As summer settles in, the North Carolina General Assembly again finds itself feuding over competing budget proposals. The Senate favors solidifying and expanding reductions to the personal income tax rate and providing modest raises to teachers and state employees. Meanwhile, the House supports larger raises and increasing revenue triggers, which would make future revenue-based personal income tax rate cuts unlikely.

Last month, I proposed that the chambers bridge the divide on the personal income tax rate by replacing the plan for three 0.5-percentage-point reductions with six 0.25-percentage-point reductions.

While this would help to mitigate the possibility of a revenue shortfall, as I stated last month, there is a deeper issue: rapid expansion in spending growth since the pandemic.

Perhaps agreeing to spend less could be just what’s needed to break the impasse and jump-start a path to compromise.

Why $32.59 billion?

One central point of agreement between the House and Senate is the decision to spend $32.59 billion. But how did lawmakers arrive at that number? Why not $32 billion? Or $31.5 billion? The simple truth is that post-COVID revenue surpluses gave legislators room to grow spending quickly — without stopping to ask whether they should.

Take recent budgets as evidence. In the 2021 biennial budget, net General Fund appropriations for fiscal year (FY) 2022–23 were slated to be $26.98 billion. However, when revenues came in stronger than expected, the 2022 budget adjustment bumped that to $27.9 billion. That adjustment added nearly a billion dollars ($920 million) in permanent spending going forward.

In the biennial budget crafted in 2023, lawmakers approved $30.9 billion in spending for FY 2024–25. But again, following robust revenue collections, that figure was raised to $31.65 billion, effectively locking in an extra $1.67 billion of permanent spending (this extra $750 million along with the previous $920 million). Without those, we would today be discussing a budget closer to $31 billion, not one approaching $33 billion.

That money could have gone back to the taxpayers who earned it, such as working families struggling to keep up with utility bills. It could have bolstered the state’s Savings Reserve. Instead, it became the new status quo — unquestioned and automatic.

In a year defined by division, embracing a leaner budget, say $32 billion, might be what policymakers need to reset the table and finally reach a compromise.

State spending

The agreed-upon spending limit of $32.59 billion would cause the growth rate in state appropriations over the six fiscal years since COVID-19 to exceed the prior 13 fiscal years leading up to the pandemic. In effect, policymakers have more than doubled the speed at which state spending grows.

Specifically, spending $32.59 billion in fiscal year FY 2025–26 would represent a striking 34% increase in net General Fund appropriations since FY 2019–20, when spending totaled $24.41 billion. By contrast, state spending increased by 31% from FY 2006–07 to FY 2019–20.

Limiting spending to $32 billion in FY 2025–26 would result in a still-robust, yet more reasonable, post-COVID growth rate of 31%. After five years of accelerating spending growth, it is time to slow down and pump the brakes.

Health and human services and education account for more than 80% of net General Fund appropriations and are the driving force behind the runaway expenditures.

The growth in net General Fund appropriations for Medicaid over the last four years is particularly startling. Proposed Medicaid spending for FY 2025–26 for both chambers would mark an increase of more than 60% since FY 2021–22.

Education is the state’s largest expenditure category, comprising nearly 60% of all net General Fund appropriations. The lion’s share of education spending pays for salaries, benefits, and pensions for employees of the UNC System, North Carolina Community College System, and the Department of Public Instruction.

Both the House and Senate spending plans would increase total education spending by more than 32% compared with six years ago.

Closing thoughts

Both chambers’ budgets include unnecessary additions, such as $1.5 million in the Senate plan for microbudget film grants and $1.5 million in the House plan for the Winston-Salem Speedway. But the core challenge isn’t just pork or pet projects.

With a base budget that has ballooned to $31.33 billion since the pandemic, any meaningful reset will require a thorough reexamination of the baseline expenditures baked into the budget over the past several years.

The pork, economic development handouts, and nonprofit giveaways should be cut. Still, the math shows that nearly 85% of net General Fund appropriations are committed to Medicaid and to state employee salaries, benefits, and pensions.

It’s time to spend less and move forward with the 2025 biennial budget. Policymakers should reduce the FY 2025–26 budget to $32 billion, which would still mark a 31% increase since FY 2019–20. Doing so would make a compromise far easier.