The following editorial was published in the November 2016 print edition of Carolina Journal:
North Carolina’s office of state controller reported a General Fund surplus of nearly $1 billion in its final report on the 2015-16 fiscal year. As we’ve noted earlier, this surplus is a direct consequence of growth-oriented tax reform and simplification, prudent fiscal management by state officials, and a voluntary commitment by leaders in the General Assembly and the Executive Mansion to keep spending growth below the combined rates of inflation and population growth.
But there’s no guarantee this pattern will continue. North Carolina has a balanced budget amendment, after all, but that budget can be balanced by restraining government growth or by creating a tax-and-spend state.
For several decades, North Carolina moved away from fiscal responsibility and created a political culture in which increasing taxes, with the intention to spend more, was an acceptable policy. Polls reveal that a majority of North Carolinians support a cap on state spending. To date, however, lawmakers have been unwilling to ask North Carolinians to approve an amendment to the North Carolina Constitution that would limit the growth of state government indefinitely.
That needs to change. Over the last four years, spending growth has been close to the level of inflation and population growth, but through much of the 2000s, spending growth far outpaced those rates.
A variety of pressures, including changes in the ideological disposition of the General Assembly or the governor’s office, could lead future legislatures to return to the tax-and-spend patterns of the past.
A constitutional amendment limiting spending growth would help to protect North Carolina taxpayers. The John Locke Foundation’s recently published Agenda outlines how one should be crafted. (Read the entire document here.)
- The amendment should limit annual state spending growth to no more than the projected rates of inflation and population growth. It should allow spending growth to exceed the cap only if approved by public referendum. Such a spending cap would better align the long-term interests of taxpayers to the short-term interests of politicians.
- The amendment should mandate that any revenues collected above the annual spending cap be deposited into a rainy day fund or returned to taxpayers.
- The amendment should be written to avoid the ratchet-down effect. In periods of revenue shortfall, spending should be held constant until revenues recover and again exceed that limit. The rainy day fund or budget stabilization fund would be used to offset at least part of the revenue shortfall.
- The amendment should establish other constitutional constraints on fiscal policy, such as a requirement that any state tax hikes receive supermajority approval from the state legislature.
With these safeguards in place, legislators will have enough money to fund the core functions of state government adequately and the flexibility to adapt to economic downturns. The 2017 session of the General Assembly needs to get on board.