To chart and follow a path to a future of shared prosperity in North Carolina, it’s important to understand the causes of the current revenue shortfall and the consequences of different choices about how best to move forward.
A balanced approach now is the fastest way towards economic recovery. The non-partisan Congressional Budget Office and private-sector economists like Moody’s Economy.com agree: when the economy is weak, each dollar a state government spends generates much more than a dollar of local economic growth.
In the long term, research shows that states are much better off when they close revenue shortfalls by raising revenue to sustain and promote high-quality public services versus cutting spending and public services.
North Carolina is in good company – the Great Recession caused state revenues to plummet across the nation, not just in North Carolina. Real state revenue collections plunged in almost every state in the first half of 2009, leaving state governments with just over $4 in tax revenues for every $5 collected in 2008.
The slow pace of the economic recovery will keep real state revenues below pre-recession levels for several years to come even as demands for state services like public education, health care, and public safety continue to grow.
Spending is not the problem. In fact, spending per person is now the lowest it’s been in 14 years. Even counting substantial federal aid and additional revenue from the temporary tax package passed in 2009, North Carolina’s 2011 budget is a smaller share of the state’s economy than 19 of the last 25 annual state budgets. Without additional revenue next year, the 2012 budget will be the smallest in 40 years.
North Carolina needs a revenue system for the 21st Century. Not the 1930’s. North Carolina’s current tax system is plagued with exemptions and loopholes and forces low-income families to pay more of their income in taxes than wealthy families.
North Carolina can reform its tax system by greatly reducing exemptions and loopholes, leveling the playing field for taxpaying households and businesses, and ensuring adequate revenues to support the state’s vital public structures.