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Caught between revenue and a hard place

Posted on June 15, 2009 by Staff

Chris Fitzsimon

When the long-awaited House revenue package was unveiled Tuesday morning in the Finance Committee, it was significantly more progressive than expected. That was evident from both the tax provisions in the package and the spirited opposition it sparked from Republicans and a handful of conservative Democrats.

The plan would end a long-standing tax break for banks, close a loophole that allows multistate corporations to shift profits to avoid paying state taxes and expand the sales tax to warranties, home repairs and online purchases.

That’s in addition to a one-fourth percent increase in the overall sales tax, higher income tax brackets for the wealthy and increases in the taxes on alcohol and cigarettes. The plan raises $940 million, or used to.

Not long after the package was explained, Democrat Van Braxton offered an amendment to remove the 25 cent increase in the cigarette tax, and it passed 22-7. That reduced the amount the plan would raise to just over $800 million.

While the House Finance members were debating the tax plan, the House budget committee was meeting one floor above, reviewing the draconian House spending proposal that now includes a provision spelling out what cuts would be restored if the revenue package was approved.

Even before the $125 million raised by the tobacco tax was eliminated, the revenue would not spare education and human services from damaging cuts. Education would have received $352 million of the new revenue, but that would still mean more than $1.5 billion would be cut from public schools, community colleges and universities next year.

Health and human services would have received $288 million, but $1.7 billion would still be cut from mental health, children’s health care, Medicaid services for seniors and people with disabilities, etc.

Some of the worst cuts would be avoided, but not all of them. And it is far from a foregone conclusion that the House will pass the revenue package, even with the tobacco tax no longer part of it.

House Republicans are holding firm to their no-new-tax mantra, defending it by challenging the size of the shortfall, the use of federal stimulus funds, and citing misleading economic theories about how to respond to a recession.

Last session’s General Assembly approved a budget of $21.35 billion. Services and staffing were based on that number. The projected revenue for the fiscal year that begins July 1 is $17.6 billion.

Add inflation, increased enrollment in schools and more people eligible for Medicaid because of the economic downturn, and you have the shortfall. It’s not that hard to understand.

Opponents of the plan also claim that raising the income tax on the wealthiest taxpayers will drive the rich out of the state. That’s the claim that’s always made about raising taxes on the wealthy.

It was made in 2001 when the tax rate on the richest taxpayers was increased. The N.C Budget and Tax Center says that the state not only gained residents after 2001, but taxable income has more than doubled since then.

And it is not just misleading rhetoric about taxes that House leaders have to worry about. Reportedly, several members of the Legislative Black Caucus don’t think the revenue package is big enough and may not vote for it unless it raises at least $2 billion, more than twice as much as the current plan.

That prompted a House Democratic Caucus late in the afternoon before the Finance Committee reconvened to consider amendments by Democrats and Republicans opposed to the proposal.

House leaders are on the right track with their revenue proposals, one of the most progressive in several years. That’s the good news. It won’t prevent all the damaging cuts by any means, but it will prevent some of them.

The challenge now is to convince reluctant House Democrats to support the revenue plan so the folks who are against everything don’t prevail.

That ought to be one thing all reasonable lawmakers can agree on, that refusing to raise any revenue and choosing to do nothing is simply not an option.

Chris Fitzsimon is executive director of NC Policy Watch.

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