by Sarah Curry
Director of Fiscal Policy Studies
As the state continues to increase spending, many citizens have begun to suspect that the effectiveness of that spending is diminishing. North Carolina’s balanced budget amendment was intended to create a fiscally responsible state that uses tax dollars wisely. However, over the last few decades, North Carolina has moved away from fiscal responsibility and become a tax-and-spend state, where increasing taxes and fees with the intention to spend more is acceptable policy.
The North Carolina constitution already has many fiscal controls, including a balanced-budget rule, a public-purpose limit on taxing power, and a maximum income-tax rate of 10 percent. While these fiscal limitations have worked to curb uninhibited spending in years past, state government has continued to evolve. There is now a need for an additional mechanism to ensure fiscal responsibility in North Carolina — a spending restraint provision.
Let’s take a look at the numbers so you know where I’m coming from. If we adjust for inflation, North Carolina’s per person General Fund spending amounted to more than $2,250 in the 2009 fiscal year. Over the last twenty years, the state’s population has grown an average of 1.7 percent while inflation has increased an average of 1.9 percent annually. Concurrently, the state’s General Fund has grown an average of 4.3 percent per year.
In concrete terms, this means that, had North Carolina’s state spending tracked population and inflation growth since 1995, the per person expenditure would be $1,865 in 2015. That is 14 percent less than the current level of $2,118.
A new tool that North Carolina should incorporate into its budgeting process is a constitutional amendment to limit spending to the combination of population growth and inflation. This is not a new idea; six states — Alaska, Colorado, Nevada, Ohio, Utah, and Washington — already limit spending or revenue growth to some combination of population and inflation, the first two by constitutional amendment and the rest by statute. The goal of creating such a restraint in North Carolina would be to keep per capital spending constant while allowing for natural growth associated with population and inflation. That way, regardless of what short-term goals either political party has while in power, the taxpayers of North Carolina know the state budget cannot grow at uncontrolled rates.
Some will argue that when the state endures a recession there will be a revenue shortfall, and such a spending restraint will not allow the state to pay for necessary services. In periods of revenue shortfall, the spending limit should be held constant until revenues recover and again exceed that limit. Either the state’s rainy day fund or a budget stabilization fund would be used to offset at least part of the revenue shortfall.
A long-term goal of a spending restraint policy is to incorporate budgetary oversight to spending shifted outside the state’s General Fund. While the state has limited control over federal funds and federally mandated programs, the state has total control of the many trust funds and programs that are not included in the General Fund. These could be included in any spending restraint amendment.
Long term, linking budget growth to population and inflation is sound policy that will ensure North Carolina a strong fiscal position able to withstand the next recession or economic downturn.
Click here for the Fiscal Update archive.
You can unsubscribe to this and all future e-mails from the John Locke Foundation by clicking the "Manage Subscriptions" button at the top of this newsletter.