The other day I opened an email and there was an article by Chris Fitzsimons blasting away at the General Assembly, saying Republicans had cut taxes on the rich and raised taxes on the poor. By now, Chris has said Republican-Tax-Plan-Helps-Rich so often the words must have a permanent place on his clipboard.

Then I opened another email and saw something you don’t see every day. A newsletter from a member of the State House crowing about how he and other House members had whipped the Senate in the tussle over tax reform. And he had a point. The House did win.

Now, at first glance, those two emails may not even seem connected. But they are.

Because, in a way, when the House whipped the Senate, it handed Fitzsimon the ammunition for his broadside.

Here’s what happened: Bob Rucho is the leading ‘Tax Reformer’ in the Senate. And he carefully wrote a tax bill that cut taxes on low income people the most. Let’s use a married couple as an example: Currently no couple pays taxes on the first $15,000 they earn. Senator Rucho increased that tax exemption a lot. By $2,500 to $17,500. Which clearly helped low income families. Because more families would pay no taxes at all. Plus, all families, including low income families, would pay less income tax.

Senator Rucho also cut the income tax rate. Another tax cut for everyone. But he increased sales taxes. A tax increase on everyone that folks like Chris Fitzsimon are quick to say hits low income families hardest.

At the end of the day, when all was said and done Senator Rucho’s plan cut taxes a net of $646 million over the biennial – with the tax cuts skewed toward giving low income families the most tax relief.

But when the bill went over to the House, Representative Saine and friends didn’t agree with the Senate at all. They did keep the cut in the income tax rate. But then they raised fees $200 million (which hits low income people hardest), allowed full deductions for medical expenses and charitable deductions (which helps wealthier people more) and threw in another tax break that helped wealthy developers renovate older buildings.

Then, finally, they reduced Senator Rucho’s $17,500 personal tax exemption to $15,500. Which tilted the whole playing field. They’d raised fees. And increased sales taxes. But taken out almost all of the tax reduction that helped low income families the most.

Representative Saine has every right to crow. The House did have the final word on Tax Reform. But wouldn’t it be nice if, just once, after passing a tax bill, we didn’t have to listen to folks like Chris Fitzsimon wailing that Republicans cut taxes on the rich and raised taxes on the poor.

Secret Societies

It was more than a little odd.

The Democratic Leader of the State House called a press conference and got up and announced he’d discovered a Republican ‘Secret Society’ at work in the State Legislature – which had a ‘secret’ plan to cut state employees fringe benefits.

Now a lot goes down at the backrooms of the General Assembly – bills get changed, budgets get bartered, and deals get made. But Democratic Leader Larry Hall must have been reading too many spy novels: Because he’s giving Republicans too much credit. What goes on in the legislature is more like organized chaos than a well-oiled conspiracy.

Secret Societies aside I, for one, am glad Hall brought up the state employees fringe benefits. It’s time someone did. Because it’s one of the most cynical political games ever played in Raleigh.

It worked like this (under Democratic legislatures) for years: Politicians tell state workers, We’re sorry but we can’t pay you as much as you want this year – but we can offer you wonderful fringe benefits like exorbitant pensions and free health insurance for life.

For the politicians, that gambit worked like a charm: 1) They gained the votes of state employees; 2) then paid for their promises with I.O.U.’s instead of cash; 3) which meant they didn’t have to raise taxes and lose the votes of taxpayers.

But, now, the chickens have come home to roost – the politicians can’t sweep the problem under the rug anymore, because the pile of IOUs is bigger than the rug.

Earlier this summer, the legislature’s non-partisan Program Evaluation Division reported unfunded retiree healthcare benefits add up to a debt owed by the state of $25.5 billion.

Let’s put that in perspective: $25.5 billion is billions larger than the whole state budget.

It’s twelve times bigger than the $2 billion or so bond legislators propose to put on the ballot for voters to approve next year and, when it comes to this $25.5 billion, there was no vote of the people to approve one penny of the debt.

