Must control spending to fix financial problems

North Carolina government has a $3 billion deficit built into its current budget, between temporary taxes, federal stimulus funds and other one-time fixes. Given the desire among legislators and bureaucrats to spend more, this easily could grow to $4 billion or more when the General Assembly convenes again next January.

The Journal reported recently that the John Locke Foundation had identified $130 million in potential cuts as a way to address the deficit. Actually, that figure simply represents wasteful new spending in the latest state budget. There are plenty of other opportunities for cost savings that would not hurt core state government services.

Before listing them, a brief word on the other option legislators could pursue to close the budget gap -- raising taxes. Simply put, they're tried before. It hasn't worked.

Despite rising tax rates, the combined state and local tax burden as a share of income in North Carolina has been within a fraction of 10 percent for the past 30 years, according to the Tax Foundation, which is based in Washington. There's no reason to believe higher tax rates would change that picture.

What higher tax rates would do is make North Carolina less competitive. North Carolina state and local governments' claims on 10 percent of personal income is a larger share than most states in the region. Tax burden as a share of income in North Carolina was below the national average in 14 of 16 years between 1977 and 1992. It was at or above the national average in 12 out of 16 years between 1993 and 2008.

If taxes will not fix the state's finances, we must look to spending.

Before Gov. Bev Perdue introduced her first budget in January 2009, the John Locke Foundation released an alternative "Back-to-Basics Budget" that would have reformed state government while reducing its economic impact.

In education, the Back-to-Basics Budget would have redirected spending from the educational bureaucracy and nonteaching positions to a smaller -- but better compensated -- teaching corps. It would have expanded the number of charter schools, put more emphasis on distance education in high school and college, and made a number of other changes to save more than $1 billion a year. More educational choices, such as charter schools or tax-deductible education scholarship funds, would reduce state spending further while also saving local governments from some of their capital expenses and supplemental spending.

In health care, the emphasis was on reducing what Medicaid offered instead of cutting reimbursement rates that keep the program attractive on paper while driving doctors out of the program. Simply bringing North Carolina's Medicaid program in line with surrounding states could save $624 million a year. Repealing expansions of NC Health Choice, a Medicaid expansion that competes with private insurance to enroll children, would save another $55 million each year.

Further savings would be achieved by eliminating needless state bureaucratic burdens on health-care providers, such as certificates of need for capital investments. Some of those savings would be redirected to needed community programs in mental health and criminal justice, but the Back-to-Basics plan would have resulted in net savings of $580 million a year in Health and Human Services -- with better results.

The plan included other specific programs to be cut, including numerous targeted business incentives, subsidies to nonprofit organizations and activities that should never have been undertaken by government in the first place. All told, it could have saved nearly $2 billion a year in the General Fund.

Want more? Consider the savings from reforming retiree health and pension benefits for future employees. Or moving current state employees to high-deductible health plans and health savings accounts and seeking modest contributions from them to help fund those plans.

A budget hole as large as North Carolina faces cannot be filled by raising taxes or by pruning the existing system. This budget crisis requires a new social contract that returns more autonomy to individuals, charities, churches, and entrepreneurs. Smaller, more effective government with less opportunity for corruption is what we'll get in return.

Joseph Coletti is the director of health and fiscal policy studies for the John Locke Foundation.

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