$1 Billion in New Taxes in North Carolina Budget

Published October 1, 2009

As summer temperatures rose in the Tar Heel State, so did tempers among elected officials at loggerheads over which taxes to raise in hopes of closing a $4.6 billion budget deficit.

The state’s fiscal year began July 1, but lawmakers couldn’t agree with Gov. Bev Perdue (D) on a budget compromise until early August. The final proposal raised nearly $1 billion in new taxes, including a 1 cent hike in the sales tax, a surcharge on some income taxes, $90 million in additional yearly taxes on cigarettes and alcohol, and a click-through tax applied to large online retail sites.

Leaders in the Democrat-controlled legislature say the tax increases are necessary because of the massive budget shortfall. House Speaker Joe Hackney (D-Orange) told the Associated Press the deal was “one of the most difficult budgets of my legislative career.”

Republican lawmakers assailed the budget compromise as involving too many taxes and too few cuts.

“What Democrats have decided to do is maintain government spending at the same level and raise taxes,” said Senate Republican Leader Phil Berger (R-Rockingham).

Weeks of Wrangling

The budget followed weeks of bad blood between Perdue and fellow Democrats in the legislature. A previous compromise version would have imposed a 2 percent income tax on all wage earners, a move Perdue torpedoed, telling reporters she was “stunned” by the proposal. Earlier she had chided the House and Senate for failing to reach a budget deal by the start of the fiscal year.

In addition to the budget wrangling, Perdue has been facing popularity challenges. Polls put her approval rating in the 25 percent range in July, a significant drop from the winter months. She has lost support among teachers and state employees after cutting wages and mandating furloughs earlier in the year.

Budget Criticism

Joe Coletti, a fiscal policy analyst for the John Locke Foundation in Raleigh, said the final budget compromise is based on bad accounting and will harm middle-income families.

“Perdue blew up an earlier deal to raise taxes on the grounds that an income tax surcharge would hurt working families,” Coletti said. “Somehow she thinks a higher sales tax that raises five times as much money as the surtax will leave working families untouched.”

The Tax Foundation, an independent tax research organization in Washington, DC, also criticized the sales tax hike.

“There’s no broadening of the sales tax base, meaning that the state government will continue to distort economic decisions by taxing similar transactions differently,” said Joseph Henchman, director of state projects for the Tax Foundation. “A more neutral plan would prevent government—or special interests—from micromanaging the economy.”

David N. Bass ([email protected]) is associate editor of Carolina Journal.