayes: Senator(s): Albertson; Atwater; Basnight; Berger, Exc. Pair SENATE VOTE SENATE 46 Votes: Total 0 Vote: Absent: 0 Exc. 31 Noes: 15 Not: 0 Exc. Ayes: Democrat Noes: Senator(s): Absence: Votes: Y) (R; N) <-> Holloman (D; Tillman Not Voting: Representative(s): Farmer-Butterfi Representative(s): Exc. Noes: Representative(s): Absence: Total Votes: 114 Votes: Total 0 Vote: Absent: 5 Exc. 31 Not: 1 Exc. 83 Noes: Ayes: Democrat Ayes: HOUSE VOTE HOUSE APPROPRIATIONS ACT OF 2006 ACT APPROPRIATIONS 362 l CIVITAS INSTITUTE l appendix Senator(s): Noes: Senator(s): Snow Basnight(CHAIR); Atwater; Albertson; Senator(s): Ayes: Democrat Ayes: 31 Noes:19 Not:0 Exc. Absent:0 Exc. Vote: 0 Total Votes: 50 SENATE VOTE Absence: Exc. Representative(s): Voting: Bordsen Not Representative(s): Coates; Love Noes: Ayes: Democrat Ayes: 64 Noes:52 Not:1 Exc. Absent:2 Exc. Vote: 0 Total Votes: 116 HOUSE VOTE APPROPRIATIONS ACT OF2007

Shaw; Soles; Swindell; Soles; Shaw; Weinstein Nesbitt;Purcell; McKissick; Queen;Rand; Malone; Kinnaird; Jones;Kerr; Hagan; Hoyle; Jenkins; Dorsett;Foriest;Dannelly; Garrou; Goss; Graham; Berger, D.; Boseman;Clodfelter; Cowell; Dalton; Representative(s): (SPEAKER) Hackney Yongue R.; Weiss; Williams; Wilkins; Womble; Wray; Wright; Tucker;Underhill; Wainwright; Warren,E.; Warren, Sutton; Ross; Saunders;Spear; Tarleton; Tolson; Parmon; Owens; Pierce; Mobley; Michaux; Rapp; McLawhorn; Lucas; McAllister; Luebke; Martin; T.; Jeff Holliman;Insko; Harrison;Hill; Goodwin;Haire;Goforth; Hall;Harrell, J.; Harrell, Farmer-Butterfi Cunningham; Dickson;Earle;England;Faison; Church; Cole; Coleman; Cotham; Crawford; Carney; Brisson;Bryant; Bell; Blue;Braxton; Representative(s): Adams; Alexander, M.;Allen; eld; Fisher; Gibson;Glazier; us; Jones; Republican Republican Smith; Stevens; Tillman Goodall; Hunt;Jacumin;Pittenger; Preston; Blake; Brock; Brown; Brunstetter; East;Forrester; Allran;Apodaca;Berger,Senator(s): P.; Bingham; Hartsell Senator(s): Representative(s): Ray Representative(s): Thomas; Tillis; Walend; Walker; West; Wiley Stam;Starnes;Steen; Stiller; Samuelson; Setzer; Moore; Neumann;Pate; McGee; McElraft; Langdon;Lewis; McComas; Kiser; Justus; Killian; Johnson;Justice; Holmes; Howard; Hurley; Holloway; Hilton; Gulley; Gillespie; Grady; Folwell; Dollar; Dockham; Frye; Daughtry; Cleveland; Current; Daughtridge; Clary; Blust;Boylan;Blackwood; Brown; Brubaker; Representative(s): Allred; Avila; Barnhart; Representative(s): None None appendix l CIVITAS INSTITUTE l 363 None Senator(s): Hartsell; Stevens Blake; Brock; Brown; P.; Senator(s): Allran; Berger, Hunt; Jacumin; East; Forrester; Brunstetter; Tillman Rucho; Smith; Preston; Senator(s): Apodaca; Goodall Senator(s): Bingham Representative(s): Allred; Barnhart; Allred; Boylan; Representative(s): Brubaker; Clary; Daughtridge; Current; Dockham; Gillespie; Grady; Dollar; Frye; Holmes; Hurley;Howard; Kiser; Johnson; Justice; Ray; Setzer; Neumann; Pate; Moore; McComas; West; Walker; Thomas; Stiller;Starnes; Steen; Wiley Blackwood; Blust; Avila; Representative(s): Daughtry; Furr; Cleveland; Brown; Folwell; Gulley; Hilton; Holloway; Justus; Killian; McElraft;Langdon; Lewis; McGee; Samuelson; Walend Tillis; Representative(s): Stam Representative(s): Republican Republican

eld; Fisher; Fisher; eld; None None None Martin; Luebke; Lucas; us; Jones; Love; Senator(s): None Berger, D.; Boseman; Clodfelter; Cowell; Dalton; Dalton; Cowell; Boseman; Clodfelter; D.; Berger, Goss; Graham; Garrou; Dannelly; Dorsett; Foriest; Hagan; Jenkins; Jones; Kerr; Malone; Kinnaird; Queen; Rand;McKissick; Shaw; Nesbitt; Purcell; Weinstein Snow; Soles; Swindell; Senator(s): Hoyle Y); (D; Senator(s): Apodaca (R; N) <-> Hoyle Representative(s): Hackney (SPEAKER); Hall Representative(s): Representative(s): Adams; Alexander, K.; Alexander, Adams; Representative(s): Braxton; Allen; Bell; Blue; Bordsen; M.; Alexander, Brisson; Bryant; Cole; Carney; Coates; Church; Dickson; Earle; Crawford; Cotham; Coleman; Farmer-Butterfi England; Faison; Gibson; Glazier; Harrell, Goforth; Haire; Goodwin; Harrison; Hill; Holliman; Hughes; T.; Harrell, J.; Insko; Jeff McAllister; Michaux; McLawhorn; Mobley; Rapp; Ross; Saunders; Pierce; Owens; Parmon; Tucker; Underhill; Tolson; Spear; Tarleton; Sutton; Wilkins; R.; Weiss; E.; Warren, Warren, Wainwright; Yongue Wray; Womble; Williams;

Not Voting: Democrat Democrat Ayes: Senator(s): Albertson; Atwater; Basnight; Exc. Pair SENATE VOTE SENATE 46 Votes: Total 0 Vote: Absent: 4 Exc. 4 Exc. 32 Noes: 14 Not: Ayes: Noes: Senator(s): Absence: Votes: Y) Goodall (R; N) <-> Bingham (R; Not Voting: Exc. Representative(s): Exc. Noes: Representative(s): Vote: Total Votes: 117 Votes: Total 1 Vote: Absent: 0 Exc. 20 Not: 2 Exc. 97 Noes: Ayes: Democrat Ayes: HOUSE VOTE HOUSE APPROPRIATIONS ACT OF 2008 ACT APPROPRIATIONS 364 l CIVITAS INSTITUTE l appendix (D; Y) <-> Bingham (R;N) (D; Y) <-> Bingham Votes: Pair Absence: Exc. Voting: Not Noes: Senator(s): Basnight;Berger, Albertson; Senator(s): D.; Blue; Ayes: Democrat Ayes: 27 Noes:18 Not:4 Exc. Absent:5 Exc. Vote: 0 Total Votes: 45 SENATE VOTE Representative(s): Goodwin;Ross Glazier; Absence: Exc. Noes: Representative(s): Ayes: Democrat Ayes: 65 Noes:52 Not:0 Exc. Absent:3 Exc. Vote: 0 Total Votes: 117 HOUSE VOTE APPROPRIATIONS ACT OF2009

Senator(s): ForiestSenator(s): (D; (R;N);Stein Y) <-> Stevens AtwaterSenator(s): Foriest;Senator(s): Stein Weinstein Swindell; Soles; Snow; Shaw; Vaughan;Rand; Nesbitt;Purcell;Kinnaird; McKissick; Queen; Jones; Garrou; Goss;Graham;Hoyle; Jenkins; Davis; Dorsett; Boseman; Clodfelter; Dannelly; Williams;Wilkins; Womble; Wray; Yongue Wainwright; Warren,E.; Warren,R.; Weiss; Whilden; Sutton; Tarleton; Stewart; Tolson; Underhill; Tucker; Parmon; Owens; Pierce; Mobley; Spear; Rapp; McLawhorn; Michaux; Martin; Luebke; Mackey; Jackson;JeffHughes; Insko; us;Jones; Love; Lucas; Haire; Hall;Harrell; Holliman; Harrison;Hill; Floyd,E.; (SPEAKER); Hackney Gibson;Gill;Goforth; Earle; England;Faison; Farmer-Butterfi Coates; Cole;Carney; Cotham; Crawford; Dickson; M.; Allen;Bell;Bordsen; Brisson;Bryant; Braxton; Representative(s): Adams; Alexander, Alexander, K.; None None eld; Fisher; Republican Republican Senator(s): Bingham;StevensSenator(s): None Senator(s): Rucho; Rouzer; Tillman Hunt;Jacumin;Preston;Goodall; Hartsell; East; Forrester;Brock; Brown; Brunstetter; Clary; Allran;Apodaca;Berger,Senator(s): P.; Blake; None Senator(s): Representative(s): Stam; Starnes;Steen; Stevens; Tillis; West; Wiley Samuelson;Setzer; Rhyne; Sager; Randleman; Moore; Neumann; Mills; McGee; McElraft; Langdon;Lewis;Killian; McComas; McCormick; Johnson;Justice; Justus; Ingle; Iler; Hurley; Howard; Holloway; Hilton; Guice; Gulley; Folwell; Dollar; Dockham; Frye; Gillespie;Grady; Burris-Floyd; Cleveland; Current; Daughtry; Blust;Boles;Brown;Blackwood; Burr; Brubaker; Representative(s): Blackwell; Avila; Barnhart; Representative(s): None None appendix l CIVITAS INSTITUTE l 365 Representative(s): West Representative(s): Barnhart; Avila; Blackwell; Representative(s): Blackwood; Blust; Boles; Brubaker; Burr; Burris- Daughtry; Current; Cleveland; Dockham;Floyd; Gillespie; Grady; Frye; Guice; Dollar; Folwell; Gulley; Hurley; Hilton; Holloway; Howard; Iler; Ingle; Justus; Langdon; Justice; Johnson; McCormick; McElraft; McComas; Lewis; McGee; Mills; Neumann; Randleman; Moore; Rhyne; Sager; Samuelson; Setzer; Stam; Starnes; Steen; Wiley Tillis; Stevens; Brown Representative(s): Killian Representative(s): Senator(s): Bingham; Stevens Brock; P.; Senator(s): Allran; Apodaca; Berger, Clary; Brunstetter; Brown; East; Forrester; Tillman Rouzer; Rucho; Hartsell; Hunt; Preston; Senator(s): Blake; Jacumin Goodall Senator(s): Republican Republican us; Love; Love; us;

Floyd,E.; eld; Fisher; tt; Parmon; Pierce; Rapp; Ross; Pierce; tt; Parmon; None Clodfelter; Dannelly; Davis; Dorsett; Foriest; Dannelly;Clodfelter; Dorsett; Foriest; Davis; Jenkins; Hoyle; Goss; Graham; Garrou; Jones; Queen; McKissick;Kinnaird; Nesbitt; Purcell; Walters Vaughan; Snow; Soles; Swindell; Stein; Senator(s): Atwater Representative(s): Mackey Representative(s): Senator(s): Boseman; Dickson; Shaw Y) <-> Goodall (D; Senator(s): Atwater (R; N); Lucas; Luebke; Martin; Luebke; May;Lucas; Michaux; McLawhorn; Mobley; Owens; Parfi Tucker; Spear; Tolson; Stewart; Tarleton; Sutton; R.; Weiss; E.; Warren, Warren, Underhill; Wainwright; Wray Womble; Whilden; Wilkins; Williams; Gibson; Gill; Glazier; Goforth; Hackney Goodwin; Heagarty; Hall; Harrison; (SPEAKER); Haire; Hill; Holliman; Hughes; Insko; Jeff Jackson; Representative(s): Adams; Alexander, K.; Alexander, K.; Alexander, Alexander, Adams; Representative(s): Braxton; Brisson; Bryant;M.; Bell; Bordsen; Carney; Earle; England; Crawford; Cotham; Cole; Coates; Farmer-Butterfi Faison;

Democrat Democrat Ayes: Blue; D.; Senator(s): Albertson; Basnight; Berger, Noes: Senator(s): Not Voting: Exc. Exc. Yongue HillRepresentative(s): Absence: Alexander; Earle; Goodwin; Representative(s): VOTE SENATE 43 Votes: Total 0 Vote: Absent: 6 Exc. 28 Noes: 15 Not: 5 Exc. Ayes: Exc. Pair Voting: Absence: Votes: Y) (D; Jacumin (R; N) <-> Shaw Not Representative(s): Jones Noes: Representative(s): Total Votes: 116 Votes: Total 0 Vote: Absent: 2 Exc. 50 Not: 2 Exc. 66 Noes: Ayes: Democrat Ayes: HOUSE VOTE HOUSE APPROPRIATIONS ACT OF 2010 ACT APPROPRIATIONS 366 l CIVITAS INSTITUTE l appendix Senator(s): Atwater; Berger, Atwater; Senator(s): D.; Blue;Clodfelter; Noes: Ayes: None Senator(s): Democrat Ayes: 31 Noes:19 Not:0 Exc. Absent:0 Exc. Vote: 0 Total Votes: 50 SENATE VOTE Absence: Not Representative(s): Adams; Alexander, K.; Noes: Ayes: Democrat Ayes: 72 Noes:47 Not:0 Exc. Absent:1 Exc. Vote: 0 Total Votes: 119 HOUSE VOTE APPROPRIATIONS ACT OF2011

