New report: to protect families and lead us out of recession, NC lawmakers must take "balanced approach"
Cuts alone won't solve the budget gap; the state must raise revenue to combat the economic crisis
RALEIGH (May 27, 2009) - Closing North Carolina's budget gap with cuts alone will deepen and prolong the recession, writes Elaine Mejia, director of the NC Justice Center's Budget & Tax Center - but raising additional revenue can help the state maintain valuable public investments that will lessen the state's economic pain.
Citing the latest economic research, Mejia's new report released this morning concludes that taking a balanced approach to the budget deficit -- including spending cuts and tax increases - is the best way to maximize impact of federal recovery dollars, to increase economic activity in the state, and to help North Carolina break out of the recession.
To attempt to balance the budget using cuts alone, Mejia writes, "will put tens of thousands of public-sector and private-sector employees out of work, will negate federal economic recovery efforts, and will prolong the current recession in North Carolina. Lawmakers should heed the lessons of the past, the approach taken by other states, and the economic research and include a well-crafted revenue package as part of the solution to the current fiscal crisis."
As Mejia notes in the report, "Between a Rock and Hard Place: NC's Worsening Budget Gap Calls for Spending Cuts and Tax Increases," 16 other states have already enacted tax increases to help deal with their respective budget shortfalls. Seventeen others are seriously considering doing so.
Spending reductions will certainly be necessary to balance the budget, Mejia acknowledges. But as North Carolina's largest employer and by far its greatest investor in education, health care, and the well-being of low-income families, state government has a tremendous impact on the state's economy. Drastic cuts risk undermining economic recovery as well as quality of life around the state.
But a carefully crafted revenue package can help maintain that quality of life while guiding North Carolina out of recession. Mejia makes several arguments for why this is the case, including:
- Specific studies: In a paper written at the outset of the previous recession, renowned economists Joseph Stiglitz and Peter Orzag concluded that "tax increases on higher-income taxpayers are preferable to cutting spending for closing state fiscal deficits in the short run." Reductions in public spending decrease economic demand by a greater amount than the spending cuts themselves. Since higher-income taxpayers can absorb increased taxes by saving less, overall consumer demand in the short term is maintained.
- Economic theory: "If North Carolina elects to fill its current and upcoming budget gaps with spending cuts alone, it could dramatically decrease economic activity in the state and considerably worsen the recession," writes Mejia. "This is because the economic multiplier of government spending is 1.5, whereas the multiplier effect of leaving an equivalent amount of money with taxpayers is 0.9 because as a portion of these funds are saved and not spent."
- History: During each of the past two recessions, North Carolina has raised revenue. In each case, this action helped rather than hindered economic recovery. "In neither the '90s nor the '00s did raising taxes hurt the state's economic recovery," writes Mejia. "Rather, doing so allowed North Carolina to achieve several short- and long-term policy objectives."
For example, the state was able to maintain public investments toward improving education levels, improving public safety, providing low-income children, elderly and disabled residents with access to quality health care, and making the environment cleaner. In addition, the state was able to stabilize demand in the economy by not shrinking its spending at the same rate as the private sector.
FOR MORE INFORMATION, CONTACT: Elaine Mejia, 919.856.2176; Jeff Shaw, director of communications, NC Justice Center, 919.863.2402 (office) 503.551.3615 (mobile).