State's Finances Could Suffer Under Bush's Economic Plan

North Carolina's budget crisis might worsen under President Bush's new economic stimulus package, through which the state could lose up to $192 million in tax revenue and see a rise in the cost of municipal bonds, experts say.

One section of Bush's $674 billion plan, which he unveiled Tuesday, suggests eliminating income tax on dividends to encourage consumer spending and investment in the stock market.

But experts say most dividends only would aid the most affluent of investors and only cause a small increase in initial spending by consumers. It would not help the financial status of the state.

Some elected officials think Bush's plan for tax cuts also will worsen an already bad economic situation for the state.

"Already the budget gap is $2 million for the 2003-2004 fiscal year," said Dan Gerlach, senior fiscal policy adviser to Gov. Mike Easley. "If the plan passes Congress, the state could see either a budget cut or an increase in other taxes."

Several N.C. politicians also are disputing whether to implement Bush's proposal, said David Crotts, senior economic analyst for the N.C. General Assembly.

"State revenues have been hurt by previous plans with promises of Medicare opportunities and terrorism relief," he said. "This will encourage many states to not conform with the federal government because of budget problems."

Easley's staff estimates the loss of dividend taxes could equal $170 million annually, but Crotts said it easily could reach $192 million.

If Bush's proposal becomes federal tax law, the states will decide whether to go along with the new plan.

"We did not conform with the bonus depreciation policy or the estate tax cut," Crotts said. "It's possible that many states will not conform to dividend changes because of their own budget problems and lack of attention from Washington."

But officials say that because the proposal has yet to pass the U.S. Congress, there is still hope for a different course of action. "This proposal still has a long way to go," Gerlach said. "It might change more with advantages for states."

Crotts also said there is a good chance that Congress only will reduce partially the dividend tax.

Even if Bush's proposal were passed wholesale, many experts are skeptical about the degree to which it could impact the economy. Experts say consumers will continue to be wary of spending money due to the looming possibility of war.

To encourage businesses to increase spending, Bush's plan also would give some businesses $75,000 for operating costs instead of the current $25,000 subsidy they receive. But businesses are wary about consumer spending due to the struggling economy, Crotts said.

"Even though the cost of investment for business owners would decrease through this plan, many might be concerned by consumer demand for their products and not put their relief money back into the economy," he said.

But some say N.C. officials have erred by making a static analysis by assuming the Bush plan will not work, unemployment will not drop and people will not spend the money they gain from dividends, said Roy Cordato, vice president for research at the John Locke Foundation, a conservative think-tank in Raleigh.

"I think it's certain that citizens will gain from this plan," he said. "The government may lose money, but nowhere near what the governor is suggesting.

"The state will not be in a deep economic distress. They might lose some money, but what the government loses will come back as soon as people begin spending what they gain from the tax cuts."

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