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Financing the Future: Fiscal Modernization in North Carolina Dr. Roland Stephen January, 2007

Financing the Future: Fiscal Modernization in North Carolina Dr. Roland Stephen January, 2007. The Institute for Emerging Issues Financing the Future. IEI is a think and do tank that turns ideas into action.

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Financing the Future: Fiscal Modernization in North Carolina Dr. Roland Stephen January, 2007

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  1. Financing the Future: Fiscal Modernization in North Carolina Dr. Roland StephenJanuary, 2007

  2. The Institute for Emerging Issues Financing the Future • IEI is a think and do tank that turns ideas into action. • We help new combinations ofleaders adoptinnovative public policies to prepare North Carolina for its future. • Financing the Future is a program of work to modernize state and local finance. 

  3. North Carolina’s Future: Opportunities and Challenges • North Carolina: A brilliant future, significant challenges: • Population Growth: Urbanization, Dependency Ratio • Spending Growth: Healthcare,K-12, Higher Education,Roads,Infrastructure • Financial Modernization: Efficiency, Public-Private Partnership, Reform

  4. North Carolina in the Year 2030 The population of North Carolina is growing rapidly

  5. North Carolina in the Year 2030 Yet population growth is not evenly distributed across the state *Each dot represents 150 additional people over the current population

  6. North Carolina in the Year 2030 And the population is aging, especially in rural areas

  7. Major Expenditure Trends Medicaid expenditures have risen rapidly and will continue to rise as the population ages.

  8. Major Expenditure Trends • The cost of higher education will rise • The cost of new schools will be concentrated in rapidly growing urban areas. 14.0 10.0 Billionsof $ 6.0 K12 2005 2010 2015 2030 Higher

  9. Major Expenditure Trends • 2.4 million new residential housing units by 2030. • $30 billion financial gap for new infrastructure

  10. North Carolina Revenue Outlook • General Fund availability in excess of $2.4 billion last year • But: 80% of that excess was non-recurring (or one time). • Future revenues look bleak.

  11. Hard Choices No magic money tree for the state! • Reduced costs and increased efficiencies in all programs • Creative public/private funding partnerships • Modernization of North Carolina’s system of tax and finance

  12. Hard Choices Modernization of state system of revenues has two elements: • Adopt sufficient, stable and fair system of revenues • Review division of responsibilities between state and local government The solution cannot be piecemeal

  13. Modernizing Tax and Finance Sales Tax • Discriminates against manufacturing • Relies on a shrinking base • Regressive dependence on goods

  14. Modernizing Tax and Finance The sales tax base is shrinking as percentage of the economy.

  15. Modernizing Tax and Finance The Income Tax • Depends on “bracket creep”: Unseen tax increase on the middle class • Volatile: New spending or painful cuts • Uncompetitive: High rates, often paid by small business

  16. Modernizing Tax and Finance NC depends heavily on the income tax …

  17. Modernizing Tax and Finance Growth in state revenues is volatile.

  18. Framework for Change Change must meet three requirements: • Sufficiency • Efficiency • Equity

  19. Framework for Change Change must be achieved through: • Balance among sources of revenues • Broad base • Low rates • Targeted social spending

  20. Conclusion State and Local Responsibilities • There are things that the state says it will pay for, but does not (ie, adequate roads & funding to operate schools) • There are things that county governments do pay for, but shouldn’t (ie Medicaid) • There are things that local government could pay for (ie, roads in urban areas) or are unable to pay for (ie, water and sewer in rural areas) • There are things that local government should pay for but sometimes won’t (ie, capital school construction) • There are things that the state says it will do but does not (ie., roads, adequate school funding) • There are things that local government wants to do but cannot (ie, roads in urban areas, water and sewer in rural areas) • There are things that local government should do but won’t (ie, capital school construction) • Only a comprehensive solution to fiscal modernization can address all of these challenges.

  21. State and Local Responsibilities This tangled web of state and local finance requires the following: • Responsibilities and funding should be matched by an appropriate source of revenue at every level of government. • Only a comprehensive solution to fiscal modernization can address all major challenges

  22. A Word about Politics • Painful political choices are inevitable • Choices avoided here will be forced on us in other ways • Change today is likely to be easier than change tomorrow

  23. Financing the Future: Fiscal Modernization in North Carolina Dr. Roland StephenJanuary, 2007

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