Robinson; Stein; Vaughan;Robinson; Walters; White Kinnaird; Mansfi Jones; Garrou; Graham;Jenkins; Dannelly; Representative(s): Wray Wainwright; Warren,E.; Weiss; Womble; Wilkins; R.; Parfi Moore, Mobley; McLawhorn; Michaux; McGuirt; Jackson; Jeff us;Keever; Lucas; Martin; Luebke; Haire; Hall;Hamilton; Harrison; Insko; Hackney; Fisher; Floyd; Goodman;Graham; Gill;Glazier; Cotham; Earle;Faison;Carney; Farmer-Butterfi Alexander, M.;Bell;Bordsen; Brandon;Bryant; Spear Owens; Representative(s): Brisson;Crawford; Hill; tt; Parmon; Pierce; Ross; Rapp; Tolson; eld; McKissick; Nesbitt;Purcell;eld; McKissick; None eld; eld; Republican Republican None Senator(s): Stevens; Rucho;Soucek; Rouzer; Tillman; Tucker Meredith; Newton; Pate; Preston; Rabon; Hunt;Jackson; Hise; Harrington; Hartsell; Daniel; Davis; East;Forrester; Gunn; Goolsby; Blake; Brock;Brown; Brunstetter; Clary; Allran;Apodaca;Berger,Senator(s): P.; Bingham; Representative(s): Killian Representative(s): Tillis (SPEAKER); Torbett; Warren, H.; West Shepard; Stam;Starnes;Steen; Stevens; Stone; Samuelson;Sanderson;Setzer; Rhyne; Sager; Moffi Mills; McGrady; McGee; McElraft; McCormick; Justice; Langdon;LaRoque;Lewis; McComas; Johnson;Jones; Jordan; Ingle; Iler; Hurley; Horn;Howard; Hollo;Holloway; Hastings; Hilton; Faircloth; Folwell; Frye; Gillespie;Guice; Hager; Dollar; Dixon; Dockham; Current; Daughtry; Cleveland; Burr; Collins;R.; Brubaker; Cook; Brown, Brawley; L.;Brown, Blust; Boles;Bradley; Representative(s): Blackwell; Avila; Barnhart; tt; Moore, T.; Pridgen; Randleman; Murry; None appendix l CIVITAS INSTITUTE l 367 None Murry; Pittman; T.; tt; Moore, Senator(s): Allran; Apodaca; Berger, P.; Bingham; P.; Senator(s): Allran; Apodaca; Berger, Carney; Brunstetter; Daniel; Brown; Blake; Brock; East; Goolsby;Davis; Hartsell; Gunn; Harrington; Pate; Hise; Newton; Meredith; Hunt; Jackson; Tillman; Rabon; Rouzer; Rucho; Soucek; Stevens; Westmoreland Tucker; Senator(s): None Senator(s): Preston Representative(s): Avila; Blackwell; Blust; Boles; Avila; Representative(s): Bradley; R.; Brubaker; L.; Brown, Brawley; Brown, Daughtry; Current; Cook; Collins; Burr; Cleveland; Frye; Folwell; Dockham;Dixon; Dollar; Faircloth; Gillespie; Hager; Hilton; Hollo; Holloway; Horn; Hurley;Howard; Iler; Ingle; Johnson; Jones; Killian; Justice; Langdon; LaRoque;Jordan; McCormick; McGee; McComas; McGrady;Lewis; Mills; Moffi Randleman; Sager;Pridgen; Saine; Samuelson; Stam; Starnes;Sanderson; Setzer; Shepard; Torbett; (SPEAKER); Tillis Stone; Stevens; Steen; H.; West Warren, Walend; Representative(s): Hastings; McElraft Representative(s): Republican Republican eld; tt; eld; Martin; Luebke; Lucas; us; Keever; Dannelly; Jenkins; Kinnaird; Mansfi Vaughan; Stein; McKissick; Nesbitt; Purcell; White Walters; Graham; Jones; Robinson Garrou; Senator(s): Alexander, M.; Bell; Bordsen; Brandon; Bryant; M.; Bell; Bordsen; Alexander, Farmer-Butterfi Carney; Earle; Faison; Cotham; Representative(s): Brisson; Crawford; Hill; Brisson; Crawford; Representative(s): OwensMcLawhorn; Gill; Glazier; Goodman; Graham; Floyd; Fisher; Hackney; Harrison; Insko; Hall; Hamilton; Haire; Jackson; Jeff McGuirt; Michaux; Mobley;R.; Parfi Moore, Wainwright; Tolson; Rapp; Ross; Pierce; Parmon; Wilkins; Wray E.; Weiss; Warren,

Exc. Exc. Absence: Noes: Blue; Clodfelter; D.; Senator(s): Atwater; Berger, Democrat Democrat Senator(s): None Ayes: SENATE VOTE SENATE 45 Votes: Total 0 Vote: Absent: 5 Exc. 30 Noes: 15 Not: 0 Exc. Ayes: Noes: K.; Alexander, Adams; Representative(s): Representative(s): Spear; Womble Spear; Representative(s): Exc. Absence: Total Votes: 116 Ayes: 71 Noes: 45 Not: 0 Exc. Absent: 4 Exc. Vote: 0 Vote: 4 Exc. Absent: 45 Not: 0 Exc. 71 Noes: 116 Ayes: Votes: Total Democrat Ayes: HOUSE VOTE HOUSE APPROPRIATIONS ACT OF 2012 ACT APPROPRIATIONS 368 l CIVITAS INSTITUTE l appendix Absence: Exec. Davis, Clark; D.; Senator(s):Blue;Bryant; Ford; Noes: Ayes: None Senator(s): Democrat Ayes: 32 Noes:17 Not:0 Exc. Absent:1 Exc. Vote: 0 Total Votes: 49 SENATE VOTE Voting: Not Representative(s): Adams; Baskerville; Alexander; Noes: Ayes: Democrat Ayes: 65 Noes:53 Not:2 Exc. Absent:0 Exc. Vote: 0 Total Votes: 118 HOUSE VOTE APPROPRIATIONS ACT OF2013

Senator(s): ClodfelterSenator(s): Woodard Nesbitt; Parmon; Robinson;Stein; Walters; McLaurin; Kinnaird;McKissick; Graham; Jenkins; Representative(s): Holley WrayWilkins; Richardson; Terry; Tine; Tolson;Queen; Waddell; Moore, R.;Pierce; Mobley; Michaux; G; McManus; Jackson;Lucas; Harrison; Insko; Luebke; Martin, C.; Graham,G.;Hall, D.; Hall, L.;Hamilton; Hanes; Floyd; Foushee; Goodman;Graham, Gill;Glazier; Cunningham; Earle;Farmer-Butterfi Cotham;Bell, L.;Brandon; Brisson;Carney; Representative(s): None eld; Fisher; Republican Republican Representative(s): Faircloth Pittman;Whitmire Ramsey; Cleveland; Dobson; Elmore; Johnson;Millis; Representative(s): Blust;Brawley, R.;Brown, B.; Wells; West; Younts (SPEAKER); Torbett;Tillis Turner; Warren,H.; Stam; Starnes;Steinburg; Stevens; Stone; Szoka; Samuelson; Schaff T.; Presnell; Ross, Riddell; S.;Saine; Murry; Moffi McNeill; McGrady; McElraft; S; Lambeth; Langdon;Lewis; Martin, Malone; Jones;Jordan; Jeter; Iler; Horn; Howard; Hurley; Hardister; Hastings;Hollo;Holloway; Hager; Davis; Dixon; Ford; Dollar; Daughtry; Fulghum; Catlin;Bumgardner; Burr; Collins; Conrad; Boles; Brawley, W.; Brown, Brody; R.;Bryan; Representative(s): Arp;Avila; Bell, J.; Blackwell; None Senator(s): Hartsell Senator(s): Tillman; Tucker; Wade Rucho;Sanderson;Soucek; Randleman; Tarte; Newton; Pate (CHAIR); Rabon; Rabin; Hunt;Jackson;Meredith;Harrington; Hise; Daniel;Davis,Cook; Curtis; Gunn; J.; Goolsby; Bingham;Brock; Brown;Berger; Brunstetter; Senator(s): Allran;Apodaca;Barefoot; Barringer; er; Setzer; Shepard; Setzer; Speciale; er; tt; Moore, appendix l CIVITAS INSTITUTE l 369 Stam; Speciale; er; Shepard; Murry; Pittman; T.; tt; Moore, Senator(s): Allran; Apodaca; Barefoot; Barringer; Senator(s): Allran; Apodaca; Barefoot; Cook; Brown; Bingham; Brock; (CHAIR); Berger Goolsby; J.; Gunn; Harrington; Daniel; Davis, Hise; Pate; Meredith; Krawiec; Hunt; Jackson; Rabin;Rabon; Randleman; Rucho; Sanderson; Wade Tucker; Tillman; Soucek; Tarte; Senator(s): None Senator(s): Curtis; Hartsell; Newton Starnes; Steinburg; Stevens; Stone; Szoka; Stone; Stevens; Starnes; Steinburg; West; Wells; Turner; Tillis (SPEAKER); Torbett; Whitmire Setzer; R.; Howard; Brawley, Representative(s): H. Warren, Younts Representative(s): R.; Blackwell; Brown, Representative(s): Hastings; Hollo; Holloway Representative(s): Arp; Avila; Bell, J.; Blust; J.; Bell, Arp; Avila; Representative(s): Bryan; B.; Brody; Brown, W.; Boles; Brawley, Collins; Cleveland; Burr;Bumgardner; Catlin; Daughtry;Conrad; Dobson; Dixon; Davis; Hager; Ford; Faircloth; Elmore; Dollar (CHAIR); Horn; Hurley; Hardister; Iler; Jeter; Johnson; Langdon; Lewis; Lambeth; Jones; Jordan; Malone; Martin, S; McElraft; McGrady; McNeill; Millis; Moffi Ramsey;Presnell; Saine; S.; Riddell; Ross, Samuelson; Schaff Republican Republican eld; Glazier eld; None J. Jackson; McKissick; Robinson; Stein; Van Duyn Van Jackson; McKissick;J. Robinson; Stein; Walters Senator(s): Graham; Jenkins; Parmon; Bell, L.; Brisson; Carney; Cotham; Cunningham; L.; Brisson; Carney; Cunningham; Bell, Cotham; Gill; Goodman; Graham, C.; Floyd; Earle; Fisher; Hanes; L.; Hamilton; Hall, D.; Graham, G.; Hall, Harrison; Holley; Luebke; Insko; Jackson; Lucas; Martin, G; Meyer; Michaux; Mobley; R.; Moore, Tine; Terry; Richardson; Reives; Queen; Pierce; Wilkins; Wray Waddell; Tolson; Brandon Representative(s): Farmer-Butterfi Representative(s): Representative(s):

Noes: Foushee; Ford; Senator(s): Blue; Bryant; D.; Davis, Exc. Absence: Democrat Democrat Ayes: Woodard Clark; Senator(s): McLaurin; SENATE VOTE SENATE 43 Votes: Total 0 Vote: Absent: 7 Exc. 33 Noes: 10 Not: 0 Exc. Ayes: Exec. Exec. Noes: Alexander; Baskerville; Adams; Representative(s): Not Voting: Absence: Total Votes: 110 Votes: Total 0 Vote: Absent: 7 Exc. 44 Not: 2 Exc. 66 Noes: Ayes: Democrat Ayes: HOUSE VOTE HOUSE APPROPRIATIONS ACT OF 2014 ACT APPROPRIATIONS 370 l CIVITAS INSTITUTE l appendix Senator(s): Blue; Bryant; D. Blue;Bryant; Senator(s): Davis; Ford; Foushee; Noes: Smith;Smith-Ingram Clark; Senator(s): Ayes: Democrat Ayes: 37 Noes:13 Not:0 Exc. Absent:0 Exc. Vote: 0 Total Votes: 50 SENATE VOTE Absence: Exec. Voting: Not Representative(s): Ager; B. Richardson; B. Turner; Noes: Ayes: Democrat Ayes: 81 Noes:33 Not:1 Exc. Absent:5 Exc. Vote: 0 Total Votes: 114 HOUSE VOTE APPROPRIATIONS ACT OF2015

