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Steady state budgets winning the fiscal race

john hood

John Hood

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Monday, June 11, 2018

The recent legislative adjustments to North Carolina's 2018-19 state budget produced two main political controversies that we'll hear more about as we move through the campaign season to the November midterms.

One was about process. Rather than enact mid-course adjustments to the biennial budget by filing separate House and Senate bills, considering and enacting them through floor debate, and then appointing a conference committee to reconcile the two into a final conference report for an up-or-down vote, legislative leaders decided to skip all but the last step.

Democrats and some Republicans complained that this shortcut reduced their ability to shape the final outcome — by proposing amendments during floor debate, for example. Offensive comparisons of North Carolina lawmakers to North Korean dictators aside, this complaint had merit in my view.

The other controversy was about substance. Democrats charged that Republicans had shortchanged education and other priorities. Gov. Roy Cooper issued a statement condemning the revised budget plan and proclaiming that his own "proposed tax fairness for teacher pay along with forward thinking investments while saving responsibly." This political claim was meritless.

For starters, the term "responsible" should not be applied to Cooper's proposal, which contained a $1.5 billion spending increase in a single year, spent or allocated this year's General Fund credit balance down to zero, and left gaping holes in projected budgets for 2019-20 and 2020-21. "The only thing that saves it from being a completely irresponsible document," said my John Locke Foundation colleague Joe Coletti, "is the fact that it is all but completely irrelevant."

The governor's representatives stated that his higher spending would be financed by "freezing" scheduled tax cuts for corporations and "people making more than $200,000 a year." These statements were misleading. The extra personal and corporate taxes Cooper wanted North Carolinians to pay totaled $110 million in 2018-19, which is real money but represents only a small share of Cooper's $1.5 billion spending hike. Moreover, these extra taxes would apply to individual taxpayers with incomes starting at $100,000 — not exactly the corporate raiders and coupon-clipping plutocrats of the Left's fevered imaginations.

In recent decades, North Carolina Democrats have made a habit of enacting bloated budgets during growth years, thus pleasing the spending lobbies in Raleigh, and then raising taxes during recessions to make up the difference.

They did it in the 1980s. They did it again in the late 1990s. They did it still another time from 2004 to 2008. In each case, when recessions crimped revenues and boosted spending, Democratic legislatures resorted to tax hikes to fill the holes — mostly sales-tax hikes, by the way, although personal and corporate income tax also rose.

All the talk about how some state programs have yet to recover to the spending levels of 2008 (after inflation and population growth) misses the point entirely. That peak was the handiwork of Democratic governors and legislators who, as the hare did in his infamous race with the tortoise, had scampered ahead without foresight and discipline.

The Republicans currently leading the General Assembly are following a different approach. While also cutting taxes and regulations to make North Carolina a more attractive place to live, work, invest, and do business, they are increasing state spending gradually, keeping rough pace with annual changes in inflation and population while prioritizing K-12 education and public safety.

Because revenues have grown more rapidly than this steady pace of spending, the General Assembly has built up the first truly sizable savings reserve in state history. The sum of what will soon be a $2.06 billion rainy-day fund, $621 million in Medicaid reserves, and another $621 million in other reserves and credit balances represents a $3.3 billion cushion for when North Carolina experiences its next recession or disaster.

Other states aren't so well-prepared. Nor do they have as well-funded a pension fund. When a recession comes, North Carolina won't have to resort to panicky cuts or costly tax increases. Rather than frolic for political gain, true leaders focus on winning the race.

John Hood (@JohnHoodNC) is chairman of the John Locke Foundation and appears on "NC SPIN," broadcast statewide at 7:30 p.m. on Fridays and 12:30 p.m. Sundays on UNC-TV.

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