by Joseph Coletti
Senior Fellow, Fiscal Studies, John Locke Foundation
Tax reform left a number of people receiving smaller refunds (or writing larger checks) this April because many taxpayers inadvertently had too little withheld from their paychecks. On the other hand, states across the country have collected significantly more in taxes. Most experts agree that states should treat the windfall as a one-time increase and not commit too much to ongoing spending hikes or tax cuts.
North Carolina had its best April for tax collections ever. State government collected $3.81 billion for the month, nearly $900 million more than the previous high of $2.96 billion set last year. The 29 percent increase is impressive and leaves total revenue for the year 5 percent ahead of last year, overcoming slower revenue collections in the first nine months of the fiscal year. The latest estimate is that revenues will finish the year $643 million higher than initially budgeted and $492 million higher than expected as recently as February.
Personal income tax collections surged 36 percent, which the consensus forecast attributed to strong capital gains and dividend payments. Economists caution that these gains are unlikely to continue beyond this year.
This has not stopped Gov. Roy Cooper from seeking to commit the money to programs that would continue indefinitely, leaving the state financially strapped and making tax increases more likely when the economy eventually slows. Budget writers in the State Senate would do well to take the opposite tack and shore up state finances.
The House budget added $100 million to the state’s rainy-day fund, the Savings Reserve, and left $600 million uncommitted, which could be used in case another major hurricane or some other emergency hits North Carolina, as it has in two of the last three years. In response to Hurricane Florence last fall, the General Assembly directed $750 million from savings to relief and recovery efforts.
With the temporary windfall, the Senate would do well to put aside even more for a rainy day and bring the Savings Reserve closer to the $2 billion it reached before the storms hit last fall. The governor’s Office of State Budget and Management and the General Assembly’s Fiscal Research Division together set a Savings Reserve target of $2.6 billion, 10.9 percent of General Fund appropriations, including debt service, in the fiscal year ending on June 30th. That target is more than twice what is currently in the Savings Reserve.
Some have suggested that lawmakers use the money to repair and renovate existing state facilities or to construct new buildings. If the choice is between spending a windfall or taking on debt, clearly it makes more sense to spend what you have than to borrow what you do not. Because this usually is not the only criterion, however, it leads to two problems. First, massive renovations and new construction tend to displace essential repairs, which contribute to the need for future renovations and new construction. The state is never able to get ahead of the need. Second, the new facilities simply do not replace what existed but come with a need for more staff, technology, and other operating costs. In this way, capital is not a one-time expenditure, even if paid with cash instead of debt, but it is a new obligation that raises spending into the future as surely as a new program does.
Just as it is unwise for Gov. Cooper to commit one-time money to recurring expenses (and there is no clear case to take on new capital projects that will expand spending) Senators should also be restrained in their tax reform plans, while rebuilding savings after recent spending increases. Their pledges of slow spending growth are still credible, but the governor’s all-but-certain veto also means more now than in the past. Spending restraint and prudent saving seem to be a better approach to uncertainty than cutting taxes too sharply or spending too much.