Diverse Economy Mitigates Recession

North Carolina is facing a budget deficit estimated at more than $1 billion for the next fiscal year -- about 7 percent of the state's total budget.

Scott Pattison, executive director of the National Association of State Budget Officers, said the entire nation is suffering from the recession, but states with a more diverse way of collecting revenue fare better under the current fiscal conditions.

For example, he said Florida relies almost entirely on sales tax revenue, and the state is facing a $1.3 billion budget shortfall because of declining tourism.

North Carolina depends on income tax for 55 percent of its revenue and sales tax for 26 percent.

Jack Vogt, a UNC School of Government professor, said the nationwide recession has especially hurt North Carolina because the state relies on income taxes for a large chunk of its revenue, and income taxes are directly linked to the state of the economy.

"Income tax fluctuates with the economy," he said. "If economy is in recession, then revenue from taxes falls."

Vogt also said the North American Free Trade Agreement and international trade had a negative effect on North Carolina's economy because they damaged the state's manufacturing industry. He said the Piedmont region was particularly hard hit, leading to double-digit unemployment in some counties.

Pattison said states have an especially difficult time during recessions because they do not have the same resources as the federal government. "States don't have the big tool that the federal government has in using deficit spending to wait (the recession) out," he said. "All the choices to solve the problem are very difficult, but you have to find them."

Pattison also said measures taken to decrease states' base budgets will assist in the recovery process.

But Fred Hartman, press secretary for Gov. Mike Easley, said the state would have been better served to have shown restraint in spending a few years ago while the economy was strong. "Maybe we should have kept an open eye when we were doing all that spending," he said.

The state spent roughly $1 billion each on increased teacher pay and tax cuts in the 1990s.

But Hartman said the state is suffering financially primarily because the recession has caused sales tax returns to fall. "Sales receipts are down," Hartman said. "When the economy slows down, people don't shop, and then they don't buy things."

Vogt said states with a rainy-day fund are better equipped to face a budget deficit than those without them.

"A state that has a rainy-day fund or emergency reserve can rely on that fund or reserve to bounce back more quickly," he said. "(North Carolina) established a rainy-day fund last recession in 1990-91 but used a lot of it when Hurricane Floyd hit. One could argue that North Carolina should carry a larger fund because of the volatility of its revenue sources."

But Hartman said the rainy-day fund left the state in a better situation than otherwise. "Other states are not in the same boat as we are because they drained their reserves," he said. "We didn't cut ourselves to the bone last year. We have our rainy-day fund, and obviously it's raining and that's what it's there for."

The State & National Editor can be reached at stntdesk@unc.edu.