Even scarier, the PED reported the debt (for this unfunded liability) is growing like kudzu – by $2.5 billion each year.

The politicians in Raleigh have flummoxed state employees with promises of grand pensions and lifetimes of free health insurance – and flummoxed taxpayers by not setting aside the money to pay for their promises. And Larry Hall knows all that. Because, as I said, most of the promises were made by past Democratic legislatures.

Despite the Democrat’s tremors, there are no secret societies in the legislature. But there is a secret problem: A $25.5 billion debt. And I’d like to hear how Representative Hall proposes to pay those bills.

Adjusting the Sales Tax

There is a peculiar and rarely mentioned anomaly in how North Carolina has, for years, allocated sales taxes to different counties.

We have heard a lot (actually more than a lot) recently about the State Senate’s plan to change how the state allocates sales taxed between counties. In a nutshell, the Senate shifts sales tax revenue from twenty urban counties to rural counties. And we’ve had a long, acrimonious debate with almost everyone pounding the table demanding more money. But we’ve had almost no debate about the most fundamental question of all: What is fair?

Additionally, in the 16 pages of the Senate version of House Bill 117, there’s one change that hardly a soul has mentioned: The elimination of what’s called the “adjustment factor” – a key but little known part of the previous plan.

The adjustment factor worked like this: Let’s say that Alexander County sent $100 in sales tax collections to the state. The state then applied a 100% adjustment factor and returned $100 to Alexander County.

But with Catawba County, the state applied a different adjustment factor – 99%. So when Catawba sent $100 to the state it only received back $99. Less than it sent.

Applying the adjustment factor meant counties like Mecklenburg took a big hit – every time Mecklenburg sent $100 to the state it only got back $89. But other counties, like Dare, were well rewarded. Every time Dare County sent in $100 to the state it got back $149.

One would hope that, years ago, there was some rational theory at work when the state set those adjustment factors – but it may also be what was at work was politics. After all, the leader of the State Senate for years was Marc Basnight from Dare County.

Reforming an unfair tax system is inevitably a painful process. Every county, naturally, wants more money. And there are always winners and losers. But still, when you cut through the politics, the fundamental question is still: What’s fair? After that it’s simply a matter of legislators having the courage to follow an old adage: Doing the right thing is the right thing to do.

The Education Sales Tax

It’s a curious turn of events: The State Senate just got whacked for spending more money on education.

For years, the state has returned 25% of the sales tax revenues to counties based on their population. The state also instructed the counties to spend part of that money to build schools.

In its new plan, the Senate doubled the amount of money (to 50%) sent to counties based on population and says all the money must all be spent on education – and allows local officials to spend the money however they want: To hire more teachers, pay teachers more, hire teacher assistants, add technology or build schools.

That sounds pretty straightforward. But there’s a hitch – any way you cut it, under the Senate’s new plan, 80 rural counties get more money and 20 urban counties get less. And the urban counties don’t like that.

It’s easy to see why a Chamber of Commerce in, say, Charlotte would feel that way.

But that ignores a second reality. There is no urban center in the state that can survive without well educated workers driving in each day from rural counties to fill jobs.

The bottom line is simple: We’re all in this together. Charlotte isn’t surrounded by a moat and a drawbridge. When a rural county nearby doesn’t have the money to pay for schools and community colleges that’s not just its problem – it’s a problem for Charlotte too. Everyone gains from better rural schools. Including urban centers like Charlotte.

Fairness and the Sales Tax

Back in the 1970’s, the legislature passed a local sales tax. The total sales tax – of one penny – was collected by Raleigh then distributed to the 100 counties based on where the goods were purchased.

Later, in 1983 and 1985, the legislature passed two one-half cent sales taxes. But, this time, the tax revenue was allocated based upon the population of each county, not by where the goods were purchased.

And for over 20 years that was our model. 50% of the sales taxes were returned to counties based on their population and 50% based on where goods were purchased.