Duyn; Waddell; Woodard J. Jackson;Lowe; Robinson;Stein; McKissick; Van Representative(s): Carney Representative(s): Reives; Salmon; Terry; Willingham Pierce; Michaux; Meyer; Queen;R.Johnson; Jackson;L.Bell;Hall;Lucas;Insko; Luebke; Gill;Hanes;Harrison;Holley; Graham; G.Martin; Hall; Earle;Farmer-Butterfi Cotham; Brockman; Cunningham; D.Baskerville; W.Richardson; Waddell; Wray Graham; Goodman;Hamilton; R.Moore; Hunter; Representative(s): Brisson;C. Adcock; Alexander; None eld; Fisher; Floyd; G. Republican Republican None Senator(s): Tillman; Tucker; Wade; Wells Rucho;Sanderson;Soucek; Randleman; Tarte; Meredith; Newton; Pate; Rabon; Rabin; J. Hise; Davis; Krawiec; Lee;Hartsell; McInnis; Brown; Daniel;Gunn;Harrington; Cook; Curtis; Barefoot; Bingham;Brock; Berger; Barringer; Apodaca;B. Alexander; Senator(s): Jackson; Hastings; Pendleton Representative(s): Bumgardner; Cleveland; Representative(s): Collins Representative(s): Yarborough; Zachary Tine; Torbett; Warren; Watford; West; Whitmire; Steinburg; Stevens; Szoka; T. Moore (SPEAKER); Saine; Schaff R. Turner; Robinson;Ross;S.Martin; Riddell; Pittman; Millis; Presnell;McNeill; R.Brown; McGrady; Langdon; Lewis; McElraft; Malone; Jones;Jordan;Jeter; L.Johnson;Lambeth; J. Bell; Iler; Horn;Howard;Holloway; Hurley; Elmore; Faircloth; Ford; Hardister; Fraley; Hager; Davis; Dixon; Dobson;Dollar; Daughtry; Catlin; Burr; Conrad; Bryan; Brody; Brawley; Blust;Boles;Bradford;Bishop; Blackwell; Representative(s): Adams; Arp;Avila; B. Brown; er; Setzer; Shepard; Setzer; Speciale;Stam; er; None appendix l CIVITAS INSTITUTE l 371 S.L. 1987-622, 1987-813 S.L. 1987-622, 1987-813 1991 S.L. 1991-689 Year Year Session Law 2001 S.L. 2001-424 1996 S.L. 1996-13es2 1998 S.L. 1998-158 1985 1985-656 S.L. 1986 1986-982 S.L. 1997 S.L. 1997-475 1998 S.L. 1998-212 2001 S.L. 2001-424 1987 1996 S.L. 1996-13es2 1987 S.L. 1987-1402 1995 S.L. 1995-474 retain 3% of retail wing merchants to Impose 5% sales tax on satellite television service television Impose 5% sales tax on satellite (loss of less than $9 million state, sales tax holiday Create at 6.0% [S.L. 2001-430, as amended by all telecommunications Tax 2001 S.L. 2001-424 Repeal sunset on 3% tax on white goods (counties receive 72% receive goods (counties Repeal sunset on 3% tax on white collection remote creating to (first step sales tax system Streamlined 2000 2000 S.L. 2000-109 October 16, 2001 4.5% for 4.0% to from sales tax rate Increase state S.L. 2000-120 2001 S.L. 2001-424 Repeal 2% state sales tax on food sales tax on food Repeal 2% state new business or reductions (for changes: exemptions Sales tax/fee 1999 pawnbrokers, check cashing, for changes (increases Sales tax/fee S.L. 1999-438 1999 S.L. 1999-438 Phase out soft drink tax over 3 years 3 years Phase out soft drink tax over 2% 3% to from sales tax on food state Reduce per month) established (80¢ E-911 fee Increase sales tax rate from 3% to 4% 3% to from Increase sales tax rate tax on soft 25% Reduce drinks by 3% 4% to from sales tax on food state Reduce Repeal provision allo of 5¢ on each 30-dozen tax Enact of eggs case new excise out-of-state require may Act: the state Tax Expand the Sales and Use 1988 S.L. 1988-1096 Repeal of sales tax on food purchased with food stamps with food purchased food Repeal of sales tax on 0.5% with raise sales tax an additional to governments local Authorize 1986 1986-906 S.L. and local sales tax state from DOT Exempt $6 million local) S.L. 2001 424]; previous tax rate varied from 0.0% on interstate 0.0% on interstate varied from tax rate S.L. 2001 424]; previous calls 6.5% on intrastate calls to of this revenue) of this revenue) and catalog sales) Internet for system July 1, 2003 to registration, loan agencies, prescription drugs, medical equipment, medical equipment, drugs, prescription loan agencies, registration, local airports) guides) used equipment, shoppers’ retailers to collect sales and use taxes on mail order sales to N.C. sales to on mail order collect to sales and use taxes retailers exploited or systematically has purposefully if the retailer customers mail or advertising solicitation by the market in N.C. through some restrictions on the use of the money; for mostly designated $198 million) revenue needs (estimated public school capital (effective July 1, 1998) (effective (effective January(effective 1, 1997) sales tax collected consumption sold for

SALES & USE TAX CHANGES TAX USE & SALES S S T S S S T T S T T S S T T S S S T S T Changes Tax Significant 372 l CIVITAS INSTITUTE l appendix S S S S T T T S T T S S S S S T S S T T S S S WX S Significant Tax Changes SALES & USE TAX CHANGES

Authorize additional appliance salestaxholiday sales taxrate f47% of 4.75% Is scheduledto expire onJune30,2011 estimated at$2.25million total amountofexemption is on salestaxes paidonelectricity; first weekend inNovember up to 5%) food, (netrevenue andmodifiedsoftware increase) electricity sold to manufacturers electricity (most localgovernments addanother2.5cents) The state salestaxwilldrop by ¼cent asofDec. 1,2006. (previously 1%tax) machinery ae a nmnfcue oe asd27%t h tt ae 03 S.L.2013-316 2013 S.L.2009-451 Repeal “back-to-school” salestaxholiday, andEnergy Star 2009 S.L. 2009-451 homesraised2.75%toSales taxonmanufactured thestate rate 2009 salestaxto onlineclick-throughExtend salesanddigital products S.L.2006-66 thestatewideIncrease salestax by a penny, from 4.75% to 5.75%. S.L.2008-107 2006 2008 Grant anexemption for an “eligible internet datacenter” (Google) S.L.2007-323 asalestaxholiday forEnact energy efficientappliances for the 2007 Expand thesalesandusetaxrefund manufacturers aircraft for certain permanenttheremainingMake ¼cent ofthe “temporary” Reduce thesalestaxfrom 2.83percent to 2.6percent on ofthe A portion “temporary” salestaxisallowed to sunset. S.L.2005-276 salestaxto satelliteExtend radio 2005 telecommunicationsExtend taxto voicemail Apply generalsalestaxrate (7%)to cable(wasonlyalocal tax, Apply uniform salestaxto candy S.L.2005-276 4.5%state salestaxrateMaintain 2005 Exempt from salestax, items ranging from horsesto laundry from taxonhomesatelliteIncrease 5%to television 7% services taxontelecommunicationsIncrease from 6%to 7% ofsalestaxrefundsExpand numberandtype &exemptions S.L.2003-284 Tax drinksinvending machinesat50%ofgeneralrate soft 2003 Conform to streamline salestaxprovision for drinks, soft prepared 4.5%state salestaxrateMaintain Accelerate the 5%salestaxonsatelliteImpose television service 1 / 2 ¢ localsalestaxoption 1 / 2 ¢ localsalestax(effective July1,2003) 03 S.L.2013-316 2013 S.L.2005-276 2005

2004 S.L. 2004-124 S.L.2001-424 2001 2001 S.L. 2001-424 02 S.L.2002-123 2002 06 S.L.2006-66 2006 S.L.2005-276 2005 S.L.2005-276 2005 S.L.2005-276 2005 07 S.L.2007-323 2007 S.L.2006-66 2006 Y ear Session Law Session Year 05 S.L.2005-276 2005 03 S.L.2003-284 2003 05 S.L.2005-276 2005 S.L.2003-284 2003 appendix l CIVITAS INSTITUTE l 373 S.L. 1987-622, 1987-813

2013 S.L. 2013-316 1985 S.L. 1985-656 1988 S.L.1988-882 1991 S.L. 1991-689 1989 S.L.1989-728 1995 S.L. 1995-42 1987 1988 S.L. 1988-1039 1988 S.L.1988-1063 Year Year Session Law 6% to 7% income tax rate from Increase corporate income tax from 7.00% to 7.75% and 7.00% to tax from income Increase corporate $100,000 above income for tax rate a 7.75% personal income Add 1991 S.L. 1991-689 Changes to the individual income tax status of retirement benefits benefits status of retirement tax the individual income Changes to tax income a change in the state to of $85 million due savings Tax 1989 S.L. 1989-792 1989 S.L.1989-728 Increases individual income tax exclusions for federal civil service federal for exclusions tax Increases individual income Income North Corporations. Enterprise Create Carolina 1988 S.L.1988-936 Tax credits to people with low and moderate incomes incomes and moderate people with low to credits Tax Increase corporate claim to taxpayers higher income Close loopholes that allow Exempt 50% of the sale price of a modular home from the sales tax the of a modular home from 50% of the sale price Exempt include some services to tax base is broadened sales such as The 2014 S.L 2014-100 2015 S.L. 2015-241 Repeal state franchise tax on electricity franchise Repeal state of piped natural and sales entertainment, and live tax on admission to movies, Privilege 2013 S.L. 2013-316 Service the contracts goods added to and warranties on tangible 2013 S.L. 2013-316 the low-income tax credit tax credit the low-income statutes allowing S-Corps to be taxed as if they were partnerships as if they were be taxed S-Corps to allowing statutes retirement pay and military retirement pay from $3,000 to $4,000 $3,000 to from and military pay pay retirement retirement amusements replaced by the general sales tax rate the general sales tax rate by amusements replaced and installation services property, maintenance tangible to repair, such as autos of the amount of an 25% for and franchise tax credits in such a corporation investment levy a scaled surtax 1.0% in 1994 4.00% in 1991 to from gas, those items now subject to general state sales tax rate subject sales tax rate now state general those items to gas, sales tax base Any taxpayer entitled to an income tax refund may tax refund an income entitled to taxpayer Any all or part the Fund. contribute to of the refund tax liability income of federal percentage for 1995 and to $2,500 for 1996 $2,500 for 1995 and to for Tax Fairness Act: base the state individual income tax on a income individual Act: base the state Fairness Tax Establish the North Carolina Candidates Financing Fund. Fund. Financing Establish the North Candidates Carolina

4 years 6.90% over 7.75% to from tax rate income corporate Reduce 1996 S.L. 1996-13es2 tax changes 1990 federal to tax conformity income state Update $2,250 $2,000 to from tax personal exemption Increase income 1991 each dependant child of $60 for Establish tax credit S.L. 1991-922 1995 S.L. 1995-42

INCOME TAX CHANGES TAX INCOME SALES & USE TAX CHANGES TAX USE & SALES T T T T WX S S WX S T T S T S S T S S S S Changes Tax Significant 374 l CIVITAS INSTITUTE l appendix S S T T T S T T T T S S S S S S S T S WX T S T T T T Significant Tax Changes INCOME TAXCHANGES S.L.2006-66 2006 The highestmarginal income taxrate falls¼percentage point 8.25%individualincome taxrate Extend for 2more years Renewablefueltaxcredits sunsetonlow-income Extend housingcredit Research anddevelopment taxcredit Qualifiedbusinessinvestment taxcredit S.L.2001-424 2001 for Increasestandard deduction marriedfilingjointlyfrom $5,000 Childhealthinsurance taxcredit taxcredit limitfor Increase conservation S.L.1998-212 Establishlong-term care insurance credit 1998 Increase non-itemizer taxcredit charity Repealincome taxonretired government employees (Baileycase)

