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John Hood: Caution on the state budget

Writer

John Hood

RALEIGH — While North Carolina legislators and Gov. Roy Cooper haven’t yet received the report on state income taxes paid or refunded by the April deadline, they shouldn’t count on a positive “April surprise” to make fiscal decisions for them. There are some very real and very important choices ahead regarding state taxes and expenditures.

As of the end of March, growth in state General Fund revenues for the 2016-17 fiscal year is solid but not spectacular, up 3.7 percent over last year. General Fund expenditures are up 4.1 percent over the same period.

That’s not necessarily a cause for alarm — state government is still running a cash surplus, and the differential will likely change by the end of the fiscal year in June — but it may be an argument for caution as lawmakers finalize their budget for the 2017-19 biennium.

Here’s another argument for caution. While recent growth in North Carolina’s gross domestic product (GDP) has been impressive, other indicators such as job creation and per-capita income growth place our state close to the national and regional averages, not above them. That’s a deceleration, though again nothing that ought to provoke panic. These numbers tend to bounce around throughout the year.

House Speaker Tim Moore, Senate leader Phil Berger, and their colleagues have signaled clear priorities for the 2017 legislative session. On the budget, they want to continue their multi-year plan to boost teacher pay — which emphasizes performance, not just across-the-board raises — while providing additional pro-growth tax relief and building up more savings reserves to hedge against recession in the short run and to offset the state’s unfunded liabilities in the long run.

These fiscal priorities can be
met, but not without disappointing some other political constituencies and spending lobbies. Fiscal conservatives embrace the reality of trade-offs. We recognize that the political temptation to say “yes” to everyone is both strong and dangerous.

Since the Republicans won their majorities in the North Carolina legislature in 2010, they’ve largely resisted the temptation. They’ve stuck to their priorities. The state tax burden is substantially lower than it was in 2010. The state’s savings reserves are substantially larger, including nearly $1.5 billion in the rainy-day account and another $400 million in Medicaid reserves. And expenditures are up markedly in high-priority areas.

Inevitably, then, state expenditures haven’t grown much in other areas. In fact, as a share of GDP, state spending in North Carolina has gone down during the past few years and is now at its lowest point in recent history.

I’ve noted this trend before, prompting some critics to observe that looking at state spending alone is insufficient. They’re right about that. States can make their budgets look artificially low by moving some programs off-budget or by transferring funding responsibilities to local governments.

In response to this concern, I recently pulled data for all 50 states that includes both state and local spending. In 2014, the last year for which all the data are available, state and local expenditures made up a combined 9.17 percent of GDP in our state. That’s the lowest rate of government spending in North Carolina in many decades, and is down more than 10 percent since 2010.

Most states have also seen their government expenditures drop as a share of GDP since the end of the Great Recession. But North Carolina’s drop exceeds the national and regional averages. Because our state’s economy grew faster than government spending did in 2015 and 2016, as well, this trend will only look better  as more years of data are reported.

If Congress does its job of reforming the federal tax code, repealing and replacing the Affordable Care Act, and pruning the regulatory thicket, North Carolina will benefit from the resulting economic tailwind. But the effects won’t be immediate, just as most of the benefits of North Carolina’s own pro-growth reforms have yet to be fully realized.

In the short run, then, fiscal caution is warranted.

John Hood is chairman of the John Locke Foundation and appears on the talk show “NC SPIN.”

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