Senate Budget Leaves Out Taxes, Incurs $1.2 Billion in Borrowing

The roughly $20 billion spending plan for the fiscal year starting July 1 is $263 million less than the House budget, primarily because the Senate wants to eliminate a quarter-penny on the sales tax and a higher income tax bracket for the state's top wage-earners.

The House decided to let the two temporary taxes -- they were first approved in 2001 and extended twice already -- remain on the books for another two years to pay for education and health care needs. They would add about $300 million to the government's coffers next year and are expected to be a key point of contention in upcoming negotiations to hammer out a final budget for Gov. Mike Easley.

"The General Assembly said in 2001, 'We are in a fiscal crisis in this state. These are temporary taxes.' It's been six years. It's time to sunset these temporary taxes," said Sen. Richard Stevens, R-Wake.

Sen. Kay Hagan, D-Guilford, one of the Senate's chief budget-writers, said the Senate hoped to hold the first of two required budget votes on Wednesday.

A portion of the temporary taxes expired last year. Under the House plan, the sales tax most consumers pay would remain 6.75 percent. The Senate wants it to drop to 6.5 percent. The Senate wants the income tax rate to fall to 7.75 percent for the state's highest wage earners, compared to 8 percent for the House.

The Senate made up for the lost revenue by setting aside about $165 million less than the House in the state's already flush rainy-day reserve fund and spending about $116 million less in upfront money on the state's building needs.

Instead, the Senate wants the state to incur more than $1.2 billion in debt to pay for about 30 university, prison and other government construction projects. The debt would be issued without the approval of voters in a statewide referendum, which is sure to draw the ire of fiscal conservatives, already upset by the about $450 million in such debt proposed in the House budget.

Hagan said the additional debt is needed to keep up with the state's building demands. North Carolina's population is expected to grow from nearly 9 million to 12 million by 2030.

Later this year, the General Assembly also is expected to consider a separate spending package that could include a bond referendum to pay for roads, schools and infrastructure.

The Senate also would give 4 percent pay raises to rank-and-file state employees. The House gave them 4.25 percent. The Senate gave teachers an average raise of 5 percent, matching the raises included in the House and Easley's proposed budget.

The Senate budget also leaves out several tax changes made as part of the House budget, including several business tax credits and a state version of the federal earned income tax credit for low-wage taxpayers.

Also absent is $100 million in one-time money the House included for the state's 100 counties to help them pay for their share of Medicaid costs. The Senate, which is looking for a long-term solution to the $500 million-plus counties must pay annually, set aside nothing.

While there are differences between the budgets prepared by lawmakers in the two chambers, they aren't all that dramatic, said House Speaker Joe Hackney, D-Orange.

"Their priorities are the same as ours," he said. "Their priority is education, their priority is fiscal stability."

But Sen. Janet Cowell, D-Wake, said the differences between the two budget proposals are great enough to ensure lengthy negotiations before a final budget bill is hammered out.

"There's some pretty different perspectives on both the tax revenue (and) where we put money," Cowell said. "(There's) probably 10 major issues where we took a fairly different world view on it."

The budget also would set aside up to $16 million from a trust fund that receives money from the national tobacco settlement for cancer research at UNC Hospitals. The hope is for the allocation to one day reach $50 million annually, Hagan said.

The Senate budget would spend about $60 million more than the House on education, with the extra money largely going to the state's university system. The Senate would spend half of what the House set aside for additional direct help to low-performing schools and for literacy coaches in middle schools.

The Senate declined Easley's request to change the funding formula for the lottery, and instead provided an additional $37.5 million in tax money - rather than revenue from ticket sales - to help reduce class sizes in early grades.

But the Senate agreed to earmark $100 million, compared to $75 million from the House, over the next two years for Easley's college grant program. The program is aimed at helping low-income students get a public university degree without going into debt.