Maintain 8.25%income taxforMaintain top income taxbracket Close loopholeinLLC franchisetax Broaden definitionofbusinessincome S.L.2001-424 S.L.2001-424 2001 Delay 2001taxbreaks: penalty standard deduction/marriage 2001 Repeal children’s taxcredit healthInsurance (effective taxyear 2001) Increase taxcredit for children from $60to $75intaxyear 2002 S.L.2001-424 2001 Create new8.25%income taxbracketfor highestincome households Pension taxwithholding(noestimate ofimpact) ofr ofdrldfnto f“hl”frsaecidtxcei 20 S.L.2003-284 2003 Conform to federal definitionof “child” for state childtaxcredit to 8percent, effective 1,2007 taxableyear beginning January to $5,500intaxyear 2002andto $6,000in2003 (increase inchildtaxcredit) and to $100in2003 2003taxyear)(sunset after to expire atthebeginning ofthe2011taxyear Is scheduledto expire atthebeginning ofthe2011taxyear earning above $150,000andmarriedfilersearningabove $250,000. $100,000. chargeThe increases extra to 3percent for single filers filers earningover $60,000andmarriedfilersearningabove percent ofsingle charge isleviedagainstthetaxliability extra 3.5 percent ofthefederal credit raea3prettxsrhreo oprt noe sshdld 09 S.L. 2009-451 2009 Create a3percent taxsurcharge oncorporate income. Isscheduled S.L.2009-451 2009 S.L. 2008-107 2008 Create atax “surcharge” onupper-level income earners. Atwo theamountofEITCIncrease to 5percent ofthefederal amount Establish astate level EarnedIncome Tax Credit (EITC) setat 1%grossImpose receipts taxonmovie admissions 02 S.L.2002-126 2002 02 S.L.2002-126 2002 98 S.L.1998-95 1998 04 S.L.2004-153 2004 S.L.2004-124 2004 S.L.1998-183 1998 99 S.L.1999-414 1999 04 S.L.2004-110 2004 S.L.2004-124 2004 S.L.1998-212 1998 02 S.L.2002-126 2002 98 S.L.1998-1es 1998 07 S.L.2007-323 2007 Y ear Session Law Session Year 03 S.L.2003-284 2003 05 S.L. 2005-276 2005 S.L.1998-212 1998 appendix l CIVITAS INSTITUTE l 375 2010 S.L. 2010-31 1987 S.L. 1987-568 1987 S.L. 1987-852 1996 S.L. 1996-13es2 2010 S.L. 2010-31 1995 S.L. 1995-4 2006 S.L. 2006-66 2007 S.L. 2007-323 2013 S.L. 2013-316 2006 S.L. 2006-66 2006 S.L. Year Year Session Law businesses small per employee for per employee for Extend sunset for a number of targeted tax credits, including tax credits, a number of targeted Extend sunset for small businesses – equal to a temporary for Create credit Provide $2.3 million tax credit for constructing renewable constructing renewable for $2.3 million tax credit Provide reporting” “combined implementing tax loophole by Close corporate 2007 S.L. 2007-323 Reduce unemployment tax for employers by 23% by employers tax for unemployment Reduce new credits create Expand jobs tax credit; a tax credit up to $250 Provide a maximum of $500,000 for of up to Offer tax credits Lower employment security contribution (payroll tax) rate for for tax) rate security (payroll employment contribution Lower in jobs that create businesses for tax credit New income 1987 certain for business investments credits Tax 1987-17 S.L. Drops state personal income tax rate to 5.499 percent by 2017, down 2017, down by 5.499 percent to tax rate personal income state Drops 2015 S.L. 2015-241 Tiered individual income tax structure with rates as high as 7.75% tax structure with rates income individual Tiered 2013 S.L. 2013-316 “severely distressed” counties counties distressed” “severely fuels facilities method for business tax filing method for employers from 2.70% to 2.25% of wages 2.70% to from employers from the current 5.75 percent. The standard deduction standard will be increased The 5.75 percent. the current from married filing jointly), $15,500 to to $15,000 example from slightly (for medical expenses is reinstated for and the tax credit tax liability. insurance unemployment 25% of the companies’ eliminated and replaced with a flat 5.8% tax rate for 2014, and 5.75% for rate with a flat 5.8% tax and replaced eliminated Singles deduction for standard income of $7,500 of 2015. A larger for some while eliminating is created, married filers and $15,000 for deductions itemized a previous credit program had expired in 2014 had expired program credit a previous to save businesses on net tens of millions in taxes in taxes of millions on net tens businesses save to in 2015 (rate scheduled to fall to 4% in 2015 and 3% in 2016 if to fall scheduled to in 2015 (rate met) targets certain revenue rehabilitation projects, interstate passenger air carrier, aviation aviation passenger air carrier, interstate projects, rehabilitation sports motor fuel for events that subsidize employee healthinsurance premiums healthinsurance employee that subsidize biodiesel providers Introduces a new tax credit for improvements to historic buildings, buildings, historic to improvements for a new tax credit Introduces 2015 S.L. 2015-241 Eliminates the $50,000 business income deduction the $50,000 business income Eliminates estimated sales factor,” “single a to tax formula Changes corporate 2015 S.L. 2015-241 Corporate income tax reduced to 6% (from 6.9%) in 2014 and 5% 6% (from to tax reduced income Corporate 2013 S.L. 2013-316 Social Security income remains fully exempt from state income tax income state from Social fully exempt Security remains income 2013 S.L. 2013-316

BUSINESS-RELATED TAX CHANGES TAX BUSINESS-RELATED INCOME TAX CHANGES TAX INCOME T S T T T T T S T T T T T T T T T WX Changes Tax Significant 376 l CIVITAS INSTITUTE l appendix Significant Tax Changes S S S "SIN" TAXCHANGES S S T S S S S T T S S S T S MOTOR FUEL TAX CHANGES DEATH-RELATED TAXCHANGES

estepeiul dutbesaegstxa aeo 5cnspr 21 S.L.2015-2 2015 thepreviouslySets adjustable state gastaxatarate of35cents per thedeathtax)forRepeals thestate estate deaths tax(aka n ouaingot and populationgrowth 2017, gasprices willincrease annuallyby arate tied to inflation would have dropped significantly lower thanthesesetrates. After six months. Low gasprices meanthatwithoutthislaw, gasprices gallon for Jan.1 2016 –June30,2016,then34cents for thefollowing 1st2013 January after fwoeaepieo te oac rdcs of wholesaleprice onothertobacco products gas taxcannow nolongerdrop below 29.9cents pergallon vehicles; moneygoesto GeneralFund (gainlessthan$3million) 1,1999) set to expire January (1/4¢ increase 1,1995andother1/4¢ scheduleto expire January Storage Tank Fund andtheGroundwater Protection Loan Fund equally between theCommercial Petroleum Leaking Underground from 12¢to 14¢pergallon price; raisePowell Billdistributionfrom 13/8¢to 13/4¢ gallon untilJune30,2009 tax sothatthetotal state gastaxcannotexceed 29.9cents per education, estate taxcredit, accelerated depreciation) nraecgrtetxfo ¢prpc o5 n eisa20 91 S.L.1991-689 1991 Increase cigarette taxfrom 2¢ perpackto 5¢andleviesa2.0% Increase someliquorsurcharges andABCpermitfees exciseIncrease taxonliquorfrom 22.5%to 28.0% S.L.2009-451 2009 S.L. 2009-108changesthestate gastaxceiling into afloor. The state S.L.2001-424 2001 Cap the variablewholesalecomponent ofthemotor fuels S.L.1991-538 Remove $1,500caponhighway usetaxfor mostnoncommercial 1991 S.L.1987-315 Highway Fund: motor fueltaxincreased by 1/2¢to bedivided 1987 S.L. 1986-982 1986 Increase thepergalloncredit for motor carriers’ purchases offuels taxincreaseGas 2¢pergallonplus3%salestaxonthewholesale Temporarily allow thestate’s estate taxto lapse Conform estate taxto federal sunset conformity to federal sunsetonpartial estateExtend tax Conform to Internal Revenue Code changes(pensionsand Repeal state inheritance tax;retain estate tax inheritance taxexemptionsRepeal certain Y ear Session Law Session Year 91 S.L.1991-454 1991 02 S.L.2002-126 2002 97 S.L.1987-832 1987 S.L.2007-323 2007 S.L.1998-212 1998

91 S.L.1991-689 1991 S.L.2003-284 2003 00 S.L.2010-31 2010 S.L.2005-144 2005 03 S.L.2013-316 2013 appendix l CIVITAS INSTITUTE l 377 (as amended by S.L. (as amended by 2001-748) 2004 2004-84 S.L. 1985 S.L. 1985-656 1986 S.L. 1986-982 1991 S.L. 1991-689

1995 S.L. 1995-41 2000 S.L. 2000-2 2001 S.L. 2001-424 2009 S.L. 2009-451 2009 S.L. 2009-451 2001 2001-424 S.L. 2004 2004-124 S.L. 2005 S.L. 2005-276

Year Year Session Law New tax on HMOs of 1.1% in 2003 and 1.0% in later years; exempts exempts years; New tax on HMOs of 1.1% in 2003 and 1.0% in later 1.1% Increase tax on medical service 0.5% to from companies HMOs from corporate income and franchise taxes and franchise taxes income corporate HMOs from Impose sales tax on spirituous liquor 6% state spirituous liquor from tax on excise Reduce Places a cap of $45 million on the sales tax refund nonprofit entities entities nonprofit a cap of $45 million on the sales tax refund Places 2013 S.L. 2013-316 Allow five percent of the purchase price of a manufactured home price of the purchase percent five Allow 2008 S.L. 2008-107 Repeal intangibles tax and reimburse local governments local governments tax and reimburse Repeal intangibles property cars from rental tax (impactExempt local revenues) on HMOs: Taxes Raise insurance tax from 1.750% of gross premiums to 1.875% for 1.875% for to premiums 1.750% of gross Raise tax from insurance tax liability premiums against gross Establish a 6.5% charge 1991 S.L. 1991-689 Partial repeal of the intangibles tax of the intangibles repeal Partial rate; with a uniform tax system premiums Restructure insurance propertyRepeal of local government tax on household 1986 S.L. 1986-1031 Increase tax on beer, wine and liquor Increase tax on beer, products and tobacco Increase tax on cigarettes a new tax on e-cigarettesCreates products and vapor at the rate 2014 S.L. 2014-3 In return, S.L. 2004-84 reinstates the discount at 2% the discount In 2004-84 reinstates S.L. return, law) by local share 7% (no 6% to from Increase tax on liquor 30¢ per pack through 5¢ to from changes (increase tax rate Tobacco 2005 S.L. 2005-276 Taxes on spirituous liquor (net gain): on spirituous Taxes wholesalers for tax discount and tobacco alcohol Reduce (including most large hospitals) can claim. This cap would not impact cap would This hospitals) can claim. (including most large at the time of its passage organizations nonprofit any community to be deducted from state and federal taxable income and federal state be deductedcommunity to from personal property eliminate to a special trust designed HMOs and BCBS) for (except support Department for a General Fund of Insurance and allow assessments Guaranty Fund tax for against premium 20% credit 1991 and to 1.900% beginning with 1992 1.900% beginning 1991 and to complete system repeal in 1988 repeal system complete of 5 cents per milliliter of the liquid used in such products of the liquid used per milliliter of 5 cents June 30, 2006 and increase to 35¢ per pack July 1, 2006) to June 30, 2006 and increase (December 1, 2001) (December 2002) 1, 25% (February 28% to ➔ ➔ ➔ ➔ in 2003 and 1.0% in later years; these companies do not pay these companies years; in 2003 and 1.0% in later or franchise tax corporate

(Budget Bill eliminates 4% tax discount) 4% tax discount) (Budget Bill eliminates

OTHER TAX CHANGES TAX OTHER T T T T S S S T T T S S S S S S S S "SIN" TAX CHANGES TAX "SIN" Changes Tax Significant 378 l CIVITAS INSTITUTE l appendix d. Includesgeneralobligationbonds. c. Includesthelocalgovernmenttransfer andappropriatedreserves. b. Includestherepairandrenovation reserve. a. Includesfundstransferredtothereserve forbudgetstabilization.

999 1,270.4 1989-90 988 1,012.7 1988-89 909 1,289.8 1990-91 978 972.4 909.9 1987-88 1986-87 938 1,906.6 1983-84 939 1,701.9 1,437.0 1,375.7 1993-94 1992-93 1991-92 958 843.4 1985-86 948 2,170.4 1,798.5 1984-85 1982-83 030 1,907.6 2003-04 020 1,841.3 1,949.5 2002-03 2001-02 989 1,759.0 1,693.5 1998-99 1997-98 949 1,859.3 1994-95 948 755.1 640.7 1984-85 1982-83 000 1,904.8 1,922.5 2000-01 1999-00 040 1,973.7 2004-05 969 1,764.2 1,735.0 1996-97 1995-96 938 698.4 1983-84 979 5,191.6 1997-98 958 2,501.4 1985-86 060 2,226.3 2,223.6 2006-07 2005-06 989 5,549.9 1998-99 968 2,660.6 1986-87 990 6,033.2 1999-00 978 2,939.7 1987-88 000 6,366.8 2000-01 988 3,230.8 1988-89 010 6,635.5 2001-02 999 3,468.2 1989-90 020 6,534.6 2002-03 909 3,672.0 1990-91 030 6,995.3 2003-04 919 3,688.6 1991-92 040 7,118.6 2004-05 929 3,829.0 1992-93 050 7,613.6 2005-06 939 4,128.2 1993-94 060 7,710.7 2006-07 949 4,417.1 1994-95 959 4,477.5 1995-96 969 4,783.6 1996-97 iclPbi Hge Communit Higher Public Fiscal iclOhrDebt Other Fiscal erEuainEuainClee eore otto Correction portation Resources Colleges Education Education Year erAece Service Agencies Year

