John Locke Update / Research Brief

Prepare for the Next State Budget by Focusing on Spending

posted on in Fiscal Insight, Spending & Taxes
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Hundreds of years separate Jean Jacques Rousseau and Dave Ramsey, but they share a common approach to finances. In the Social Contract, Rousseau writes that the “most important maxim of the administration of finances is to work much more carefully to prevent needs than to increase revenues.” On Twitter, Ramsey warns more directly, “You cannot out-earn your stupidity.”

“If one examines how the needs of a state grow,” Rousseau explains, “this will often be found to happen in about the same way as it does for private individuals, less by true necessity than by an expansion of frivolous desires, and often expenses are increased solely to provide a pretext for increasing revenue.” Legislatures generally spend every dollar available. This is one reason we should be thankful for the history of conservative revenue forecasts in North Carolina, which have helped make spending restraint and the accumulation of surpluses easier for legislative leaders.

Gov. Roy Cooper’s desire to spend will put more pressure on Office of State Budget and Management staff and the Fiscal Research Division to keep a lid on growth and revenue estimates for the coming fiscal year. But the governor’s desires may be kept in check by the slow pace of revenue compared to expectations from July through December. At an end of the year press conference, State Budget Director Charlie Perusse said that revenues are about $91 million behind schedule and “this is definitely concerning to the governor.”

Perusse then went through a long list of potential areas for new spending that could total more than half a billion, conveniently close to the amount the value of tax rate reductions set to take effect in January 2019. As described by Will Doran for Under the Dome: “an extra $300 million or so for spending that includes Hurricane Matthew recovery efforts, fighting the opioid epidemic, prison safety improvements, environmental projects and more.” [Emphasis added.] Perusse listed permanent spending increases for higher salaries and pension benefits that could take $175 million a year and $41 million North Carolina owes the federal government for improper Medicaid payments dating back to the Perdue administration.

Milton Friedman repeatedly told people that government spending is the true tax. As he explained in a 1967 Newsweek column, “If taxes are raised in order to keep down the deficit, the result is likely to be a higher norm for government spending. Deficits will again mount and the process will be repeated.” Academic research has continued to reiterate the point that “higher spending now will lead to higher taxes later.”

Tax reductions, starting with the expiration of a temporary sales tax hike in 2011, have saved North Carolina families and businesses billions of dollars over the past few years. Spending restraint has made those savings possible, reversing a series of temporary and permanent tax hikes between 2001 and 2009, even while building the rainy day fund to its highest level. It stretches credibility, however, to claim that tax reforms since 2013 will result in $3 billion in less revenue in the next fiscal year as Perusse and other advocates of more government spending have contended.

Rather than debate the effects of tax cuts that nobody proposes repealing, Gov. Cooper and legislative budget writers should continue to focus on how state government can spend less than it currently collects in taxes while it addresses safety for prisoners and officers, pensions for existing government employees, and better ways to fund public education.

As Senior Fellow, Joe examines fiscal and tax policy. He previously headed the North Carolina Government Efficiency and Reform initiative within the Office of State Budget and Management, which led to changes in automotive fleet management, natural and… ...

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