During the 1970s and 1980s, America saw a growing federal deficit that caused states to react. North Carolina rewrote its constitution in 1971, and as part of that constitution the state is required to pass a ‘balanced budget.’ More specifically, the state’s total expenditures cannot exceed its total income and surplus from previous years during a fiscal period.
North Carolina’s balanced budget legislation worked in the 1970s, but needs updating for the fiscal problems and concerns of today. One of those concerns is the ever-increasing shift of the state’s spending outside the General Fund, such as with transportation and numerous trust funds. Current laws only require the General Fund to be balanced; this excludes federal funding and non-General Fund expenditures.
A great example is the way the legislature and former governors have treated the highway fund and highway trust fund. For years, if the General Fund needed more revenue, then a transfer would occur to fill the gap. The balanced budget requirement was met, but the highway funds were left without sufficient money to maintain the state’s road systems — a problem the state is still dealing with today, and a major reason that a billion dollar transportation bond package is being suggested by the McCrory administration.
The other problem is the amount of federal funds in the state budget. Every state in the nation relies on the federal government for some portion of its budget. Over the last decade, many states have developed greater reliance on those federal funds than they have had historically, and North Carolina is no exception. So what happens if the federal government decides not to send as much money as they have in years past? Well, either the state cuts government services or has to pick up the bill — and either will put a strain on balancing the budget.
North Carolina needs to look at implementing an addition to the constitution that would work alongside the balanced budget requirement and limit spending. As the state continues to increase spending, the cost-effectiveness of tax dollars is decreasing. The state’s balanced budget amendment was not intended to create a tax-and-spend state, but rather a fiscally responsible state that uses tax dollars wisely.
A Taxpayer Bill of Rights, better known as a TABOR, is the tool needed alongside a balanced budget to limit the state’s spending. In order to avoid the problem of moving government activities outside the General Fund, North Carolina needs to incorporate a TABOR that would cap all state spending, regardless of whether it is included in the General Fund or not. Spending would only be allowed to increase at a rate of inflation plus population growth in addition to any voter approved changes each year.
As with any state, North Carolina has experienced periods of economic growth and recessions. To ensure the TABOR would not negatively impact the state, the ratchet down effect would need to be avoided. When there is a revenue shortfall, the TABOR should not set a lower limit for spending. In periods of a revenue shortfall, the TABOR limit should be held constant until revenues recover and again exceed that limit. This creates an incentive for state budget writers to send revenues collected above the spending cap to be deposited into a rainy day fund or a budget stabilization fund, which would be used to offset the shortfall.
A key goal of TABOR is to keep per capita spending constant while allowing for natural growth associated with population and inflation. As the population of the state increases, the amount spent in the budget would also increase based on the rate of population growth, while also being adjusted for inflation.
In the last 20 years, inflation and population have been relatively constant, while General Fund spending has had no stability. Since 1980, North Carolina’s population has grown an average of 1.7 percent per year and inflation has grown an average of 2.2 percent annually. Concurrently, the General Fund has grown an average annual rate of 5 percent.
So while the balanced budget approach is helpful and keeps North Carolina from falling into massive amounts of debt like the federal government has, the time has come to add to that and cap spending using a TABOR. Not only will a TABOR allow North Carolina a more efficient and priority based budgeting process, but it will also keep taxes lower and help keep North Carolina a wonderful place to live and do business for generations to come.
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