944.4

1,058.9 856.4 $ 302.6 200.4 167.2

114.2$ $ 270.0 244.1

1,300.7

1,414.4

1,662.2

Trends inthe Total State Budget:1983-2007

261.7

232.0 $ 13.2 221.1 104.6

494.3 222.6

2,262.6 1,219.8 2,321.1 2,473.6 2,555.3 1,483.2 2,781.0 2,814.1 1,700.0 3,016.8 1,647.3 3,103.5 1,728.9 3,489.0 1,850.9 3,530.1 1,932.9 2,121.32,035.1 107.6 108.9 111.9 108.7 114.2 129.6 127.0 117.9 114.5 438.1 301.2 142.5 117.8 561.1 135.4 157.0 740.7 660.3 98.2 1,462.2 $ $

Reserves (In Millions) 147.3 576.6 288.2 221.5 135.6 278.3 235.0 610.6 304.7 644.4 269.2257.8 659.9 337.1 681.5 358.9 724.1 364.7 772.1 403.2 825.6 433.5 832.9 410.7 880.6 476.8 959.9 504.0 959.9 534.6 546.1 18.7 15.821.1 11.4 (5.4) (5.4) 2.6 0.9 6.3 2.9 6.9 y - a 626.8 $

2,598.5

2,800.8

2,831.3

3,043.0

3,525.0

10,404.5 10,581.2 11,553.0 13,270.6 14,213.0 Capital ua Trans- Human 1,601.3 1,118.0 6,324.4 1,719.6 1,533.3 1,201.4 1,534.2 6,955.9 1,945.6 1,206.7 7,604.9 2,032.8 7,814.7 2,251.2 8,213.6 2,435.8 9,567.5 2,695.5 3,012.3 3,661.6 4,244.2 5,289.4 5,616.5 5,910.1 292.5 316.9 265.3 910.1 334.0 298.0 762.9 274.5242.6 592.6 377.6 234.1 881.2 883.5 116.0 424.0 877.1 245.7 456.0 72.4$ b d d d d d 21,124.8 19,780.2 176.1$ $ 24,501.7 24,290.4 22,631.6 10,410.4 9,724.6 8,956.5 8,400.6 7,453.2 6,703.9 18,056.6

833.3

831.0

859.0 261.7 899.2 306.0 883.0 343.1 933.3 380.8 890.6 428.0 950.7 484.8 959.1 517.2 1,057.1 577.4 1,072.3 732.5 815.4 1,987.6 2,106.4 2,125.4 1,005.7 2,492.9 1,086.1 2,635.8 1,111.7 2,808.3 1,399.1 1,378.5 1,512.3 1,614.3 1,727.9 1,850.1 1,917.5 Other 231.8 629.0 447.4 864.3 232.4 468.0 476.8 236.8 893.4 236.8 908.1 30.0 62.0 66.5 40.0 62.0 62.0 62.0 ------$ 5,990.7 -$ c

11,996.4 14,508.7 13,610.4 12,939.5 17,277.7 27,152.7 26,565.9 18,149.9 29,397.0 33,843.5 31,221.5 34,555.0 190.5 212.7 244.3 Total appendix l CIVITAS INSTITUTE l 379 6.8% 15.2% 90 1989- 07 2006- 7.1% 89

12.2% 1988- 1 8.8% 06 2005- 88 1987- 6.4% 6.3% 87 05 1986- 2004- 12.9% 86 6.4% 1985- 10.9% 04 2003- 85 1984- 1.3% 12.0% 84 03 2002- 1983- 4.1% 7.3% 83 5.1% during 2000s 8.7% during 1980s 5.8% during 2000s 1982- 02 6.2% 2001- 82 1981- 1.0% 8.8% 01 81 2000- 1980- 5% 0% 5% 0% 30% 25% 20% 15% 10% 30% 25% 20% 15% 10% 8.0% 4.4% 1970-2007 00 80 1999- 1979- 8.6% 11.2% 99 79 1998- 1978- 7.2% 15.1% 98 1997- 78 1977- 5.7% 6.3% 97 1996- 77 0.3% 1976- 96 1995- 5.7% 76 7.3% 1975- Average Growth in General Fund Budget: Fund in General Growth Average 95 9.1% 1994- 15.4% 75 1974- 94 1993- 25.1% 6.6% 6.7% during 1990s 74 10.6% during 1970s 1973- 93 1992- -0.9% 5.2% 73 92 1972- 1991- 26.3% 7.9% These numbers reflect adjustments for total current operations. Fiscal Research Division, North General Research Carolina Fiscal operations. current total numbers reflect for adjustments These Overview: and Budgetary Assembly Research Session Actions Fiscal (Revised) (Raleigh: Fiscal 2006 Legislative http://www.ncga.state.nc.us/fiscalresearch/frd_reports/frd_reports_pdfs/ Division, 2006), Q2-Q3; from available Overview_2006.pdf. 72 91 1971- 1990- 1 The charts above somewhat obscure the growth of the state budget over the last several the last several budget over of the state the growth chartsThe somewhat obscure above an does not give year to year budget from of the state measuring the growth In itself, years. FY1973-1974, FY1972-1973 to From growth. budget picture of long-term accurate entirely $1.712 billion – $1.187 billion to from authorizations went General Fund total example, for FY2003-2004, authorizations FY2002-2003 to From of $525 million or 44 percent. an increase or 3.9 percent. of $563 million $14.914 billion – an increase $14.351 billion to from went Thus while from one perspective – i.e., in terms of growth from year to year – the budget year to year from of growth in terms one perspective – i.e., while from Thus quickly in terms more now quickly the budget is growing expanded more during the 1970s, authorizations of $19.102 billion as taking FY2006-2007 General Fund Thus, of actual dollars. increase. as a 5 percent only register of $1 billion would an increase even a baseline, 5% 0% 5% 0% -5% 30% 25% 20% 15% 10% 30% 25% 20% 15% 10% 380 l CIVITAS INSTITUTE l appendix 1991-92 1990-91 1987-88 1986-87 1985-86 1989-90 1988-89 1984-85 1983-84 1982-83 bonuspayment) 5%+($200one-time 1981-82 bonuspayment) 5%+($200 one-time 1980-81 1979-80 1978-79 1977-78 1971-72 1973-74 5% + (5% for those under $2.75/hour 5% + (employment extended 187to 5%+(employment extended 5%+(5%for thoseunder$2.75/hour 1973-74 1972-73 1970-71 1975-76 1974-75 1976-77 YEAR b a a a Salary Increases: Salary Teachers &State Employees STATE EMPLOYEES %+1se nrae(.% 1-step increase (4.8%)second year 5% +1step increase (9.6%) 4% +$300(average 7.2%) $75 month(average 6%) 4% +2%meritfunds 4% +2%meritfunds 5% (eff 1-1-82) ective 4.5% 6.5% 7.5% 10% 10% 10% (+ (Salary schedulechanged=2% 10%(+(Salary 10% 5% 5% (employment extended 185to 5%(employment 187 extended 5% 5% 5% 8% 5% 2% -0- -0- -0- teachers; 2-step increase (9.6%)third or 200 days = 7% salary increase and1 200 days =7%salary to 10% added to each step of salary to 10%addedto eachstep ofsalary TEACHERS 4% +$300(average 6.8%) days = 1% salary increase days =1%salary classifi step added to schedule 5% (eff more year teachers cation adjustment 10% + 4.8% salary 10% +4.8%salary 6.15% average 6.65% average ective ective 1-1-82) range) 4.5% 6.5% 7.5% 6.5% 10% 5% 5% 8% 5% -0- -0- -0- appendix l CIVITAS INSTITUTE l 381 -0- -0- 2% 5.50% 4% - 9% 4% - 9% 4% - 11% 3% average 2% average 2.5% - 13.8% 5% - 1-3 years 1.0% to 6.02% 1.0% to 0.0% to 5.85% 0.0% to (2.5% average) (5.0% average) (3.0% average) 7% - 4-29 years 1.42% to 5.86% 1.42% to 5.90% 1.41% to 6.27% 1.77% to 4.05% to 9.53% 4.05% to 2.39% to 6.63% 2.39% to (2.86% average) (1.84% average) (1.81% average) (2.24% average) (8.23% average) 6.45% to 14.05% 6.45% to TEACHERS -0- -0- -0- -0- 2% $626 $522 + 1% one-time bonus Greater of a $850 or 2.0% Greater across-the-board increase across-the-board increase across-the-board increase Greater of a $1,000 or 2.5% Greater Greater of a $1,100 or 2.74% Greater + $500 Compensation Bonus + $500 Compensation + $125 Compensation Bonus + $125 Compensation 1% COLA + 2% career growth 2% career + 1% COLA 1% COLA + 2% career growth + 2% career 1% COLA 2% COLA + 2% career growth + 2% career 2% COLA STATE EMPLOYEES STATE 2.2% COLA + 2% career growth + 2% career 2.2% COLA 5.5% across-the-board increase 4.0% across-the-board increase 2.50% COLA + 2% career growth + 2% career 2.50% COLA 4% + 1% one-time bonus payment 2% + 1% one-time bonus payment Salary Increases: Teachers & State Employees (Continued) Employees & State Teachers Salary Increases: c YEAR increases. larger for eligible cation were certifi one year for employment upon continuous Conditional 2001-02 2002-03 2005-06 2003-04 2004-05 2006-07 2000-01 2007-08 1999-00 2010-11 2008-09 2009-10 1998-99 1996-97 1997-98 1995-96 1994-95 1993-94 1992-93 frozen Salary program increment Most teachers received between 4%-9%. Teachers receiving National Board of Professional Teaching Standards (NBPTS) (NBPTS) Standards Teaching of Professional National Board receiving Teachers 4%-9%. between Most received teachers c a b 382 l CIVITAS INSTITUTE l appendix 990 3,5,1 27,607,550 28,357,925 5,841,462 238,355,819 4,978,215 192,350,072 25,133,780 1999-00 165,973,573 1998-99 127,038,338 27,631,295 1997-98 124,742,353 37,359,875 1996-97 38,018,250 1995-96 38,227,230 113,399,264 86,368,214 37,392,600 89,020,478 1994-95 79,683,770 38,491,163 1993-94 71,259,383 37,295,105 1992-93 32,453,812 1991-92 8,984,917 69,083,445 1990-91 71,636,370 38,445,500 73,929,627 1989-90 64,506,250 1988-89 38,401,500 75,781,250 1987-88 38,288,000 1986-87 38,772,567 76,077,250 30,062,040 1985-86 79,525,500 30,329,757 75,020,500 1984-85 65,062,550 29,292,661 1983-84 62,173,700 29,596,000 1982-83 27,522,500 1981-82 55,341,050 23,156,000 1980-81 53,000,000 23,776,500 49,202,210 1979-80 40,024,500 1978-79 34,870,615 25,083,000 1977-78 25,749,000 1976-77 32,617,500 1975-76 48,147,042 25,599,500 21,466,030 1974-75 18,631,260 1973-74 17,757,503 1972-73 1971-72 1970-71 iclGnrlHgwyRvneTtlPrasa%of Per Total Revenue Highway General Fiscal erFund Year North Carolina 1971-2006 AnnualNorth DebtService: 24,415,500 0 Fund Special ud etSrieCpt G.F.Revenue Capita DebtService Funds 2,2,8 72 0.9% 1.1% 1.0% 17.22 1.0% 18.04 123,728,089 17.10 1.0% 127,038,728 16.02 1.2% 117,911,000 1.3% 108,651,983 16.15 16.58 1.5% 107,574,608 16.41 108,931,475 1.7% 106,383,439 18.06 2.0% 2.2% 114,226,750 18.30 19.11 114,478,750 18.73 117,813,500 113,793,067 6,6,6 29 1.8% 1.5% 1.4% 32.92 1.2% 27.76 1.2% 265,963,369 22.00 220,707,997 17.24 1.1% 171,815,035 19.99 132,016,553 149,876,133 19.21 141,030,559 341171.71.2% 11.47 73,491,167 2.0% 2.1% 15.81 1.9% 15.53 2.1% 95,124,590 2.2% 92,503,457 14.36 2.0% 14.22 2.0% 84,633,711 13.35 0.0% 82,596,000 11.14 76,724,710 10.48 3.2% 1.6% 63,180,500 4.41 1.7% 58,647,115 1.8% 13.40 8.77 24,415,500 9.67 73,230,042 8.32 47,215,030 51,248,760 43,357,003 oa G.F.DebtService Total appendix l CIVITAS INSTITUTE l 383 Total G.F. Debt Service 281,676,630 34.87 1.9% Funds Debt Service Capita G.F. Revenue Special (Principal and Interest) (Principal Fund North Carolina Annual Debt Service Annual Debt North Carolina Year Fund Fiscal General Highway Revenue Total Per as a % of 2000-012001-02 254,819,4552002-03 302,612,0232003-04 304,506,2182004-05 26,857,175 390,389,6982005-06 26,106,800 476,124,775 25,356,425 561,598,242 32,568,237 70,057,016 93,449,000 3,958,191 328,718,823 329,862,643 659,005,433 40.10 422,957,935 39.68 75.90 546,181,791 50.22 2.3% 63.95 2.2% 3.1% 2.6% 2.9% Note: Debt service requirements are updated annually by the Department of State Treasurer. Historical debt service of State Treasurer. Historical debt service are updated annually by the Department Note: Debt service requirements Population estimates from State Data Center. reflect the most current information available. amounts are updated to Revenue estimates provided by Fiscal Research. 384 l CIVITAS INSTITUTE l appendix 100,000 120,000 140,000 160,000 20,000 40,000 60,000 80,000

Cherokee

Graham Clay

0 Macon Swain

1985

Jackson Haywood Transylvania

1986 Net Births/Deaths Net Migration Madison

Buncombe Henderson 1987 Reasons for N.C.Population Growth:1985-2005

ano 5 o25% to 15% of Gain 15% to 10% of Gain 10% to 5% of Gain 5% than less of Gain 5% than less of Loss Yancey Population Changeby County: 2000-2004

Mitchell Polk McDowell

Rutherford 1988

Avery Watauga

Burke 1989

Caldwell

Cleveland

Ashe

Lincoln Catawba 1990 Alexander Gaston Alleghany Wilkes

1991 Mecklenburg Iredell Surry

Yadkin

Cabarrus Union Davie

Rowan 1992

Forsyth Stokes

Stanly Davidson 1993 Anson Montgomery Rockingham

Randolph

Guilford

Richmond 1994 Moore

Scotland Caswell 1995 Chatham Alamance

Robeson Hoke Lee

Orange 1996 Cumberland

Harnett Person Durham Columbus Wake

Bladen 1997 Granville

Brunswick Johnston

Sampson Franklin Vance 1998 Warren e Hanover New Wilson

Pender Nash Duplin Wayne 1999

Edgecombe Greene

Lenoir Halifax Northampton

Onslow 2000 Jones

Pitt Craven

Hertford 2001 Bertie

Beaufort Gates Chowan Washington

Carteret Pamlico 2002 Perquimans

Pasquotank 2003

Hyde Tyrrell

Currituck 2004

Dare 2005

appendix l CIVITAS INSTITUTE l 385 005-06

N.C. 004-05

U.S.

