Civitas Report: Overspending Leads to Higher Taxes

Legislature’s Appetite for Pork Leaves Residents with $1 Billion Tax Increase

A total of $1.64 billion of non-essential new spending was introduced by North Carolina budget writers during the economic boom years of 2004-05 to 2007-08, according to recent research by the Civitas Institute. This boon in non-essential spending helps explain why state lawmakers felt it was necessary to impose more than $1 billion in new taxes to balance the current year’s budget. (For full study, see here)

For fiscal years 2004-05 through 2007-08, North Carolina state government raked in a total of $3.4 billion in surplus revenue. In spite of the substantial revenue windfall, however, North Carolina’s “rainy day” fund balance stood at only $787 million by 2008, and was nearly drained by the time budget negotiators sat down to find the necessary funds to balance the current year’s spending plan.

“If even one-third of the surplus revenue raked in from 2005 to 2008 had been saved in the rainy day fund, North Carolina citizens could have been spared from one of the largest tax hikes in state history,” said Civitas Budget and Tax Policy Analyst Brian Balfour.

The lessons from this study are clear:

• There is always an opportunity cost to every tax dollar spent. An extra dollar spent during the boom years on nonessentials like museums or welcome centers is one less dollar the state will have to preserve teachers’ jobs, judges pay, and maintenance of prisons or social services programs when the next recession comes.
• Taxpayers and lawmakers should always keep an eye on the long term and understand the cyclical nature of our economy. Booms are inevitably followed by busts. How we allocate tax dollars during the boom is just as important and should be scrutinized just as closely as how tax dollars are spent during a recession.

 

Overviews of the findings include:

• A total of $1.64 billion in non-essential new expansionary spending from 2004-05 to 2007-08.
• Almost a billion of that total ($967 million) went to expanding and maintaining higher levels of appropriations for recurring program expenditures (above and beyond normal base budget expansion for inflationary and program enrollment increases), or creating and growing new programs.
• Another $677 million went toward one-time, nonrecurring expenditures.
• Some of the items received both recurring spending expansion and one-time nonrecurring additional funds.
• More than 240 line items were earmarked for specific, mostly local, projects and organizations.
• The largest recipient of the new spending documented was public education. Roughly $650 million went to ABC bonuses and additional non-teacher personnel alone.

 

One example clarifies the opportunity costs involved in state spending during flush economic times. From 2004-05 to 2007-08, the state spent $368 million on ABC teacher bonuses and another $278 million in new expenditures for additional non-teacher personnel in the public education system.

“If this money had instead been saved, how many teachers’ jobs could have been preserved this year with that $646 million,” asked Balfour.

Perhaps during the next boom period, budget makers will have the foresight to seriously consider setting aside more revenue to preserve essential operations during the recession that will surely follow.