A Bit of a Tight Spot

By Mitch Frank with reporting by Constance E. Richards/Asheville

George Bush told reporters last week that a "fiscal straitjacket" is good for government. Maybe he should ask Mike Easley how it feels. Easley became Governor of North Carolina in January, dreaming of smaller class sizes and a prescription-drug benefit for seniors. These weren't wild fantasies; his predecessor, fellow Democrat Jim Hunt, doled out plums for eight years while the economy boomed--a pre-kindergarten program for low-income kids, big pay raises for teachers, $1.5 billion in tax cuts.

But Easley woke up from his sweet dreams to find his arms pinned to his sides. During his first five months in office, the slowing economy opened up an $850 million budget shortfall; he had to spend the state's entire rainy-day fund to keep North Carolina running. Now Easley is urging the legislature to pass a $440 million tax increase to prevent another deficit next year.

Easley isn't the only Governor feeling helpless. After a decade of good times, most state governments are being forced to either slash budgets, spend their savings or raise taxes. So far, 17 states have dealt with shortfalls.

Few Governors have followed Easley's lead of proposing tax increases. State legislatures have cut taxes a total of $36 billion nationwide since 1995; most aren't ready to admit the party's over. Virginia Republican Governor Jim Gilmore, who criticized Easley's tax increase, dealt with his state's $420 million shortfall by cutting pay raises for state workers and freezing construction projects at state universities. The Virginia legislature tried to block Gilmore's repeal of a state car tax so such deep cuts wouldn't be needed, but Gilmore prevailed. Now a new budget gap may force him to cut another $52 million.

In Tennessee the tax debate got even uglier. Republican Governor Don Sundquist lobbied his legislature in June to impose the first-ever state income tax. Antitax protesters, egged on by a talk-radio host, surrounded the capitol, banging on the doors, throwing rocks through windows and scaring legislators into dropping the new tax. Instead they used the state's $560 million share of the national tobacco settlement to balance the books. More than a dozen states have tapped rainy-day funds or tobacco money so far.

While no one in North Carolina is throwing rocks just yet, a protester lobbed tea bags from the house gallery during a tax debate last month. The troublemaker was dragged out; state legislators probably wish they would be. The North Carolina house and senate remain deadlocked over the best way to raise taxes. Eight renegade Democrats in the house are joining with Republicans to block any increases. The budget is two months late. One Republican, state representative Cary Allred, tried to save money by raising tuition for out-of-state UNC students. "How much culture can we absorb from New Jersey? How much do we want?" he asked. Some legislators are criticizing Easley for being too tentative during the crisis, but the new Governor has clung to his priorities. He's still working to shrink class sizes. "We simply cannot, and will not, let a budget shortfall become an education shortfall," said Easley. He sounds good, for a guy in a straitjacket.

--By Mitch Frank, with reporting by Constance E. Richards/Asheville