February 19, 2013
RALEIGH — While North Carolina’s elected leaders prepare to tackle tax reform, the John Locke Foundation’s new book urges them to take on the related issue of government overspending through a state Taxpayer Bill of Rights.
The book First In Freedom: Transforming Ideas Into Consequences for North Carolina devotes an entire chapter to the history, key features, and benefits of TABOR. “It would advance North Carolina as a national leader in fiscal responsibility, stability, and accountability,” writes Fergus Hodgson, JLF’s former fiscal policy analyst. “Most importantly, it would better align the actions of state officials to serve the will of their constituents.”
TABOR legislation would ask North Carolina voters to amend the North Carolina Constitution to limit future government spending growth. Future spending increases would be limited to the combined rate of inflation and population growth. Any growth beyond that rate would require “explicit voter approval.”
North Carolina is a “fitting candidate” for a constitutional spending limit, said Sarah Curry, JLF Director of Fiscal Policy Studies.
“North Carolina’s total state spending from all revenue sources has grown steadily for the past four decades, both on an inflation-adjusted, per capita basis and as a percentage of personal income,” Curry said. “In fact, North Carolina set spending records during the 2012 budget year. Government spent $5,247 per resident. That was equal to 14.4 percent of personal income. In contrast, state government spent $1,701 per person, or 10.9 percent of personal income, in 1970.”
State spending has swelled in all major categories, including education, health and human services, transportation, correction, and debt payments. “All have more than doubled since the mid-1970s in inflation-adjusted, per capita terms,” Curry said.
Inaccurate reporting of the state’s future liabilities has complicated the picture. This is particularly true of government employee pension and health care retirement benefits, Hodgson writes in First In Freedom. “These unfunded liabilities — or deferred expenses — are now officially worth $37.5 billion,” he said. “More realistic accounting places those liabilities at $81.8 billion.”
Government spending growth has affected North Carolina’s tax burden, Hodgson said. “This state has a higher tax burden than all of its neighbors and ranks No. 44 in the nation in the Tax Foundation’s State Business Tax Climate Index.”
Existing state law caps General Fund spending at 7 percent of total state personal income, but this law falls short of the mark of limiting spending growth, Hodgson said. “The current law excludes everything outside of the General Fund, such as capital spending, one-time spending linked to natural disasters, federal mandates, plus the costs of providing health insurance for state employees,” he said. “Plus the legislature could repeal the law at any time.”
First In Freedom documents 40 years of nationwide history of the Taxpayer Bill of Rights and discusses other states’ efforts to rein in government spending through constitutional limits. The book devotes particular attention to Colorado, where voters approved in 1992 a TABOR “by far the closest to ideal of any in existence in the United States.”
The book also includes model TABOR legislation and highlights four key provisions that should be featured in any law. “First, it should set a revenue and spending limit at inflation plus population growth plus whatever level receives explicit voter approval,” Hodgson writes. “Second, surplus funds should be diverted automatically to the North Carolina Savings Reserve Account, often known as the state’s ‘rainy-day fund.'”
The third component calls for a Budget Stabilization Fund. “This fund would hold revenues for automatic rebates or to fund temporary tax-rate reductions of equal value,” Hodgson said. “The state would use this fund only when revenues exceed both the TABOR spending limit and the maximum level set for the state’s ‘rainy-day fund.'”
Fourth, the model TABOR would prohibit unfunded mandates for local governments. “This provision would stop state officials from transferring their tax collection role and burden to local counties and municipalities,” Hodgson said.
Some state lawmakers already endorse the idea of a Taxpayer Bill of Rights. Legislators have sponsored TABOR bills at least as far back as 1995. During the 2011-12 legislative session, more than 40 members of the N.C. House signed on to a TABOR plan.
“As state spending consumes a larger and larger share of the economy, a constitutional remedy is necessary to transfer greater authority back to the people and place North Carolina on a sustainable path,” Hodgson concludes in First In Freedom. “Fortunately, a clearly defined TABOR is a proven remedy yet to be implemented in North Carolina.”
Copies of First in Freedom: Transforming Ideas Into Consequences for North Carolina are available at the John Locke Foundation’s online store.