A decade of fiscal responsibility and sustainable government could be squandered unless North Carolina taxpayers build some financial guardrails in the state constitution.
A report by the John Locke Foundation says a tax and spending limit needs to be enshrined in the constitution to strengthen the economy, protect taxpayers, and limit growth of government spending. State laws alone aren’t enough, says Joe Coletti, John Locke Foundation senior fellow for fiscal policy.
“If you control spending right, government becomes more sustainable,” Coletti said. “When you control spending, you don’t have to raise taxes in a recession, you don’t have to lay off everybody or furlough everyone else. Government can function.”
JLF researchers concluded that North Carolina should consider a constitutional amendment similar to Colorado’s Taxpayer’s Bill of Rights. Colorado requires the government to return excess revenue to taxpayers if its revenue outpaces the growth in inflation and population.
North Carolina’s General Assembly has controlled spending over the past decade, keeping the growth of government spending level with inflation and population growth. State General Fund appropriations increased only 2.8% between fiscal years 2010-11 and 2018-19.
That fiscal restraint allowed the legislature to pass tax reforms that saved North Carolinians $18 billion since 2011.
Living with its means also helped the state build strong reserves, helping it deal with the coronavirus pandemic. North Carolina had $1.5 billion unspent in its General Fund in July, as well as more than $1 billion in the rainy-day reserves and savings.
The legislature hasn’t had to raise the sales tax to cover its obligations as it did during the Great Recession. Spending had grown by 5.4% from 2000-1 to 2008-9.
“For state government employees, it’s less likely that they’ll lose their job to balance the budget,” Coletti said. “For everyone else, lower spending today means that there’s less of a chance your taxes will go up in the next recession.”
But by themselves, laws lack staying power. The legislature flips between parties, and lawmakers’ priorities change with the sessions, said Coletti.
Fiscal conservatives aren’t always going to be in charge, Coletti said. “No current legislature can bind the actions of a future legislature, even if it’s all the same people. Any law that [one set of lawmakers] make can be repealed or ignored.”
Gov. Roy Cooper has pushed for more spending and more borrowing. His two most recent budgets would have increased spending 5.6% per year. He proposed $4 billion in bonds during the pandemic and the economic slowdown.
That spending comes with a cost.
Personal income tax rates would roughly have to double, to 6.2%, if North Carolina adopted collective bargaining for public-sector unions, expanded Medicaid, and poured money into Cooper’s other priorities. The economy would take a $7 billion hit from slower growth over four years, shedding 5,500 more jobs each year than it would under the 2.7% spending rises in recent years.
That’s why Coletti’s paper recommends enshrining a tax and spending limit as a constitutional amendment.
“The lesson from Colorado is that if you have a constitutional limit, it can make it a little harder for people to overspend,” Coletti said.
The need for constitutional protections are more important than ever, says Coletti. The coronavirus crisis pushed government spending for public services and business relief to massive levels.
Before the pandemic, North Carolina funnelled 16.8% of its Gross Domestic Product into state and local government spending. But after the shutdowns, government spending swelled to 62% of GDP, with federal spending consuming a whopping 47% of GDP in the second quarter of 2020.
“Every dollar lost from the economy means that there’s a dollar lost for someone trying to put food on the table,” Coletti said. “And for every opportunity that’s lost, that’s one less person who can advance economically in life.”