How will Perdue fill the gap? Governor proposes increasing tax on tobacco, creating an alcohol tax

RALEIGH

Care for a smoke? First prepare for sticker shock.

The average price of cigarettes in North Carolina could rise by about 50 percent to well more than $5 a pack later this year.

That is if Gov. Bev Perdue can persuade state legislators to go along with her plan to increase taxes on tobacco -- and alcohol -- in order to help close a major hole in the state budget.

In a budget plan she rolled out yesterday, Perdue also proposed deep cuts to state spending, the closure of several prisons and the elimination of 1,400 state jobs. It was the proposals to raise the tax on tobacco and create a new sales tax on alcohol, however, that caught the most attention, especially in Winston-Salem.

Reynolds American Inc. called the tobacco-tax proposal "an outrageous attack." Local legislators said that, in the current recession, it would be destructive.

But other powerful legislators were much more supportive, saying that the tax increase is needed to pay for health-care costs caused by smoking-related illnesses.

Perdue said that she opposes any broad tax increases, but she is OK with taxing cigarettes and alcohol, she said, because smoking and drinking are voluntary activities.

Still, her proposal breaks a promise she made during her campaign for governor last year, when she pledged several times not to raise any taxes.

"Obviously, I have watched with concern, deep concern, as the health-care costs related to tobacco usage continue to grow in North Carolina," Perdue said as she announced her budget plan yesterday. "And the literature is fairly clear that to keep kids from smoking, you've got to increase the prices."

Perdue, a Democrat, wants to raise the state tax on cigarettes by $1 -- from the current rate of 35 cents a pack to $1.35. That $1 increase would be on top of a 62-cent increase in the federal tax on cigarettes passed by Congress earlier this year and signed by President Obama. The federal increase will take effect April 1.

Reynolds, the tobacco giant based in Winston-Salem, said yesterday that the proposed state increase combined with the federal increase would cause the average retail price of cigarettes in North Carolina to grow to almost $5.50 a pack.

In addition to the tobacco tax, Perdue proposed creating a new sales tax on alcohol on top of the existing state excise tax. Consumers would pay a 5 percent tax on the cost of alcoholic beverages.

Perdue's budget plan now goes to the General Assembly, which will likely make many adjustments as it works to pass a budget before July 1, the start of the 2009-10 fiscal year.

State Sen. Linda Garrou, D-Forsyth, is one of the legislature's chief budget writers and represents the district where Reynolds has its headquarters. She defended the value of Reynolds to the state economy and she said she adamantly opposes any tax increase on tobacco this year.

"Either that, or just give it an ax and do away with this company, because that looks like what we're trying to do," she said. "Here we've got a company who's paying a big amount of taxes to the state. They employ people. They have good jobs.… The semi-skilled jobs, those are the jobs that we need. And they pay people well and they provide a good living."

Garrou is at odds with Sen. Marc Basnight, the powerful leader of the Senate. Basnight strongly supports increasing the cigarette tax.

Basnight, D-Dare, said he is not sure whether enough Senate Democrats support Perdue's tax proposals to get them passed in the Senate. House Speaker Joe Hackney, D-Orange, gave a similar assessment of the Democratic caucus in the House.

Democrats control both legislative chambers.

Republicans roundly criticized Perdue's budget proposal yesterday, saying that there are more places to cut in order to avoid tax increases.

Perdue's plan does contain a number of substantial cuts. In an overall annual budget of slightly more than $20 billion, she proposed cutting spending by $1.3 billion in each of the next two years. More than 20 programs, described as outdated or duplicative, would be eliminated. Seven prisons would be closed and prisoners moved to other facilities.

More than 1,400 state jobs would be eliminated -- although some of them are vacant, and in others, employees would be moved to new positions. Perdue's budget director, Charlie Perusse, said that 268 state workers could lose their jobs under the governor's plan.

Perdue is also relying heavily on $2.9 billion from the federal stimulus package to help close the projected budget shortfall, which is caused by diminishing tax revenues in the economic recession.

In particular, the stimulus money helped Perdue keep a promise to increase per-pupil spending on education. Her plan calls for reduced state spending on education, but once federal money is factored in, overall education spending would increase slightly.

■ James Romoser can be reached at 919-210-6794 or at jromoser@wsjournal.com.

Budget proposals

Because of declining tax revenues, North Carolina is facing a projected budget shortfall of $3.4 billion in 2009-10 and $3 billion in 2010-11. That is out of an overall budget of slightly more than $20 billion a year. Yesterday, Gov. Bev Perdue announced her budget proposals for each of these years. Here are some of the major ways that Perdue is proposing to close the budget gap:

Raise ‘sin' taxes

Perdue wants to raise the tax on cigarettes by $1 a pack. She also wants to enact a new 5 percent sales tax on alcohol. The two proposals would raise a total of $508 million.

Reduce the number of state employees

Her budget would eliminate 1,411 positions in state government. Of those positions, 444 are currently vacant. Of the remaining employees, about two-thirds would be moved to other posts, and a third would likely lose their jobs.

Use the federal stimulus

In 2009-10, her budget would use $1.7 billion from the federal recovery package, mainly for education and Medicaid costs. In 2010-11, her budget would use $1.2 billion in federal stimulus money.

Freeze Medicaid rate

The reimbursement rate that Medicaid pays to health-care providers normally goes up each year, but Perdue's budget would freeze it at the current level.

Reduce spending

Spending throughout state government would be cut in various ways. State prisons would be closed and outdated programs would be eliminated. Perdue proposes to curtail state spending by $1.3 billion in each of the next two years.

Source: Office of Gov. Bev Perdue