What Lies Beneath: “Hidden” Costs of Government in the Budget

The FY2007-09 budget bill recently approved by the House increases the price of state government by $637 for a family of four compared to last year. This continues an alarming trend of rapid growth in state government spending. General Fund expenditures are up 7.6 percent from FY2006-07 and 41 percent since FY2002-03. This unchecked spending growth has lawmakers scrambling to find more ways to raise revenues. The decision to once again extend the “temporary” tax rates has garnered the most attention. In spite of another budget surplus in excess of $1 billion, the House budget extends these taxes enacted in 2001 — breaking for the third time their promise to fully repeal these rates. The estimated cost to taxpayers for these temporary taxes will be $299 million in FY200708, and $353 million in FY2008-09.

“Hidden Costs” Also on the Rise

This year’s version of the House budget also includes more than $94 million in new “hidden” costs for North Carolina’s citizens in the form of:

• Fee increases, most notably on the insurance industry
• Corporate welfare, i.e. economic development
• Targeted tax breaks

Regulation and User Fees

Fees lack transparency because the people who ultimately bear the costs have difficulty keeping track of how much these fees really impact their pocketbooks. For example, an increase in the water quality fee assessed on water treatment facilities will be silently passed along on the water bill of paying customers. The House budget includes a number of fee increases that will impact hard working North Carolinians. The total price tag of these is roughly $28 million:

• A new insurance regulatory fee: 5.5 percent of total tax liability on all insurance companies. The money from this fee will be used to finance the creation of an Insurance Regulatory Fund. Based on taxes paid by insurance companies in FY2005-06, this fee effectively amounts to a $24 million tax increase on insurance companies in North Carolina.
• These higher costs will most likely be passed along to consumers.
• A new utility regulatory fee: 0.12 percent of utility companies’ gross revenues. Also an annual $200,000 fee placed on the “Electric Membership Corporation” — a co-operative that supplies electricity to 26 electric companies across the state. Like the new insurance regulatory fee, the money from these fees will be used to bring about greater regulation of the utility industry.
• Increase in health care facility construction project fees (hospitals, nursing homes, psychiatric hospitals, etc). Estimated cost: $1.7 million.
• Increase in sediment and erosion control plan fees from $50 to $65 to fund seven new environmental specialist positions. Estimated cost: $472,500
• Increase in mining permit fees. Estimated cost: $286,088
• Increase of 20 percent in water quality fee assessed on water treatment facilities. Used to fund nine new jobs. Estimated cost: $997,945.
• Increase of 20 percent in animal waste management fees.
• Increase in corporate annual report filing fees. Estimated cost: $536,016.

Corporate Subsidies — Planning the Economy at Taxpayers’ Expense

Politicians in North Carolina engage in economic planning — under the guise of “economic development” — using millions of taxpayer dollars. Basically, lawmakers attempt to pick winners and losers in the economy by giving financial incentives to favored companies. This year’s House budget designates more than $38 million to pay for various corporate subsidies:

• Expand Economic Infrastructure fund: $19 million
• One NC Fund: $13 million
• One NC Small Business Fund: $4.8 million
• NC Center for Automotive Research: $3.5 million
• E-NC Authority: $3 million to pay for Internet connections to rural businesses
• Kerr-Tar Regional Economic Development: $1.9 million
• Defense and Security Technology Accelerator: $1 million
• Grants to short-line railroads: $1 million
• NC Green business fund: $1 million

Targeted Tax Breaks Increase Burden on Non-Favored Taxpayers

The House budget also provides millions of dollars worth of tax credits to specific industries, such as software publishers and aircraft part manufacturers. Extending tax credits to select businesses narrows the tax base by reducing the amount of taxable income in the state. This means the remaining taxpayers will shoulder an even heavier load in order to generate the tax revenue required to finance the state government’s spending habits. Without the targeted tax breaks (and corporate subsidies), tax rates for the people of North Carolina as a whole could be lowered while still generating the same level of revenue. More than $28 million in targeted breaks for FY2007-08 alone means those not favored by Raleigh bureaucrats will have to pay more taxes.

• Reserve for manufacturers and farmers targeted energy tax phase-out: $14.5 million
• Long-term care insurance tax credit: $7 million
• Reduction in privilege tax on software publishers’ machinery and equipment: $3.7 million
• Modify tax on property tax contracts (credits for property insurance premiums): $1.5 million
• Sales tax refund for aircraft part manufacturers: $800,000
• Sales tax holiday: $600,000
• R&D credit enhancement: $400,000
• Credit for one renewable fuel facility (yet unnamed): $2.25 million (effective FY 2008-09)