As the general election campaign begins in North Carolina, you can expect to hear a lot about Kansas.
Yes, I can read a map. Kansas and North Carolina aren’t exactly neighbors. But when it comes to fiscal policy, critics of Gov. Pat McCrory and the General Assembly in Raleigh would rather talk about what’s happening out on the prairies of the Sunflower State rather than what’s happening in the mountains, piedmont, and coastal plain of the Tar Heel State.
Several years ago, Kansas and North Carolina each began a series of tax reforms and reductions. Because both sets of policies were championed by many conservatives and savaged by many liberals, they came to be associated with each other by national reporters and policy analysts. In reality, however, the two states made markedly different choices — and have ended up with markedly different results.
A couple of months ago, the Kansas legislature was forced to fill a large hole in its state budget by delaying a scheduled contribution to its state pension fund as well as cutting its school, university, and road budgets across the board. Here in North Carolina, the latest estimates (through May 31) show our state’s General Fund budget running an operating surplus for the current fiscal year of $1.2 billion. That reflects the difference between $20.1 billion in revenue and $18.9 billion in expenditures.
This hefty surplus for the first 11 months of the fiscal year, combined with leftover money from last year and healthy revenue projections for next year, should explain why McCrory and the legislature will soon enact a state budget that raises teacher pay substantially, boosts pay for at least some state employees, funds other necessary services, saves more money for a rainy day, and provides North Carolinians another round of tax relief.
How did Kansas and North Carolina end up in such different conditions? For one thing, while the two states both enacted major tax cuts, they weren’t structured the same way. Kansas punched a large hole in its income-tax base by excluding self-employment income. North Carolina briefly created a version of this exclusion in the immediate aftermath of the Great Recession, but then wisely eliminated it in favor of applying a low, uniform tax rate on a broad base of personal income.
In Kansas, lawmakers also allowed themselves to be bamboozled by some out-of-state tax “experts” claiming that cutting income taxes would generate so much new investment, entrepreneurship, and population growth that the revenue loss to the state would be substantially offset. This can actually be true, of course — in the very long run, counted in decades. In the short run of state budgeting, however, policymakers are better off making far more conservative assumptions about revenue feedbacks.
North Carolina did precisely that. Our state policymakers didn’t just reduce and reform taxes. They also controlled expenditures. Since the enactment of the 2013 tax changes, their authorized budgets have never pushed spending growth above the combined rates of inflation and population growth. Actual spending, in fact, has often come in below even these budgeted amounts. Look at the first 11 months of this year. Most of the operating surplus comes from lower-than-expected spending ($1 billion), not higher-than-expected revenues ($224 million).
North Carolina’s economy has outperformed that of Kansas, to be sure, although this was likely to occur regardless of tax reform. The real difference here was one of strategy. It’s clearly better to set conservative goals and then be pleasantly surprised, rather than let rosy scenarios lead to unpleasant shocks.
Liberals in our state can (and will) say that North Carolina should have kept taxes higher to fund more government spending. Conservatives obviously disagree. But what liberals can’t say now — even though they predicted it in 2013 — is that North Carolina’s tax reforms have created a fiscal crisis. Our operating budget and savings reserve are both in good shape.
“I’ve a feeling we’re not in Kansas anymore,” Dorothy told Toto. When it comes to state fiscal policy, North Carolina never was.
John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.