Resist impulses on budget surplus

John Hood Columnist

As of January 31, state government had collected $12.1 billion in General Fund revenue and expended $11.2 billion on education, Medicaid, and other state programs since the beginning of the 2015-16 fiscal year. In other words, it ran a cash surplus of about $900 million.

While state redistricting and national politics are getting most of the headlines right now, you can be sure that North Carolina politicos are well aware of the current budget numbers and their implications. The industries, vendors, and public employees who pocket most state expenditures are ramping up their lobbying efforts for the legislative session that begins in April. Incumbent lawmakers are drafting their own plans, both fiscal and political, for the coming election-year budget.

My advice remains the same as it was this time last year, when North Carolina’s fiscal situation seemed dire: don’t jump to conclusions.

Current conditions do suggest that at least a modest budget surplus will exist by the end of the fiscal year in June. But neither state revenues nor state expenditures are evenly distributed throughout the year. A disproportionate share of income tax revenue, for example, comes in at or near the April 15 filing deadline.

Last year, disingenuous liberals and panicky worrywarts looked at the early numbers and concluded that North Carolina’s tax reforms had reduced revenue far more than projected. What really happened was that the pattern of income-tax collections changed, with most North Carolinians keeping more of what they earned from each paycheck (because of lower withholding) but then some paying more at the end of the year than they were used to (because of fewer special deductions).

Now that the changes in collection patterns are present for both years of comparison, a very large and positive “April surprise” for 2016 is less likely than it was last year. Indeed, the legislature’s fiscal staff says that General Fund revenue is running about $108 million above projected amounts for the first seven months of the 2015-16 fiscal year. That’s measurable, certainly, but hardly massive.

On the spending side, early indications suggest that Medicaid inflation has moderated and other programs may be below budgeted amounts, as well. In fact, the state has spent about $12 million less on General Fund programs so far this year than it did during the same period a year ago. Just as with revenue, however, expenditures are not evenly distributed across 12 months. They can be lumpy.

If a healthy surplus does present itself by the end of the year, I would still urge both Republicans and Democrats to resist their natural impulses. The first thing to do is to make another large deposit into the state’s rainy day fund, particularly given the rising risk of a national recession. North Carolina currently has nearly $1.6 billion in formal and informal reserves. I’d like to see that number get to around 10 percent of the General Fund Budget, which would take another $400 million to $500 million.

Lawmakers should also enact another round of compensation adjustments for teachers and other public employees. I’d recommend a mix of across-the-board raises and additional pay for hard-to-staff jobs and high-performing employees. On taxes, the highest priority should be to continue reducing the tax system’s bias against investment. Capital-gains relief would be welcome on the business side. Higher standard deductions and child tax credits would reduce the tax penalty on family investment in human capital.

Are there other legitimate spending needs? Sure. Both courts and schools could benefit from additional technology upgrades, for example. But state lawmakers must resist the temptation to give in to every seemingly reasonable or heartfelt request for money. Fiscal restraint is in the long-term interest of most North Carolinians, even though it is not a cause championed by hosts of lobbyists and special-interest groups.

Too often in the past, state politicians counted their fiscal chickens before they were hatched and made promises they couldn’t deliver. The wiser course is to wait, so as to avoid the political equivalent of laying an egg.

John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.

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