United States United

003-04

002-03

Southeast Region Southeast

001-02

000-01

999-00

998-99

997-98

996-97

995-96

994-95

993-94 992-93

FL GA NC SC TN VA SE US

Annual Population Growth: N.C. and U.S. Growth: Population Annual Southeast Population Growth: 1990-2006 Growth: Southeast Population 991-92

5% 0% 990-91 50% 45% 40% 35% 30% 25% 20% 15% 10% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 386 l CIVITAS INSTITUTE l appendix APPENDIX l CIVITAS INSTITUTE l 387 (Raleigh: (Raleigh: (Raleigh: Overview: 2006 Legislative Debt Affordability Study Overview: 2006 Legislative Session Fiscal Overview: Session Fiscal 2006 Legislative Overview: Session Fiscal 2006 Legislative (Raleigh: Fiscal Research Division, 2007), Q-1. Research (Raleigh: Fiscal Created by Civitas Institute, Chloe Gossage. Data Source: Office Budget and Management, Data Source: of State Chloe Gossage. Civitas Institute, by Created Division, North General Assembly, Research Carolina in Fiscal as cited and Budgetary (Revised) Actions Session Fiscal Fiscal Research Division, 2007), Q-2, Q-3, Q-7 and U.S. Department of Labor, Bureau of Labor Bureau Division, 2007), Q-2, Research Q-3, Department Q-7Fiscal Labor, of and U.S. ftp://ftp.bls.gov/pub/special from available Index, All Urban Consumers; Price Consumer Statistics, .requests/cpi/cpiai.txt. Division, 2007), Q-17,and Budgetary Research Q-18. (Revised) (Raleigh: Actions Fiscal in as cited Treasurer, Department Data Source: Chloe Gossage. of State Civitas Institute, by Created Division, North General Assembly, Research Carolina Fiscal Division, 2007), Q-17,and Budgetary Research Q-18. (Raleigh: (Revised) Actions Fiscal Division, North Research Carolina Fiscal Data Sources: Chloe Gossage. Civitas Institute, by Created Budgetary and (Revised) Overview: Actions Session Fiscal 2006 Legislative General Assembly, of Labor Bureau Division, 2007), Q-2, Research Q-3, Department Q-7Fiscal of Labor, and U.S. ftp://ftp.bls.gov/pub/special from available Index, Urban Consumers; All Price Consumer Statistics, .requests/cpi/cpiai.txt. Created by Civitas Institute, Sven Larson. Data Source: Bureau of Economic Analysis, Regional Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created available Taxes; Current SA50: Personal Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA50. from Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created available Taxes; Current SA50: Personal Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA50. from in as cited Treasurer, Department Data Source: Chloe Gossage. of State Civitas Institute, by Created Division, North General Assembly, Research Carolina Fiscal Created by Civitas Institute, Chloe Gossage. Data Sources: Fiscal Research Division, North Research Carolina Fiscal Data Sources: Chloe Gossage. Civitas Institute, by Created and Budgetary (Revised) Overview: Actions Session Fiscal 2006 Legislative General Assembly, State of North Carolina, Debt Affordability Advisory Committee, Advisory Committee, of NorthState Debt Affordability Carolina, Department of State Treasurer, 2007), 10:chart http://www.nctreasurer.com/NR from 4; available Treasurer, Department of State /rdonlyres/599BB76E-EA20-4705-9D15A086DF3EB490/0/2007DAAC_Final.pdf. Created by Civitas Institute, Brian Balfour. Data Source: Annual Budget bills from FY 2000-01 Budget bills from Annual Data Source: Brian Balfour. Civitas Institute, by Created FY 2010-11 through Created by Civitas Institute, Brian Balfour. Data Source: Annual Budget bills from FY 2000-01 FY 2000-01 Annual Budget bills from Data Source: Brian Balfour. Institute, Civitas by Created FY 2010-11 through Created by Civitas Institute, Brian Balfour. Data Source: Coletti, Joseph. “Spending Beyond “Spending Beyond Joseph. Coletti, Data Source: Brian Balfour. Civitas Institute, by Created Spotlight Report, January Foundation Locke a John 7, 2009 Means,” Government p. 10 p. 11 p. 12 p. 13 p. 14 p. 14 p. 29 p. 30 p. 31 p. 32 p. 33 Budget Budget Q&A 2001-2005 2001-2005 Source of Funds Source Executive Summary Executive States, 1985-1994 States, 1995-2005 States, Annual Debt ServiceAnnual Debt ServiceAnnual Outstanding Net Tax- Outstanding Net vs. Real General Fund Fund General Real vs. Total State Budget by by Budget State Total Payments: 2001-2011 Payments: 2001-2011 Payments: Index and Sources for ChartsIndex for and Sources & Graphs Growth in General Fund Fund in General Growth Fund in General Growth Total Outstanding Debt: Total Outstanding Debt: Total Budget Growth 1979-2009 Budget Growth North Carolina’s Population Population North Carolina’s Personal Income: Southeast Income: Personal Southeast Income: Personal Supported Debt: 2001-2006 State/Local Taxes as Share of as Share Taxes State/Local of as Share Taxes State/Local 388 l CIVITAS INSTITUTE l APPENDIX Savings asaPercent Reserve Southeast States,Southeast 1975-1984 Percent ofGeneral Fund Tax Personal Income: Southeast General Fund Tax Revenue: es): North Carolina vs.es): North U.S., Private JobGrowth: Sector Federal DollarReceived by GDP Growth (current pric- Sources ofState Revenue: Revenue ChangesDueto State Taxes Collected per State andLocal Sales Tax Corporate Income Tax as North Carolina vs.North U.S., Nonfarm Employment: Tax Burden asShare of TABOR Limitfor North States, 1984and2006 Per Capita State Debt Private Share of Total Tax and Fee Changes of the Statutory Cap of theStatutory Carolina: 1997-2007 Revenue Growth 2001 Recession 2001 Recession North Carolina North U.S. andN.C. 2000-2010 1986-2006 Revenue p. 33 p. p. 58 p. 56 p. 47 p. 47 p. p. 40 p. 39 p. 34 p. p. 67 p. 46 p. p. 45 p. 44 p. 41 p. Comprehensive Financial 2010. Report, Created by CivitasInstitute, BrianBalfour. Carolina ofState Datasource: Controller, Office North from http://www.bea.gov/regional/spi/default.cfm?satable=SA25. Economic Accounts, State AnnualPersonal Income, Table available SA25:Employment by industry; Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional Fiscal Research Division,2007),Q-7. General Assembly, 2006Legislative Fiscal Session Actions Overview: (Revised) andBudgetary Created by CivitasInstitute, ChloeGossage. DataSource: Fiscal Carolina Research Division,North for Carolina Institute Emerging (Raleigh: Issues,Modernization inNorth 2007),16. NC State University, for Institute Emerging Issues, Dr. RolandStephen, Used withpermission. /policyReports/spend&tax-policyreport.pdf. JohnLocke(Raleigh: Foundation, 2006),8;available from http://www.johnlocke.org/acrobat Joseph Coletti, SpendandTax: ofGeneral Fund AHistory CrisesinN.C.andHow toPrevent Them Created by CivitasInstitute, ChloeGossage. DataSource and Template: JohnLocke Foundation, from http://www.bea.gov/regional/spi/default.cfm?satable=SA25. Economic Accounts, State AnnualPersonal Income, Table available SA25:Employment by Industry; Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional Fiscal Research Division,2007),Q-5. General Assembly, 2006Legislative Fiscal Session Actions Overview: (Revised) andBudgetary Created by CivitasInstitute, ChloeGossage. DataSource: Fiscal Carolina Research Division,North Economic Accounts, Gross DomesticProduct by State; available from http://bea.gov/regional/gsp/. Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional available from http://www.leadershipnc.org/Class%20XIV%20Page/Crotts.pdf. Fiscal Research Division, Used withpermission. /policyReports/spend&tax-policyreport.pdf. JohnLocke(Raleigh: Foundation, 2006),12;available from http://www.johnlocke.org/acrobat Joseph Coletti, SpendandTax: ofGeneral Fund AHistory CrisesinN.C.andHow toPrevent Them Created by CivitasInstitute, ChloeGossage. DataSource and Template: JohnLocke Foundation, Budget Revenues from Corporate Income Tax” in Fiscal Originally Research publishedas Division,2007),Q-6. “ Share Fund ofGeneralIncome General Assembly, 2006Legislative Fiscal Session Actions Overview: (Revised) andBudgetary Recreated by CivitasInstitute, ChloeGossage. DataSource: Fiscal Carolina Research Division,North 230-231. Controller, Created by CivitasInstitute, Sven Carolina, oftheState Larson.DataSource: Office State ofNorth with permission. Foundation, 2006),5;available from http://www.johnlocke.org/agenda2006/statebudget.html. Used Agenda 2006:ACandidate’s Carolina Public GuidetoKey IssuesinNorth Policy Created by CivitasInstitute, ChloeGossage. DataSource and Template: JohnLocke Foundation, (Raleigh: North Carolina Progress North (Raleigh: Board, 2003),9:Fig. 3.4. Comprehensive Fiscal Annual (CAFR) Report State BudgetOutlook Our State, Our Money: ACitizen’s State, Money: Our Our Carolina GuidetotheNorth (Raleigh: Fiscal (Raleigh: Research Division,November 2,2006),4; (Raleigh: Office oftheState Controller, Office (Raleigh: 2005), Financing theFuture: Fiscal (Raleigh: JohnLocke(Raleigh: (Raleigh: (Raleigh: (Raleigh: (Raleigh: (Raleigh: (Raleigh:

