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Easley Unveils Budget Proposal, Seeks Cigarette Tax Increase

Posted February 24, 2005

— A pack of cigarettes would cost 35 cents more this fall and sales taxes would remain flat under Gov. Mike Easley's $16.9 billion budget proposal released Wednesday.

North Carolina's cigarette tax now stands at 5 cents per pack, the second-lowest in the country. But following last fall's federal tobacco quota buyout, many state leaders have said it is time to raise that to help pay for smoking-related health care and efforts to cut teen smoking.

The Democratic governor's two-year plan would raise the tax to 40 cents per pack this year, with a recommendation of an additional hike to 50 cents in 2007.

"I didn't think we could do it last year," Easley told reporters. "I didn't think the legislators would vote for any kind of tax increase. The buyout helps some."

In deciding how much to raise the tax on cigarettes, Easley said he tried to strike a balance. He wants to raise it enough to deter teen smoking, but not so much that it deters lawmakers from tobacco-dependent communities from voting for it.

"We were hoping, based on the governor's comments Monday night that he would do something significant and 35 cents just doesn't do much to improve the health of our children," said Peg O'Connell, of the N.C. Alliance for Health.

Anti-smoking advocates said the Governor's proposal misses the effect a larger increase would have in preventing teen smoking. They want a 75-cent increase, all at once. That bill is already filed in the House. A similar one is on its way in the Senate.

The proposed cigarette tax hike still keeps North Carolina below the national average. At 50 cents, the tax would be 19.5 cents lower than the national number. The highest cigarette tax in the country right now is in Rhode Island at almost $2.50 a pack. At three cents, Kentucky's cigarette tax is the lowest.

Easley's spending plan also further extends a half-cent sales tax increase first put in place in 2001 to stem a budget crisis. Easley had come into this budget year hoping to allow the tax to expire this summer, but decided that was not feasible with the state facing a potential $1.3 billion shortfall in the budget year that begins July 1.

However, Easley's plan does begin to phase out an income tax hike on the state's top wage earners that was first enacted in 2001.

"We do not believe revenues will grow as fast as we hoped for the rest of the year," Easley said in releasing the first budget proposal of his second term. "That, in addition to unmet needs in the west and substantial health care growth, makes the temporary continuation necessary."

The governor is expected to soon receive from the General Assembly a $247.5 million hurricane relief package aimed at helping western North Carolina, which was hit hard by tropical weather in September.

2005-2007 Governor's Recommended Budget

Easley's proposal would gradually roll back the 8.25 percent marginal income tax rate on the highest wage-earners added in 2001. Under the governor's plan, the rate would drop to 8 percent in January and back to 7.75 percent -- the previous highest income tax rate -- in 2007.

Easley's proposal, which raises state spending by more than $900 million over the current budget, bridges the looming shortfall with revenues from the cigarette tax increase ($172 million), the extended half-cent sales tax ($413 million) and the state's portion of the estate tax ($31 million).

The budget also anticipates an additional $105.6 million in revenue from raising taxes on satellite and cable television services, liquor, candy, movies and newspapers to bring them in line with other states.

Various states are trying to streamline their tax definitions to allow Congress to pass legislation that would compel online retailers to collect sales taxes from customers in states where the retailer does not have a brick-and-mortar store.

"We can't continue to discriminate against the local hardware salesman down on Main Street because things aren't bought on the Internet or online," the governor said.

Medicaid, which is administered by the state Department of Health and Human Services, would see the largest single spending increase, of $215 million. Easley said the increase would have been about $275 million if he was not also ordering $60 million in expense reductions from increased patient co-payments and cuts in spending on prescription drug coverage.

In all, Easley said he wants state agencies to cut spending on current duties by $203 million.

"I'm presenting a solid, balanced budget that allows use to make real, sustainable progress and provide the revenue necessary to fund our priorities," he said.

Easley said he would seek $532 million in additional education spending, more than half of which would go to teacher performance bonuses and projected enrollment growth in the public schools, universities and community colleges.

State employees and teachers would receive salary increases of 2 percent but face dependent health insurance premium increases that average 10 percent. Community college faculty and staff would get 4 percent pay raises.

A representative for the state employee's union told WRAL the raise is not enough. Plus, the group is concerned about the possibility of health benefit cuts.

The "Learn and Earn" program, in which high schools offer a fifth year for students to receive an associate's degree would receive funding increases of more than $4 million in 2005-06 and $10.3 million in 2006-07.

"We have to do more in high schools and make high schools do more for our people," Easley said.

Poor school districts also would see their targeted funding increase by $58.5 million over two years to more than $167 million -- a move in part designed to meet the requirements of last year's Leandro school funding ruling by the state Supreme Court.

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