A report released Thursday predicts the dire budget situation in North Carolina will get worse over the next two years.

The North Carolina Justice Center predicts the 2010-2011 budget year, beginning in June, will see a $1.6 billion budget shortfall.

In 2011-2012, the non-profit expects the shortfall to grow to somewhere between $3.3 and $4.4 billion.

“It’s a serious situation, and I’m afraid it’s not getting any better,” North Carolina Senator Bill Purcell said Thursday.

He is a co-chairman of the Senate’s Health and Human Services, which saw what he termed “draconian cuts” when the 2009-10 budget was finalized.

He explained the state budgeted for two years, and is “supposed to tweak” the second year of the budget in this year’s short legislative session.

He went on to explain that “tweak,” in this case, means cut another 5 percent, or $216 million, in services.

“That’s not going to be easy, because we cut over $1 billion in state money from health and human services in the last budget,” Purcell said. “It’s not much fun when you’re having to cut services for children and the mentally ill and those types of things.”

Last year’s budget session stretched on a month longer than expected after Gov. Bev Perdue rejected the legislature’s original proposal. The finalized budget included about $3 billion worth of cuts. That was offset by about $1.5 billion in stimulus money from the federal government.

There has been talk of a second stimulus package, but the federal government generated a $714 billion deficit in the first half of the 2010 budget, according to the non-partisan Congressional Budget Office.

Unlike federal officials, North Carolina lawmakers are required to balance the state budget, meaning legislators aren’t allowed to saddle the taxpayers with deficits and have to “pay as you go” for social programs and services.

Purcell explained the state’s two largest sources of revenue are personal income tax and sales tax. Last year, income tax came in about 39 percent below projections.

“When people aren’t working, they’re not paying income tax and they’re not going out and buying things,” Purcell said.

In its report, the N.C. Justice Center emphasized the importance of taking “a balanced approach” to addressing the shortage of funds in the state.

That would include “finding efficiencies, tapping all available resources, eliminating ineffective tax expenditures, improving tax collections and other strategies,” according to co-author Elaine Mejia, who is the director of the non-profit’s budget and tax center.

According to the report, North Carolina is hardly alone in its budget woes, and 48 states are facing shortfalls in their budgets.

“In addition to depleting tax revenues, the recession has increased the demand for some critical public investments, namely health insurance for low-income children and adults and post-secondary education for workers who find themselves out of a job and thus turn to retraining opportunities,” a news release about the report reads.

“Maintaining investments in vital programs that educate children and retrain adult workers are effective ways to save money long-term and stimulate North Carolina’s economy,” report co-author Meg Gray-Wiehe said. “To maintain these investments in a better future, we need state policymakers to leave no stone unturned as they look for solutions to the state’s budget crisis.”

Purcell said lawmakers are turning over stones looking for ways to save money, but are running out of options. He said education could be the next service to go on the chopping block. He is also a member of the Senate’s education committee.

“We tried to protect education by eliminating some vacant positions and cutting elsewhere, but I think you’re going to see some cuts in education,” Purcell said.

He said in a meeting with Gov. Perdue Wednesday, she made it clear there is no money for any new programs.

One possible solution to the state’s budget ills Purcell has advocated is restructuring the tax base to include more services.

“The idea is to change our tax structure by lowering personal income tax, sales tax and corporate tax, and spreading your tax base over a number of services,” he said.

There are currently about 30 services the state taxes.

Purcell said political expediency may keep some legislators from doing what he feels is right for the citizens of the state, however.

“I don’t think you’ll see that happen this session because it’s an election year,” he said. “But this is something that has to be done in the future.”

Staff Writer Philip D. Brown can be reached at (910) 997-3111 ext. 32, or by e-mail at pbrown@yourdailyjournal.com.