So far this year, North Carolina’s state budget is running a surplus. There’s nothing new about that — robust economic growth and fiscal restraint have produced a series of healthy surpluses since 2014. But both the Cooper administration and the General Assembly need to temper their expectations about next year’s budget.
I recognize that neither party may be in the tempering mood. Gov. Roy Cooper, now backed by larger Democratic minorities in the North Carolina House and Senate, talked during the 2018 campaign about significant spending hikes for education, health care, and other services. Some Republicans did, too, while others dangled the possibility of additional tax relief.
The context of state budgeting in 2019, however, argues against major new initiatives in either direction. Last year, the General Assembly gave public schoolteachers an average raise of 6.5 percent, plus significant raises for other state employees and increases in many other state programs. Total expenditures in the state’s General Fund went up by nearly $1 billion, an increase of between 3.85 percent and 4.5 percent (depending on how capital expenditures are accounted for).
North Carolina’s tax rates will also go down again without any additional action by the General Assembly. Thanks to budget bills already enacted, the state income tax is declining to 5.25 percent, down from about 5.5 percent, and the corporate rate will drop half a point to 2.5 percent.
Democrats may wish to refight the tax-cut battles of the past several years. Some Republicans may wish they’d been more careful about last year’s spending growth. But I don’t see the General Assembly going along with any proposal from Cooper to raise taxes, and I don’t see the governor — his negotiating position newly strengthened thanks to Democratic gains in the legislature — viewing with favor any major GOP initiative to pare back government in some areas to fund new spending in others.
One possible outcome could be an impasse that delays approval of a new state budget well past the July 1 start of the 2019-20 fiscal year. That won’t produce a fiscal crisis — current law allows North Carolina state government to continue operating at currently budgeted levels — but it will produce political turmoil and frustration.
A better way to proceed would be for both sides to enter next year with eyes wide open and appetites in check.
During the first third of the current fiscal year, the state collected $7.7 billion in General Fund revenues and spent about $7 billion on General Fund programs. Don’t get carried away by the apparent size of that operating surplus, however. Revenues and expenses aren’t spread evenly across the year. Upcoming spending obligations and tax relief will change the math. And the effects of recent storm damage on both sides of the budget are not fully priced in, yet.
So far, legislative fiscal analysts project that General Fund revenue is about $64 million higher than originally projected when the 2018-19 budget plan was enacted. That’s closer to a rounding error than a lucky strike in the context of a $23 billion General Fund and a total state budget in excess of $50 billion.
Keep in mind, as well, that America’s current economic expansion is long in the tooth by historical standards. A downturn would hardly be surprising at this point. North Carolina had $1.8 billion in its rainy-day reserve before the hurricane hit. Now it is $1.25 billion, plus some other reserves.
If recession comes, tax collections will fall short of the projected level and spending demands will surge far above it. Under that scenario, it will be good to have our current fiscal cushion. But it would be great to have even more saved up to cover the state’s core responsibilities while heading off any economically counterproductive tax hikes.
It’s not particularly exciting, I suppose, to go off to Raleigh as a newly elected or reelected lawmaker and then fashion a responsible budget without large-scale changes or dramatic new initiatives. Still, I think North Carolinians would prefer prudence to excitement.
John Hood (@JohnHoodNC) is chairman of the John Locke Foundation and appears on “NC SPIN,” broadcast statewide Fridays at 7:30 p.m. and Sundays at 12:30 p.m. on UNC-TV.