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September 2003
North Carolina Needs to Learn Lessons Earlier than California!
By John Paul Galles

As state governments propose their budgets and manage their fiscal affairs, North Carolina appears to have fared substantially better than California. For the fiscal year ending 2003, North Carolina is reporting a meager surplus of $250 million. While revenues were actually less than expected at $14.l billion instead of $14.3 billion, spending was also less than expected at $13.85 billion instead of $14.3 billion. North Carolina state officials reported that Medicaid spending was lower than anticipated. California, on the other hand, is in chaos as the state reels from a $38.2 billion deficit with a state budget of nearly $100 billion and anticipates a recall of their governor as a result.

            Governor Easley recently signed a budget for 2003-04 totaling $14.8 billion that included a supplemental bill providing the governor with more flexibility to manage state finances. It includes an extension of the “temporary” half cent sales tax hike originally enacted in 2001. To the contrary, Governor Davis of California has little authority and flexibility in addressing budget matters. Many California voter initiatives limit legislative and gubernatorial discretion. They have established that a minimum of 40 percent of the general fund will be dedicated to K-14 educational purposes and that sales tax on gasoline sales will be dedicated to transportation and transit projects.

            Economic downturns consistently stress government budgets. In FY 2001-02, 41 states collected less in revenues than anticipated in their budgets. Population and economic growth in North Carolina in the ’90s supplied revenue growth so that the state could cut taxes in 1995, 1996 and 1997. At the same time, spending continued to grow.

     Both North Carolina and California budgets were seduced by capital gains tax revenues during the growth of the “irrational exuberance” of the stock market and dot-coms. In California they grew to nearly $20 billion in state revenues in 2000-01, which was 25 percent of general fund revenues.

     While revenues are driven down during recessions, spending demands grow. Aid to laid-off workers and Medicaid support increase. Support for community colleges also usually increases to meet the demands of workers seeking new skills to obtain new jobs.

      While signs of an economic recovery are beginning to appear, banking on that recovery to fund government spending would be quite risky for either California or North Carolina. Fortunately, North Carolina does not have to experience a recall of its governor before further examining its economic future.

      However, having been heavily reliant upon textile manufacturing, North Carolina has been swallowing the bitter pills of plant closures and large layoffs within its workforce. In the Charlotte region alone, Cabarrus, Gaston and Catawba counties have been especially hard hit. It has a certain similarity to California’s once-vibrant Silicon Valley. For either state to recover, businesses need to grow and expand and make profits. Enticing corporate growth is less likely with tax increases. Cutting spending on education, health care and job training also seems to stymie corporate investments.

     Job growth and economic growth will only occur when the key components of land, labor and capital align with vision and a business plan that produce products and services that are in demand and sell for more than their costs. Economic and tax incentives can be helpful in the final package that tip the balance in favor of one community or particular state.

     Turning the tide so that everyone benefits demands leadership and the foresight to do what is tough and right before the challenge becomes monumental. North Carolina can be proud to have faced its fiscal needs earlier than California. Unfortunately, there is still more to be done to create new jobs replacing the old ones that have been lost. It continues to be a painful process of economic restructuring that preoccupies our resources and our ambitions. Focusing our limited resources for maximum return is the target of economic development. We can invite corporations to relocate to the Charlotte region, encourage others to expand into our region, and enable new and smaller entities to grow in the Charlotte region.

    We need to do all we can as soon as we can to encourage and attract business before other communities and states beat us to the punch!

John Paul Galles is the publisher of Greater Charlotte Biz.
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