North Carolina Budget Saga Finally Over

If haste makes waste and good things come to those who wait, how then can we explain the recent North Carolina budget fiasco? After a legislative session that dragged on through the threat of a government shutdown and two stopgap spending measures that kept the state running in the absence of a budget, legislators finally emerged from the statehouse in August with a budget for the 2006 and 2007 fiscal years—a month and a half into the 2006 fiscal year.

They took their time hammering out the details, but not everyone is happy with the result of their long hours—a budget that increases spending by $1.3 billion, raises taxes by $657 million and, in general, exemplifies poor tax policy. It increases taxes on select groups, delays sunsets, and increases tax complexity.

The budget includes:

• A 600% increase in the cigarette tax.
• A two-year extension of two recent tax increases that were intended to sunset at the end of 2005: a .5% sales tax increase and an 8.25% top income tax rate.
• Sales tax changes: Candy and cable television will be subject to sales tax, and certain farming supplies will be exempt. The annual sales tax holiday will include computer supplies under $250. As we have written before, sales tax holidays are poor tax policy, and numerous tax exemptions and frequent changes increase compliance costs and complexity.
• $400,000 for a teapot museum–one of the budget’s highly criticized pork-barrel projects.
• Allocations for the projected $425 million that a state lottery would generate, ostensibly for public education, even though the legislation establishing a lottery had not passed the Senate. (The House had approved the legislation in April.)

After the budget unveiling, the debate still wasn’t over. The House, in an attempt to ensure additional education funding in the event that the Senate did not approve a lottery, passed a bill authorizing certain counties to raise their sales taxes to increase education funding.

The Senate continued the contentious lottery debate and, at the 11th hour, unexpectedly passed the bill. Many legislators see the lottery as a way to increase education spending without raising taxes, not realizing that the lottery is a tax.

Weary legislators headed home on Sept. 2, but perhaps they should have called it quits a bit sooner.