Then, in 2007, the legislature changed the model. And local sales taxes were distributed 25% based on population and 75% based on point of sale. Obviously, that change favored commercial centers like Charlotte and Raleigh and left rural counties with less money to pay for schools, roads, and other needs.

Today, there is a debate underway to change the formula again.

Rural counties argue they do not have enough money to pay for schools and other essentials.

Urban areas argue they have to spend more to provide roads and infrastructure and police to support commercial centers – like shopping malls – that both urban and rural citizens use.

One earlier bill proposed to distribute 80% of the sales taxes based on population and 20% based on point of sale. Obviously, that reverses the current formula. And is a big change in favor of rural counties and a big drop in revenue for urban counties.

So, was it fair?

Would 20% (instead of 75%) cover urban counties unique infrastructure costs – which serve both urban and rural citizens?

As far as I can tell no one on either side has even attempted to answer that question. So no one knows what is fair.

That said, it’s hard to argue with returning to the 50-50 allocation we used for years. That will provide rural counties more money for their schools. And urban counties will still get a relative boost to help meet their unique infrastructure needs.

It’s not a perfect solution but, for now, it may be as close to fair as we can come.


Now and then, I happen across a program in state government that makes me wonder, what on earth were they thinking?

And, usually, the answer is: They were thinking about politics.

And that’s probably the best explanation of why politicians in Raleigh have made such lavish promises to provide health insurance benefits to state employees after they ‘retire’ – without setting aside a penny to pay for those promises.

Now, when I say retire most people will think of someone who retires at 65 and signs up for Medicare.

But that’s not the case here.

A state employee can work 20 years and retire and the state will go right on paying for their health insurance. For years.

The state will even continue to pay for their health insurance if they take a job with another employer.

My friends in the private sector, who have reached 65, tell me hitting the age of Medicare is like walking into the Promised Land. Not only are basic Medicare benefits well beyond what they had been paying for with their own insurance – they’re free. And, if they want, they can buy additional benefits (say, to pay for all their prescription drugs) for a fraction of the cost.

A state employee who goes on Medicare at 65 gets an even better deal: The state will provide whatever supplements or additional coverages they want and it doesn’t cost them a penny. They get Medicare free. And additional coverages free too.

Which leads to an inevitable question: How much are all these promises going to cost taxpayers? The answer: $26 billion. Which is what state budget writers are euphemistically calling an ‘unfunded liability.’ And what the rest of us simply call a debt.

Let’s put that $26 billion in perspective: I remember the debate, two years ago, when we found ourselves facing an inherited $2.5 billion debt to the federal government for unemployment insurance.

Now we face another debt that is ten times as big.

No one questions taxpayers providing health insurance to people who work for the state – but spending $26 billion to provide health insurance to people who don’t work for the state? It’s time for a serious talk.

More Debt and Market Timing

I’ll admit if I was a genius at stock market timing, I might not be serving in the NC Senate. I also suspect the same holds true of most folks serving in state government. So it’s interesting to watch the ongoing debate in Raleigh over how to fund NC’s long-ignored infrastructure needs.

One side says now is the time to borrow a couple of billion dollars – because interest rates are low and cannot go lower.

That may be so. But, then again, it may not.

While market timing is tempting, as a lot of folks have learned the hard way, it’s also risky. And when it comes to borrowing a couple of billion dollars it’s hard to ignore gathering clouds on the economic horizon.

While Greece gets most of the recent headlines, it’s also a fact that the stock market in China has lost about a third of its value since mid-June. And the drop in industrial commodity prices, like oil and copper, suggest the world economy may be slowing.

At the same time, both the wizards of Wall Street and the typical American family are reducing debt . In fact, the only sector actively adding to its debt burden is government.

I don’t pretend to know if this is the right time to borrow billions – and I’m not sure anyone else does either.

