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Opinion,Taxes and Budget

The Real North Carolina Budget

Mar. 2nd, 2012
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RALEIGH – If all you know about North Carolina’s state budget is what you see in headlines or hear in political ads, you don’t know enough. Most politicians and analysts talk only about the General Fund – the share of state spending paid for by North Carolina’s income tax, statewide sales tax, and a few other sources.

Yes, the General Fund pays for most teacher salaries and prison beds. And the General Fund is directly under the control of North Carolina governors and lawmakers, unlike some other parts of the budget.

But the General Fund, which totals nearly $20 billion this fiscal year, only represents 39 percent of North Carolina’s state budget of about $51 billion. When I first moved back to North Carolina from Washington in 1989, the General Fund accounted for fully 60 percent of state spending.

One big change has been in the relationship of Washington fiscal policy to that of North Carolina (and to all other states). In 1989, federal funds made up about 20 percent of the state budget. In the 2011-12 fiscal year, federal funds make up 36 percent of the state budget, mostly in the areas of Medicaid, social services, education, and unemployment benefits.

In other words, government revenues raised either by federal borrowing or federal taxes and fees pay for nearly as much state spending in North Carolina as do government revenues raised by General Fund taxes and fees. Because virtually every “federal” dollar spent in North Carolina comes from a federal taxpayer in North Carolina (either today or, in the case of debt, in the future), it is truly silly – and highly misleading – to focus on the $20 billion General Fund as if it were “the” state budget of North Carolina.

So, of the $51 billion state budget, $20 billion comes from the General Fund and $18 billion from federal funds. That still leaves $13 billion in annual state spending unaccounted for.

Nearly $3 billion of that represents transportation spending in either the Highway Fund or the Highway Trust Fund. These are also taxes and fees collected primarily from North Carolinians, in their capacity as owners of vehicles or purchasers of motor fuels. Unlike federal funds, highway funds have declined as a share of the state budget, from 10 percent in 1989 to six percent today.

The remaining $10 billion is classified as “other revenue.” What is it? Well, one way to think about state government is that it is a holding company for dozens of separate enterprises – educational institutions, medical providers, grantmakers, regulators, and infrastructure financiers, for example – that collect receipts as a part of their daily operations.

Of the University of North Carolina system’s $4 billion budget, for example, receipts and other enterprise revenues outside of the General Fund account for nearly one third of the total. State government also manages an unclaimed-property (escheats) fund, purchases information services, operates a state lottery, manages a portfolio of financial assets and liabilities, and manages a portfolio of fee-generating real estate (such as the State Fairgrounds in Raleigh). All of these activities, and many more, generate revenues of various kinds.

My point is that if you look only at the General Fund – leaving out federal funds, highway funds, receipts, and other revenue – you are looking at far less than half of what North Carolina state government does every year. You are undercounting how much money gets spent on major programs such as education, health care, and transportation. Because these funding shares have changed over time, you are likely overestimating the fiscal impact of recent General Fund budget cuts and underestimating the extent to which North Carolina continues to spend a tremendous amount of money on programs of wildly varying justification or effectiveness.

North Carolina’s state budget this year is $51 billion, not $20 billion. Even that doesn’t include fiscal liabilities that will be accrued this year but don’t show up on the budget, such as the future cost of paying future benefits to current state employees.

Sound like a lot to you? It should.

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Hood is president of the John Locke Foundation and publisher of CarolinaJournal.com.