Bitter medicine's gag factor.

• Author: Mooneyham, Scott
• Position: CAPITALGOODS

Tom Ross hadn't been president of the University of North Carolina long before expressing a sobering thought. "This isn't a temporary economic downturn," he told members of the university system's board of governors. "This is an economic restructuring." That assessment might not seem surprising to most folks, not with the unemployment rate still hovering near 10% and home sales expected to be soft for the foreseeable future. Still, economic restructuring is a concept that Ross' fellow administrators overseeing state government may struggle to get their minds wrapped around.

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In a state where the budget must be balanced, the economy is tied to the budget, the budget to the economy. When times are good, tax revenue increases, the state's purse strings loosen. When times aren't so good, the purse strings cinch. Legislators and governors have two choices. Neither involves borrowing their way out of the mess. They must raise taxes or cut spending. Either decision will ripple through the broader economy.

The new Republican majority in the General Assembly shows no inclination to extend $1 billion in tax hikes scheduled to expire in July. "We will not extend those temporary taxes. We are going to keep the promises we made to the people," says Phil Berger, the Senate's new boss, sentiments his counterpart in the House, Thorn Tillis, seems to share.

The line they drew in the sand on the opening day of the new legislative session doesn't provide much wiggle room. Another player in the debate--Democratic Gov. Beverly Perdue--might have a different take. Earlier in the year, she said she'd like to see the sales and income taxes adopted two years ago as an emergency measure expire as well. On the eve of the session, she sounded less sure.

Assuming legislative Republicans carry the day, state agencies, including the university system, could be forced to make about $2 billion in real, year-over-year cuts to a $19 billion state budget. Without drastic improvement in the employment picture, the outlook for those agencies won't get better anytime soon. The reason: Individual income-tax collections account for more than half of the state's operating budget. So state government will experience some of that restructuring. Perdue already has laid out plans to consolidate some state agencies to save money on human-resources and information-technology operations. It won't stop there.

You can't make significant cuts to state government without...