APPENDIX l CIVITAS INSTITUTE l 389 Overview: 2006 Legislative (Raleigh: Office of the State Controller, (Raleigh: Office Controller, of the State (Raleigh: Fiscal Research Division, 2007), Q-1. Research (Raleigh: Fiscal tion, Legislative Statistics (1965-2006); available from http:// from Statistics (1965-2006); available tion, Legislative Comprehensive Annual Financial Report Annual Financial (CAFR) Comprehensive Created by Civitas Institute, Sven Larson. Data Source: Bureau of Economic Analysis, Regional Regional Analysis, of Economic Bureau Source: Larson. Data Sven Civitas Institute, by Created available Taxes; Current Personal SA50: Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA50. from Regional Analysis, of Economic Bureau Source: Larson. Data Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created available Taxes; Current SA50: Personal Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA50. from Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created Income and Detailed SA05: Personal Table Income, Annual Personal State Accounts, Economic Industry;Earnings by http://www.bea.gov/regional/spi/default.cfm?satable=SA05. from available Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Created by Civitas Institute, Chloe Gossage. Data Source: State of North State Office Data Source: of the State Carolina, Chloe Gossage. Civitas Institute, by Created Controller, Session Fiscal and Budgetary (Revised) Actions Session Fiscal Created by Civitas Institute, Sven Larson. Data Source: Bureau of Economic Analysis, Regional Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created Income and Detailed SA05: Personal Table Income, Annual Personal State Accounts, Economic Industry;Earnings by http://www.bea.gov/regional/spi/default.cfm?satable=SA05. from available Office Budget and Management, Data Source: of State Chloe Gossage. Civitas Institute, by Created Division, North General Assembly, Research Carolina in Fiscal as cited 1988), 171, 174-175. North General Assembly, Data Source: Chloe Gossage. Carolina Civitas Institute, by Created Historical Informa Library, Legislative www.ncleg.net/LegLibrary/LegStats1965-2006.pdf. Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created Income and Detailed SA05: Personal Table Income, Annual Personal State Accounts, Economic Industry;Earnings by http://www.bea.gov/regional/spi/default.cfm?satable=SA05. from available Created by Civitas Institute, Sven Larson. Data Source: Bureau of Economic Analysis, Regional Regional Analysis, Economic of Bureau Larson. Data Source: Sven Institute, Civitas by Created Income and Detailed SA05: Personal Table Income, Personal Annual State Accounts, Economic Industry;Earnings by http://www.bea.gov/regional/spi/default.cfm?satable=SA05. from available p. 85 p. p. 78 p. 79 p. 83 p. 72 p. 73 p. 73 p. 72 p. 71 p. 69 p. p. 70 p. 68 Timeline 1985-86 Biennium 1975-1985 1975-1984 Compensation States, 1976-1984 States, States, 1975-1984 States, Carolina, 1975-1984 Carolina, Employment Growth: Growth: Employment State/Local Employee Employee State/Local Income Growth: Select Growth: Income Share of Total Nonfarm Nonfarm Total of Share Employment: Southeast Employment: State/Local Government Government State/Local State/Local Government Government State/Local U.S. Average, 1975-1984 Average, U.S. Source of Budget Funds: of Budget Funds: Source Compensation per Dollar Compensation Carolina vs. U.S. Average, Average, U.S. vs. Carolina Economic Snapshot: 1985 Economic Growth: Southeast States, Southeast States, Growth: State/Local Taxes as Share as Share Taxes State/Local State/Local Taxes as Share as Share Taxes State/Local Total Days in Session Each Days Total of Personal Income: North Income: of Personal of Personal Income: North Income: of Personal Income Growth: Southeast Growth: Income Select Southeast States vs. Select vs. Southeast States of Private Sector Employee Sector Employee of Private Total Nonfarm Employment Nonfarm Employment Total Per Capita Personal Income: Income: Personal Capita Per Nominal Per Capita Personal Personal Capita Nominal Per Nominal Per Capita Personal Personal Capita Nominal Per Southeast States, 1985-2005 Southeast States, Southeast States, 1975-1985 Southeast States, 390 l CIVITAS INSTITUTE l APPENDIX State/Local Taxes asShare of Nominal Per Capita Personal Personal Income: Southeast Income Growth: Southeast State/Local Tax Burden for of Personal Income: North of Personal Income: North State/Local Taxes asShare State/Local Taxes asShare State/Local Share of Total Carolina vs. U.S. Average, Sales &UseSales Tax Revenue Select Southeast States, Southeast Select Private vs. Government Government Employee Nonfarm Employment: Private Employees per Compared toPersonal Revenue Compared to Individual Income Tax Spending &Revenue Carolina, 1985-1994 Percent Changein States, 1985-1994 States, 1985-1994 Private vs. Other N.C. andtheU.S. Personal Income Employment Employment 1985-2005 1985-1994 Changes Income p. 112 p. 111 p. 110 p. 109 p. 105 p. 102 p. 90 p. p. 88 p. 87 p. p. 89 p. p. 99 p. p. 93 p. Reports/spend&tax-policyreport.pdf. Used withpermission. Reports/spend&tax-policyreport.pdf. JohnLocke(Raleigh: Foundation, 2006),8; available from http://www.johnlocke.org/acrobat/policy Joseph Coletti, SpendandTax: ofGeneral Fund AHistory CrisesinN.C.andHow toPrevent Them Created by CivitasInstitute, ChloeGossage. DataSource and Template: JohnLocke Foundation, available from http://www.bls.gov/sae/home.htm#tables. Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofLaborStatistics, State Data; .htm#tables. Metro Area Statistics, Requested Statistics;available Most from http://www.bls.gov/sae/home Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofLaborStatistics, Detailed State and from http://www.bea.gov/regional/spi/default.cfm?satable=SA25. Economic Accounts, State Annual Personal Income, Table available SA25:Employment by Industry; Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional http://www.bea.gov/regional/sqpi/default.cfm?sqtable=SQ1. Economic Analysis, U.S. ofCommerce, Department Personal State Quarterly available Income; from Fiscal andRegional Research Economic Information Division,2007),Q-6 System, Bureau of General Assembly, 2006Legislative Fiscal Session Actions Overview: (Revised) andBudgetary Created by CivitasInstitute, ChloeGossage. DataSources: Fiscal Carolina Research Division,North from http://www.bea.gov/regional/spi/default.cfm?satable=SA50. Economic Accounts, State AnnualPersonal Income, Table SA50:Personal Current Taxes; available Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional from http://www.bea.gov/regional/spi/default.cfm?satable=SA25. Economic Accounts, State AnnualPersonal Income, Table available SA25:Employment by industry; Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional http://www.bea.gov/regional/sqpi/default.cfm?sqtable=SQ1. Analysis, U.S. ofCommerce, Department Personal State Quarterly available Income; from Fiscal Regional Research Economic Information Division,2007),Q-6. System, Bureau ofEconomic General Assembly, 2006Legislative Fiscal Session Actions Overview: (Revised) andBudgetary Created by CivitasInstitute, ChloeGossage. DataSources: Fiscal Carolina Research Division,North from http://www.bea.gov/regional/spi/default.cfm?satable=SA50. Economic Accounts, State AnnualPersonal Income, Table SA50:Personal Current Taxes; available Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional from http://www.bea.gov/regional/spi/default.cfm?satable=SA50. Economic Accounts, State AnnualPersonal Income, Table SA50:Personal Current Taxes; available Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional from http://www.bea.gov/regional/spi/default.cfm?satable=SA50. Economic Accounts, State AnnualPersonal Income, Table SA50:Personal Current Taxes; available Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional available from http://www.bea.gov/regional/spi/default.cfm?satable=SA05.Earnings by Industry; Economic Accounts, State AnnualPersonal Income, Table SA05:Personal andDetailed Income Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional (Raleigh: (Raleigh: (Raleigh: (Raleigh: APPENDIX l CIVITAS INSTITUTE l 391 (Raleigh: (Raleigh: (Raleigh: Overview: 2006 Legislative (Raleigh: Office of the State Controller), (Raleigh: Office Controller), of the State , “Individual Income Tax Rates – Calendar Rates – Calendar Tax “Individual Income , (Raleigh: Fiscal Research Division, 2007), Q-1. Research (Raleigh: Fiscal Comprehensive Annual Financial Report Annual Financial (CAFR) Comprehensive Comprehensive Annual Financial Report Annual Financial (CAFR) Comprehensive Created by Civitas Institute, Sven Larson. Data Source: Bureau of Economic Analysis, Regional Regional Analysis, Economic of Bureau Larson. Data Source: Sven Institute, Civitas by Created industry; by Employment SA25: available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Regional Analysis, of Economic Bureau Source: Larson. Data Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Regional Analysis, of Economic Bureau Source: Larson. Data Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Regional Analysis, of Economic Bureau Source: Larson. Data Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from of North State Office Data Sources: of the State Carolina, Chloe Gossage. Civitas Institute, by Created Controller, 1990: 188, 2005: 248, 2006: 259-268. Created by Civitas Institute, Chloe Gossage. Data Sources: Fiscal Research Division, North Research Carolina Fiscal Data Sources: Chloe Gossage. Civitas Institute, by Created and Budgetary (Revised) Overview: Actions Session Fiscal 2006 Legislative General Assembly, Fiscal Research Division, 2007), Q-6 and Regional Economic Information System, Bureau of Bureau System, Division, 2007), Q-6 Information Economic Research and Regional Fiscal from Income; available Quarterly State Personal Department of Commerce, U.S. Analysis, Economic http://www.bea.gov/regional/sqpi/default.cfm?sqtable=SQ1. Office Budget and Management, Data Source: of State Chloe Gossage. Civitas Institute, by Created Division, North General Assembly, Research Carolina in Fiscal as cited Session Fiscal and Budgetary (Revised) Actions Session Fiscal Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from of North State Office Data Source: of the State Carolina, Chloe Gossage. Civitas Institute, by Created Controller, Years 1997-2006” (Raleigh: Office of the State Controller, 2006), 243. (Raleigh: Office Controller, State of the 1997-2006” Years Division, North Research Carolina Fiscal Data Source: Chloe Gossage. Civitas Institute, by Created Budgetary and (Revised) Overview: Actions Session Fiscal 2006 Legislative General Assembly, Division, 2007), Q-9, Research Q-10. Fiscal Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created available Taxes; Current SA50: Personal Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA50. from Division, North Research Carolina Fiscal Data Sources: Chloe Gossage. Civitas Institute, by Created Budgetary and (Revised) Overview: Actions Session Fiscal 2006 Legislative General Assembly, Bureau Census U.S. 2007), Q-7 Division, Research and North Demographics, State Fiscal Carolina http://demog.state.nc.us/demog from 1990-2006; available Table: Comparison, data, N.C.-to-U.S. /ncusagr6.html. p. 129 p. 133 p. 135 p. 136 p. p. 124 p. 127 p. p. 118 p. 119 p. p. 116 p. p. 113 p. 114 p. 115 p. 115 p. Income 1990-91 Brackets 1985-2005 1985-1995 1985-1995 General Fund Fund General States, 1985-1994 States, Capita: 1985-2005 Capita: Carolina, 1985-2005 Carolina, Private Share of Total Total of Share Private Employment Growth: Growth: Employment Individual Income Tax Tax Individual Income State Tax Revenue per Revenue Tax State Compared to Personal to Personal Compared Nonfarm Employment: Nonfarm Employment: Share of Total Nonfarm Total of Share Employment: Southeast Employment: State/Local Government Government State/Local Government State/Local Source of Budget Funds: of Budget Funds: Source Economic Snapshot: 1990 Economic Total Income Tax Revenue Revenue Tax Income Total Total Private Employment Employment Private Total Total Private Employment Employment Private Total Growth: Southeast States, Southeast States, Growth: Growth: Southeast States, Southeast States, Growth: Growth: Southeast States, Southeast States, Growth: State/Local Taxes as Share as Share Taxes State/Local of Personal Income: North Income: of Personal Total Nonfarm Employment Employment Nonfarm Total Southeast States, 1985-1994 Southeast States, Southeast States, 1985-1995 Southeast States, Authorizations by Issue Area by Authorizations 392 l CIVITAS INSTITUTE l APPENDIX State/Local Taxes asShare of Southeast States,Southeast 1985-2005 Nominal Per Capita Personal General Obligation DebtPer General Fund Revenues and Personal Income: Southeast Trends inPersonal Income: Income Growth: Southeast of Personal Income: North of Personal Income: North State/Local Taxes asShare State/Local Taxes asShare Economic Snapshot:1995 Carolina vs. U.S. Average, Personal Income and Tax Source ofBudgetFunds: Revenue Annual Growth State/Local Government Select Southeast States, Southeast Select Nonfarm Employment: General Fund Revenue Employment Growth: Private Share of Total Carolina, 1995-2005 Growth: 1984-2007 Capita: 1988-1997 States, 1995-2005 States, 1995-2005 Expenditures 1985-2011 1995-2005 1985-2005 1995-96 p. 137 p. 147 p. 141 p. 154 p. 156 p. 155 p. 153 p. 167 p. 162 p. 160 p. 159 p. 158 p. 173 Session FiscalSession Actions (Revised) andBudgetary as cited inFiscal Carolina Research GeneralAssembly, Division, North Created by CivitasInstitute, Chloe Gossage. ofState DataSource: BudgetandManagement, Office from http://www.bea.gov/regional/spi/default.cfm?satable=SA50. Economic Accounts, State AnnualPersonal Income, Table SA50:Personal Current Taxes; available Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional from http://www.bea.gov/regional/spi/default.cfm?satable=SA50. Economic Accounts, State AnnualPersonal Income, Table SA50:Personal Current Taxes; available Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional Fiscal Q-7. Q-3, Research Division,2007),Q-2, General Assembly, 2006Legislative Fiscal Session Actions Overview: andBudgetary Created by CivitasInstitute, ChloeGossage. DataSource: Fiscal Carolina Research Division,North from http://www.bea.gov/regional/spi/default.cfm?satable=SA25. Economic Accounts, State Annual Personal Income, Table available SA25:Employment by industry; Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional from http://www.bea.gov/regional/spi/default.cfm?satable=SA25. Economic Accounts, State Annual Personal Income, Table available SA25:Employment by industry; Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional 1995: 191,1997:182-183. Controller, Created by CivitasInstitute, Chloe Gossage. Carolina, oftheState DataSources: Office State ofNorth 10; available from http://www.leadershipnc.org/Class%20XIV%20Page/Crotts.pdf. Fiscal Research Division,StateBudgetOutlook from http://www.bea.gov/regional/spi/default.cfm?satable=SA50. Economic Accounts, State AnnualPersonal Income, Table SA50:Personal Current Taxes; available Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional available from http://www.bea.gov/regional/spi/default.cfm?satable=SA05.Earnings by Industry; Economic Accounts, State AnnualPersonal Income, Table SA05:Personal andDetailed Income Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional revenue_report_jan_2007_long.pdf. 12; available from http://www.ncleg.net/fiscalresearch/topics_of_interest/topics_pdfs/state_ Fiscal Research Division,S http://www.bea.gov/regional/sqpi/default.cfm?sqtable=SQ1. Economic Analysis, U.S. ofCommerce, Department Personal State Quarterly available Income; from Fiscal andRegional Research Economic Information Division,2007),Q-6 System, Bureau of General Assembly, 2006Legislative Fiscal Session Actions Overview: (Revised) andBudgetary Created by CivitasInstitute, ChloeGossage. DataSources: Fiscal Carolina Research Division,North 1997), 175. Controller, Created by CivitasInstitute, ChloeGossage. Carolina, oftheState DataSource: Office State ofNorth Comprehensive (CAFR) Financial Annual Report Comprehensive (CAFR) Financial Annual Report tate Revenue Outlook (Raleigh: Fiscal (Raleigh: Research Division,2007),Q-1. (Raleigh: Fiscal (Raleigh: Research Division,November 2,2006), (Raleigh: Fiscal 30,2007), (Raleigh: Research Division,January (Raleigh: Office oftheState Controller), Office (Raleigh: (Raleigh: Office oftheState Controller, Office (Raleigh: Overview: 2006Legislative Overview:

