The final numbers are in on North Carolina’s budget surplus. They are informative. They ought to provoke significant discussion. Instead, they have gotten virtually no media coverage or public comment.
According to a new report from the office of State Controller Linda Combs, state government collected nearly $22.2 billion in General Fund revenue during the 2015-16 fiscal year that ended June 30. It spent about $21.2 billion on General Fund programs ranging from public education and Medicaid to prisons and regulatory agencies.
The cash surplus for the fiscal year, then, was just shy of $1 billion. The General Fund revenue surplus — the amount of tax and fee revenue that came in above the state’s original projection — was actually $430 million. In other words, most of the cash surplus was due to lower-than-expected expenditures, not higher-than-expected revenues.
That’s informative. State lawmakers, reporters, and policy wonks spent much of early 2016 speculating about the eventual size of the “April surprise.” But North Carolina’s revenue surplus this year ended up being slightly lower than the $447 million General Fund revenue surplus the state ran in 2014-15. The bigger story was that state spending fell $530 million below projections in 2015-16, vs. $416 million below in 2014-15.
More than three-quarters of the 2015-16 budget savings are attributable to lower-than-expected expenditures on public education ($173 million) and Medicaid ($242 million). No, the state didn’t stiff schools or hospitals. What actually happened was that enrollments in schools and Medicaid fell short of projections. Some items and services also cost less than anticipated.
As for the revenue surplus itself, some attempted to attribute it to the (heartless) General Assembly raising sales taxes on poor people to pay for income-tax cuts for the wealthy. Again, the actual numbers don’t square with that. North Carolina’s sales-tax revenues were indeed up over the 2014-15 fiscal year, but they actually fell short of projections by $185 million.
So why didn’t we have a revenue deficit? Primarily because income-tax revenues were some $600 million above the forecast. North Carolina had more people employed, at higher incomes, than originally anticipated. So more revenue came in than projected, even though the marginal tax rate was dropping.
This does not prove, by the way, that the state’s cut in income tax rates “paid for itself.” We don’t know for certain what the baseline of employment and salaries would have been in the absence of North Carolina’s tax changes. What we do know is that Gov. Pat McCrory and legislative leaders wisely used conservative forecasts of both revenues and expenditures when constructing their budgets, rather than rosy scenarios, so that the “surprise” at the end of the fiscal year proved to be welcome rather than unwelcome.
State policymakers didn’t take the resulting billion-dollar surplus and run off into fiscal fantasyland. They put much of it into savings — the state now has $1.6 billion in reserves to hedge against actual or fiscal rainy days, plus another $411 million to hedge against future Medicaid overruns. Lawmakers also enacted additional tax relief, mostly with an expanded standard deduction that disproportionately benefitted low- to moderate-income taxpayers, and put some additional money into pay hikes for teachers and other priorities.
These fiscal-policy decisions should be prompting vigorous debate. Democrats could object that declines in enrollment growth and Medicaid costs are likely temporary. True, Republicans might respond, but we put lots more money into savings for precisely this reason — to insure against unwelcome budget news in future years.
This kind of exchange would help inform voters in the fall elections. Constructing a state budget is the single most important thing governors and legislators do. It affects millions of people. But to be blunt, focusing the public’s attention on North Carolina’s recent fiscal and economic history would make voters feel better about the direction of their state, not worse. It would not assist Democrats in unseating Republicans. So don’t expect such stories to lead newscasts or make front-page news.
On this matter, I plead guilty to the charge of cynicism.
John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.