RALEIGH — State officials are reporting that North Carolina revenue collections continue to run slightly ahead of projections for the 2003-04 fiscal year. But as the General Assembly prepares to reconvene in May for its short budget-adjustment session, lawmakers would be foolish to expect a lot of new money to toss around in an election year.
You have to keep your eye on the ball when analyzing state-budget trends. Things can sometimes not be what they seem — just ask that billion-dollar-cutting governor, Mike Easley. Billowing smoke and shiny mirrors can lead you far astray within the not-so-funhouse of Raleigh. And there are factors, economic and fiscal, that lay outside the immediate control of appropriators in the General Assembly.
When you parse the statements of budget officials about the projected “surplus,” for example, complexities begin to present themselves. First of all, as the Associated Press I linked above notes, there are two different numbers circulating around the state capital about the size of the surplus-to-date. The larger one, $133 million, is inflated by the inclusion of an earlier-than-expected transfer of Highway Fund dollars into the General Fund and by a later-than-expected pay out to local governments and nonprofits for sales-tax refunds. The true, underlying surplus appears to be only $24 million, more or less a rounding error.
Second, these revenue numbers are all preliminary. The month of April is the big month for state revenue collections, for obvious reasons. At the federal level, it appears that many taxpayers are receiving larger-than-expected refunds due to the continuing implementation of the Bush tax cuts. Collections of taxes on dividends and capital gains are also below previous expectations because investors are continuing to carry forward their losses from the 2000-02 bear market, thus offsetting what might otherwise be increases in taxable income. North Carolina leaders won’t really know where they stand until quarterly payments and 2003 tax returns come in through mid-April.
Finally, this discussion is all about the revenue side of the ledger. Even if the numbers continued to look OK there, state legislators won’t have a budget surplus to play with for FY 2004-05 if state spending comes in above projections. There has already been some talk that Medicaid expenditures, a major driver of state budget trends, may present an unwelcome surprise to state leaders this year.
A small budget surplus materializing for FY 2003-04 won’t help Gov. Easley and lawmakers much, anyway. The current 2004-05 budget is essentially a shell. It doesn’t include money to finance growth in higher-education enrollment, ABC bonuses to state teachers, and repairs and rainy-day reserves. It doesn’t include money to offer state employees a raise. It doesn’t cover any expected inflation in Medicaid costs for 2004-05. It doesn’t offer any wiggle room to those seeking a corporate-tax cut. In short, there are hundreds of millions of dollars of potential demands for new spending, possibly approaching $1 billion. Unless a $24 million surplus in February becomes a whopping one in June, expect another round of tough budget choices in 2004.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.