(Revised) (Raleigh: (Raleigh: (Raleigh: (Raleigh: APPENDIX l CIVITAS INSTITUTE l 393 (Raleigh: (Raleigh: (Raleigh: Overview: 2006 Legislative Session Fiscal Overview: Session Fiscal 2006 Legislative (Raleigh: Office of the State Controller), (Raleigh: Office Controller), of the State omprehensive Annual Financial Report Annual Financial (CAFR) omprehensive Fiscal Research Division, 2007), Q-5. Division, Research Fiscal North Division, Research Carolina Fiscal Sources: Data Chloe Gossage. Institute, Civitas by Created and Budgetary (Revised) Overview: Actions SessionFiscal 2006 Legislative General Assembly, Created by Civitas Institute, Chloe Gossage. Data Source: Fiscal Research Division, North Division, Research Carolina Fiscal Source: Data Chloe Gossage. Institute, Civitas by Created and Budgetary (Revised) Overview: Actions SessionFiscal 2006 Legislative General Assembly, of Bureau System, Division, 2007), Q-6 Information Economic Research and Regional Fiscal from Income; available Quarterly State Personal Department of Commerce, U.S. Analysis, Economic http://www.bea.gov/regional/sqpi/default.cfm?sqtable=SQ1. Regional Analysis, of Economic Bureau Source: Larson. Data Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Regional Analysis, of Economic Bureau Source: Larson. Data Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Created by Civitas Institute, Sven Larson. Data Source: Bureau of Economic Analysis, Regional Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from Division, North Research Carolina Fiscal Data Sources: Chloe Gossage. Civitas Institute, by Created and Budgetary (Revised) Overview: Actions Session Fiscal 2006 Legislative General Assembly, Fiscal Research Division, 2007), Q-6 and Regional Economic Information System, Bureau of Bureau System, Division, 2007), Q-6 Information Economic Research and Regional Fiscal from Income; available Quarterly State Personal Department of Commerce, U.S. Analysis, Economic http://www.bea.gov/regional/sqpi/default.cfm?sqtable=SQ1. of North State Office Data Sources: of the State Carolina, Chloe Gossage. Civitas Institute, by Created C Controller, (Raleigh: Fiscal Research Division, 2006), Q14; available from http:// from Division, 2006), Q14; available and Budgetary Research (Raleigh: (Revised) Actions Fiscal www.ncga.state.nc.us/fiscalresearch/frd_reports/frd_reports_pdfs/Overview_2006.pdf. Regional Analysis, of Economic Bureau Larson. Data Source: Sven Civitas Institute, by Created industry; by SA25: Employment available Table Income, Annual Personal State Accounts, Economic http://www.bea.gov/regional/spi/default.cfm?satable=SA25. from 2000: 195, 2005: 248, 2006: 258-259. Division, North General Assembly, Research Carolina Fiscal p. 207 p. p. 201 p. 202 p. p. 193 p. 194 p. 197 p. p. 192 p. 193 p. p. 185 p. 186 p. 188 p. 191 p. Income 1971-2000 1995-2005 1995-2005 1985-2005 States, 1995-2005 States, Total Tax Revenue Tax Total and Cap: 1992-2006 and Cap: Private Share of Total Total of Share Private Employment Growth: Growth: Employment Compared to Personal to Personal Compared North Carolina vs. U.S. North vs. Carolina Nonfarm Employment: Nonfarm Employment: Share of Total Nonfarm Total of Share Employment: Southeast Employment: Acts Voted on by Public: Public: on by Voted Acts State/Local Government Government State/Local State/Local Government Government State/Local Savings Reserve Balance Reserve Balance Savings General Obligation Bond Obligation General Economic Snapshot: 2000 Economic Total Private Employment Employment Private Total Growth: Southeast States, Southeast States, Growth: Growth: Southeast States, Southeast States, Growth: Growth: Southeast States, Southeast States, Growth: Private Sector Job Growth: Sector Job Growth: Private Paid to State as Income Tax as Income to State Paid Total Nonfarm Employment Nonfarm Employment Total Total Nonfarm Employment Employment Nonfarm Total Amount of Personal Income Income of Personal Amount Southeast States, 1995-2005 Southeast States, 1995-2005 Southeast States, 394 l CIVITAS INSTITUTE l APPENDIX Southeast States,Southeast 1985-2005 Southeast States,Southeast 1985-2005 State &Local Tax Burden per Per Capita Personal Income: Individual Income Tax Filers Nonmajor SpecialRevenue of Personal Income: Select of Personal Income: North State/Local Taxes asShare State/Local Taxes asShare Economic Snapshot:2005 Cost for Each1%Increase Carolina vs. U.S. Average, Debt toPersonal Income Source ofBudgetFunds: Source ofBudgetFunds: Tax Burden inSoutheast Across-the-board Salary Across-the-board Salary General Fund Balances: and Liability byand Liability Income 2001 Tax Increases asa Percentage ofIncome Capita: 2003-04 States: 2006 Percentages 1997-2007 1985-2005 (Millions) 2000-01 2005-06 Funds p. 221 p. 216 p. 209 p. 208 p. 222 p. 219 p. 237 p. 229 p. 226 p. 246 p. 244 p. 243 p. 242 p. 238 Level Session FiscalSession Actions (Revised) andBudgetary as cited inFiscal Carolina Research General Assembly, Division,North Created by CivitasInstitute, ChloeGossage. ofState DataSource: Budget andManagement, Office .census.gov/govs/www/estimate04.html. Local Governments, State andLocal Government Finances: 2003-04;available from http://www Created by CivitasInstitute, ChloeGossage. DataSource: U.S. Census Bureau, Federal, State, and with permission. Foundation, 2006),7;available from http://www.johnlocke.org/agenda2006/statebudget.html. Used Agenda 2006:ACandidate’s Carolina Public GuidetoKey IssuesinNorth Policy Created by CivitasInstitute, ChloeGossage. DataSource and Template: JohnLocke Foundation, 2005: 246,248,2006:258-259. FiscalSession Actions (Revised) andBudgetary as cited inFiscal Carolina Research GeneralAssembly, Division,North Created by CivitasInstitute, ChloeGossage. ofState DataSource: BudgetandManagement, Office Controller, Created by CivitasInstitute, ChloeGossage. Carolina, oftheState DataSources: Office State ofNorth available from http://www.bea.gov/regional/spi/default.cfm?satable=SA05.Earnings by Industry; Economic Accounts, State AnnualPersonal Income, Table SA05:Personal andDetailed Income Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional State Controller, 2006),243. Income “Individual Tax Filers –Calendar andLiability Years 1997and2004” ofthe Office (Raleigh: Carolina, oftheState Controller, Office State ofNorth Comprehensive Fiscal Annual (CAFR) Report /rdonlyres/599BB76E-EA20-4705-9D15A086DF3EB490/0/2007DAAC_Final.pdf. ofState Department Treasurer, 10;available from http://www.nctreasurer.com/NR 2007),17:chart Carolina, DebtAffordabilityState ofNorth Committee, Advisory www.ncga.state.nc.us/fiscalresearch/frd_reports/frd_reports_pdfs/Overview_2006.pdf. Fiscal Actions (Revised)(Raleigh: Researchand Budgetary Division,2006),Q19;available from http:// Fiscal Carolina Research GeneralAssembly, Division,North from http://www.bea.gov/regional/spi/default.cfm?satable=SA50. Economic Accounts, State AnnualPersonal Income, Table SA50:Personal Current Taxes; available Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional Special Revenue Funds” oftheState Controller, Office (Raleigh: 2005),172-174. /rdonlyres/599BB76E-EA20-4705-9D15A086DF3EB490/0/2007DAAC_Final.pdf. ofState Department Treasurer, 19;available from http://www.nctreasurer.com/NR 2007),19:chart Carolina, DebtAffordabilityState ofNorth Committee, Advisory DebtAffordability Study(Raleigh: from http://www.bea.gov/regional/spi/default.cfm?satable=SA50. Economic Accounts, State AnnualPersonal Income, Table SA50:Personal Current Taxes; available Created by CivitasInstitute, Sven Larson.DataSource: Bureau ofEconomic Analysis, Regional Controller, Created by CivitasInstitute, Dion Terry. Carolina, oftheState DataSource: Office State ofNorth buddeficit.pdf. Development Center, 2002),5;available from http://www.ncjustice.org/media/library/80_hownc andHow Weinto thisBudgetDeficit Can GetOut Carolina Budgetand North Tax Center, andChrisEstes, Cartron Kimberly Comprehensive (CAFR) Financial Annual Report Comprehensive (CAFR) Financial Annual Report (Raleigh: Fiscal (Raleigh: Research Division,2007),Q-1. (Raleigh: Fiscal(Raleigh: Research Division,2007),Q-1. (Raleigh: North Carolina Justice andCommunity North (Raleigh: , “Combining Balance SheetNonmajor (Raleigh: Office oftheState Controller), Office (Raleigh: Overview: 2006Legislative Fiscal Session Overview: Debt Affordability Study Affordability Debt Overview: 2006Legislative Overview: 2006Legislative Overview: How North Carolina Got How North (Raleigh: JohnLocke(Raleigh: (Raleigh: (Raleigh: , APPENDIX l CIVITAS INSTITUTE l 395 Created by Civitas Institute, Brian Balfour. Data Sources: Population source for 2006: U.S. Census Census 2006: U.S. for source Population Data Sources: Balfour. Brian Civitas Institute, by Created U.S. Income from data obtained GCT-T1-R; Table Estimates, Population American Factfinder, Bureau, industry NAICS and earnings by source major by income Personal Analysis, of Economic Bureau Current of Labor Statistics, Bureau Data Source: Balfour. Brian Civitas Institute, by Created Statistics Employment Data; Regional Analysis, of Economic Bureau Data Source: Brian Balfour. Civitas Institute, by Created full-time and part-time industry NAICS by employment Total Regional Analysis, of Economic Bureau Source: Data Brian Balfour. Civitas Institute, by Created full-time and part-time industry NAICS by employment Total Accounts, Economic “Spending Beyond Joseph. Coletti, Data Source: Brian Balfour. Civitas Institute, by Created Spotlight Report, January Foundation a John Locke 7, 2009 Means,” Government 2009 p. 252 p. 293 p. p. 249 p. 250 p. 251 p. 2006-2009 2006-2010 vs. Real General Fund Fund Real General vs. Change in Total Private Private Total Change in Share of Total Nonfarm Nonfarm Total of Share Employment: SE States, SE States, Employment: Employment 2006-2010 Employment State/Local Government Government State/Local Government Employees: Employees: Government Change in State and Local and Local Change in State Per Capita Income Growth Growth Income Capita Per Budget Growth 1979-2009 North Carolina’s Population Population North Carolina’s 396 l CIVITAS INSTITUTE l APPENDIX About the Civitas Institute

The vision of the Civitas Institute is of a North Carolina whose citizens enjoy liberty and prosperity derived from limited government, personal responsibility and civic engagement.

The mission of the Civitas Institute is to facilitate the implementation of conservative policy solutions to improve the lives of all North Carolinians. Towards that end, Civitas provides research, information and training to:

• Empower citizens to become better civic leaders and more informed voters; • Educate emerging public leaders, enabling them to be more eff ective in the democratic process; and • Inform elected offi cials about citizen-based, free-market solutions to problems facing North Carolinians.

For more information, or to obtain additional copies of this guide, please contact:

www.nccivitas.org 100 S. Harrington St. Raleigh, NC 27603 919.834.2099 | 919.834.2350 (fax)