RALEIGH — If leaders of the North Carolina House are right that the state needs a 6.3 percent increase in general fund spending for the coming year, then they were wrong two years ago when they helped craft an historic tax-reform package to boost North Carolina’s economic competitiveness.
Back then, you see, Democrats and liberal editorialists argued that across-the-board reductions in personal and corporate income taxes were not an effective way to boost job creation and economic growth. They said that North Carolina should instead spend more money on, among other things, targeted business subsidies.
During the 2013 debate, Republican lawmakers didn’t question the economic value of spending on basic services such as schools and roads. But they insisted that reductions in the overall tax burden were, indeed, a better tool for economic development than subsidies aimed at politically favored companies or industries. They also argued that fiscal discipline was essential to sound governance. Their arguments prevailed.
Fast-forward two years. With revenues exceeding forecasts, the General Assembly now finds itself with a $837 million cash surplus for the current fiscal year and healthy revenue growth projected for the 2015-16 and 2016-17 fiscal years.
Under the terms of the 2013 tax reform, these conditions will automatically produce a drop in the corporate income tax from its current 5 percent rate to 3 percent, which will make North Carolina’s business-tax climate even better while providing some $458 million in tax relief over the next two years to the shareholders, employees and customers of companies doing business in our state.
Not surprisingly, the tight budgets of the Great Recession and its aftermath have produced pent-up demand among public employees, contractors, medical providers and other spending lobbies. In some cases, they have a reasonable case for more funds. In other cases, however, their requests are best ignored.
The onset of healthier revenue growth for state government doesn’t excuse lawmakers from the need to exercise their most important muscle: fiscal restraint. Every dollar of the “surplus” is a dollar taken from the pockets of North Carolina households and businesses. That dollar either needs to be spent on a critical need or returned to its place of origin.
Calculated properly, the House budget as proposed on May 18 will increase total general fund spending by $1.3 billion during the fiscal year that begins July 1. That’s an increase of 6.3 percent. The operating budget alone, excluding capital spending, would rise about 4.9 percent, far more than the combined projections for inflation and population growth (2.7 percent).
Virtually all of the total spending increase fits into four categories: higher compensation for public employees (34 percent of the House’s new spending); enrollment increases for schools, universities and the Medicaid program (33 percent); facility construction and repairs (19 percent); and targeted economic-development grants (11 percent).
Take the last point first. Lawmakers should simply forgo the extra $145 million for targeted grants. Basic services and tax relief are higher priorities. As for pay increases, I think it would be wiser to go with a 1 percent across-the-board raise (on top of what legislators propose to do for starting teachers and other high-priority positions), rather than the 2 percent raise the House proposes.
To help offset the fiscal effects of enrollment increases, lawmakers should continue to reduce or eliminate low-priority items elsewhere in the budget.
As the state budget moves over to the Senate side, I’d like to see much lower growth in the operating budget (in the $570 million range at most, rather than the House’s $1 billion), which would allow for doubling the House’s proposed deposit into rainy-day savings to $400 million, and increasing by 50 percent its repairs and renovations allocation to $300 million.
Any remaining funds should be returned to taxpayers — perhaps by restoring the medical-expense deduction (which is needed for neutrality as long as the tax code continues to exempt health insurance premiums) and increasing the per-child tax credit.
Lawmakers were right in 2013 to prioritize general needs above business subsidies. Consistency should be the rule for 2015 and beyond.
John Hood is chairman of the John Locke Foundation, a conservative public policy think tank. Follow him on Twitter @JohnHoodNC.