Another option is to redirect roughly $900 million currently held by the Golden Leaf Foundation and use that money to pay for the same infrastructure projects. That sounds a lot safer than borrowing.

In other words, NC taxpayers have close to $1 billion in cash on hand – so why take on the risk of borrowing?

I realize some will protest (loudly) that Golden Leaf was supposed to help rural areas that were dependent on tobacco, but a review of their grant allocations by county show some pretty prosperous counties – like Wake and Durham – at the top of the list.

And there’s another consideration. Several state leaders are actively promoting a new tax structure because they want to shift sales tax dollars from urban to rural counties. But, if we are going down that road, we can surely eliminate the special programs buried in the labyrinthine state bureaucracy – like Golden Leaf – that were set up to accomplish the same goal.

Let’s make those infrastructure improvements. But let’s do it with available cash, not by increasing a debt burden that will quickly weigh on current taxpayers as well as future taxpayers.

A $26 Billion Hole

One item – that comes with a $26 billion price tag – in the Senate budget is getting plenty of attention. In fact, the rhetoric – from the State Employees Association and the Teachers Union and liberal groups – has gotten so heated one spokesman went so far as to suggest that, if this reform stays in the budget, we may never be able to hire another state employee.

Here’s what the ruckus is all about: Currently, state employees receive first class health insurance. And they receive two additional health insurance benefits: First, after working 20 years, and after reaching age 50, a state employee may retire and the state will continue to pay for their health insurance.

Second, if the same employee decides to go to a new job, the state will still continue to pay for his or her health insurance – instead of their new employer.

Those are the provisions the Senate proposes to change – for people who will be hired to work for the state after Jan 1, 2016.

What this means is straightforward: As long as a new employee works for the state he or she will receive the same first class health care benefits as every other state employee. However, if he or she changes jobs (after working 20 years and after reaching age 50) the state will no longer pay for their health insurance. Their new employer will have to do that. Or, if they decide to retire early, they will have to pay for their health insurance themselves.

There’s one other argument in favor of this change.

For years, the state has made commitments to pay employees and teachers pensions. And each year, the state has set aside funds to pay those pensions. As a result, the state’s pension plan is well funded and rests on a solid financial foundation.

However, state health insurance benefits are different. The state has never set aside a penny to pay for these benefits and, as a result, the state now has an unfunded liability of $26 billion.

We’ve dug ourselves a financial hole. Should we keep on digging or start climbing out?

The Senate’s proposal is fair to both employees and taxpayers. And – with a $26 billion unfunded liability – it’s the right thing to do.

The Road to Charlotte

Mooresville is thirty minutes north of Charlotte, and Rock Hill (South Carolina) is thirty minutes south of Charlotte – thirty minutes that is, as Google Maps puts it, “without traffic.” And there’s the rub.

When you leave Rock Hill heading for the big city, Interstate-77 is an 8-lane boulevard. When you leave Mooresville, it’s a 4-lane bumper to bumper parking lot.

The NC Department of Transportation needed – and came up – with a solution: To get a private business to build two additional lanes and, in return, let them collect tolls on the new lanes. The idea received, at best, mixed reviews from NC commuters who would be paying the tolls.

And, then, the process took a decided turn for the worse.

At the last minute, after the contract was signed, legislators learned there was a big surprise buried in the fine print – a non-compete clause. A clause that said NCDOT cannot, for 50 years, add additional lanes to I-77 where the toll lanes run. And if they do, NC taxpayers will have to pay damages to the toll-collecting corporation.

So if we decide our side of I-77 should be as wide as SC’s side, NC taxpayers will not only pay for the road construction, there will be an additional ransom for adding those lanes.

In the meantime, nothing stops SC from adding more lanes on their side whenever they want.

There are two lessons to be learned from this: First, maybe something other than incentives is luring companies from NC to SC. And, second, when state bureaucrats sit down at the table to negotiate a contract with eagle-eyed MBAs, the taxpayers will likely be the dinner.