Myth #1: North Carolina’s economy is in better shape than most states
• Real personal income growth in North Carolina from 2000-2006 was 7.3 percent. This rate was far below that of Florida (15.1 percent), Virginia (13.2 percent) and Tennessee (10.5 percent). North Carolina also lagged behind the national growth rate of 9.3 percent.
• North Carolinians have fallen further behind the national income rate. In 2000, North Carolina’s per capita income was 98.1 percent of the national average; by 2006 it had fallen to 96.3 percent.
• North Carolina’s 2006 per capita income growth was the third-lowest in the nation.
• The state’s annual unemployment rate has been higher than the national average for seven straight years. By contrast, North Carolina’s annual unemployment rate exceeded the national average only once in the 25 years prior to 2000.
Myth #2: Growth in state spending is primarily attributable to population growth
State spending has increased 42 percent since Governor Mike Easley’s (D) first year in office (FY2001-02).
• Even once population gains are accounted for, per capita spending has increased 29 percent during Easley’s tenure (compared to a 17 percent inflation rate).
• The end result is that General Fund spending is now $2,000 more for the average family of four than it was just six years ago.
Myth #3: Wealthy North Carolinians don’t pay their “fair share” of taxes
• The top 17 percent of income earners account for roughly 70 percent of the individual income taxes paid in North Carolina, according to the 2007 North Carolina Comprehensive Annual Financial Report.
• About one-sixth of taxpayers shoulder more than two-thirds of the individual income tax burden.
• The bottom 65 percent of income earners contribute only 12 percent to the income tax pie.
• The top 1.6 percent of income earners in 2005 paid more than $2.5 billion in state income tax – accounting for roughly one-sixth of all General Fund tax revenues for that year.
• The bottom 51.3 percent of tax filers in 2005 collectively paid $439 million – or only about 3 percent of total General Fund tax revenue.
Myth #4: North Carolina has the “best business climate” in the nation
North Carolina’s Department of Commerce proudly declares on its Web site that Site Selection magazine has ranked North Carolina as having the “best business climate” in the nation six of the last seven years. While the state’s relatively low property tax rates and right-to-work status are no doubt attractive to companies, other prominent measures of business climate are much less flattering.
• The Tax Foundation, a Washington, D.C., nonpartisan research group, ranks North Carolina 40th in their 2008 State Business Tax Climate Index.
• The Small Business & Entrepreneurship Council likewise rated North Carolina 39th in terms of “friendliest policy environment for entrepreneurs” in their 2007 Small Business Survival Index.
• Rankings aside, North Carolina’s small business employment growth from 1999-2004 was only 9 percent – compared to 18 percent in Florida, 16 percent for Georgia and 13 percent for the Southeast region.
Myth #5: North Carolina voters get to vote on all state debt
• North Carolina’s Constitution mandates that debt can be incurred only if approved by voters in a referendum (Article V, Section 3).
• State lawmakers, however, have found a loophole – Certificates of Participation (COPs). COPs are tax-exempt lease financing agreements guaranteed, not by the state, but by liens on property or equipment. For this reason, the General Assembly can issue COPs without voter approval. But taxpayers still end up paying the tab.
• Over the last six years, the General Assembly has authorized more than $2 billion in COPs, relying exclusively on such debt from 2001 to 2006.
Myth #6: The “temporary taxes” had to be extended to preserve necessary services during the last recession
The “temporary” taxes, in fact, fueled a significant increase in government spending, extending well beyond any budget “crisis” and into a healthy economic expansion.
• Lawmakers have taxed North Carolina citizens an extra $2.03 billion by extending the “temporary” taxes beyond their originally approved sunset date of 2003 (including estimates for FY2007-08).
• During the same period, the state collected more than $3.1 billion in surplus revenue.
• In short, the “temporary” taxes could have expired as originally promised and state lawmakers still would have enjoyed more than $1 billion in surplus revenue over the last five years.
Myth #7: Allowing the “temporary” top income tax rate of 8.25 percent to sunset was merely a “tax cut for the rich”
Because of certain filing advantages, the majority of businesses in America currently organize as partnerships, sole proprietorships, S-corps and limited liability corporations (LLCs) – all of which are subject to the individual income tax rate.
• In 2004, roughly 90 percent of all North Carolina businesses filed an individual income tax return rather than pay corporate taxes.
• Thus, cutting the top income tax rate was good for North Carolina’s small businesses, who employee roughly half of non-farm workers in North Carolina.
• While many small businesses currently pay the 7.75 percent income tax rate, corporations pay 6.9 percent.
Myth #8: The state retiree system is in sound financial shape
According to the State Treasurer’s Web site: “North Carolina’s pension fund is the second strongest in the nation for the third year in a row, according to a new report issued by Standard & Poor’s, the national credit-rating agency. The fund, managed by State Treasurer Richard Moore, is one of only five state pension funds in the nation with all the money on hand to meet its obligations.” Okay, so the pension fund is sound, but what about other post-employment benefits (OPEB) such as retiree health insurance?
• The General Assembly’s Fiscal Research Division reports that future costs to finance North Carolina’s state health benefits for retired employees amount to roughly $24 billion – equal to just under $11,000 per family of four.
• As of the report’s writing, the state had accumulated only $139 million in assets dedicated to this liability.
Myth #9: Budget appropriations receive proper debate and scrutiny by the General Assembly before being approved
In order to provide for a transparent budget process, the state’s legislative leadership long ago established certain ground rules that include:
o Adding no new budget items and provisions after both chambers passed a version of the budget;
o Changing no items that had already been agreed to in both chambers’ budgets;
o Providing no more money for items than was proposed in either chamber’s budget.
• State lawmakers violated their own rules more than 100 times during the 2007 session – a clear affront to public transparency and open debate.
Myth #10: The General Assembly has prepared sufficiently for the “rainy day” sure to accompany any future economic slowdowns
• As the economy slows, so does tax revenue. For this reason, the General Assembly decided in 2006 to set for itself the “goal” (cf. § 143C-4-2) of accumulating a balance in the Savings Reserve Account “equal to or greater than eight percent (8%) of the prior year’s General Fund operating budget.”
• Yet, when crafting the FY2007-08 budget, the General Assembly opted to set aside only enough funds to increase the Savings Reserve Account to 4.2 percent of the previous year’s budget – roughly $711 million below target.
Update: Myth #11: The General Assembly merely ‘tweaks’ the budget during their short sessions
• North Carolina’s budget process stipulates that the budget be prepared on a biennial basis
• The General Assembly puts the biennial budget together in each odd-numbered year (long session) in anticipation of returning in the even-numbered year (short session) to fine-tune it and make adjustments for changing economic factors
• The reality, however, is that short session “fine tuning” typically involves as many ‘budgetary actions’ as during the long session. The best barometer of this is a document published by the General Assembly’s Fiscal Research Division called the “Legislative Session Fiscal and Budgetary Actions.” When comparing documents from short and long sessions, one discovers that they typically are virtually identical in length – indicating that lawmakers do just as much budgetary tinkering during the short sessions as they do in the long sessions.
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