John Locke Update / Research Brief

Columnist’s Opposition To Amendment Ignores Past, Misdiagnoses Future

posted on in Fiscal Insight, Spending & Taxes
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Rob Christensen, the venerable political reporter for the News & Observer, offers a future vision of North Carolina as Illinois, with out-of-control spending leading to failing government and bad credit. The path to this fiscal hell could begin this fall, according to Christensen, if voters approve a constitutional amendment to reduce the cap on income tax rates to 7 percent from the current 10 percent cap. There are only two problems with this vision, it completely ignores the past and misdiagnoses the cause of future disease. Let’s look at how everything unfolds in this alternate universe.

“The record tax cuts made by the then-Republican-controlled legislature in 2013 also contributed to the shortfall, draining the state coffers of billions over the years.”

  • This seems plausible, but state reserves to weather a future recession are at their highest level ever, $2 billion or 9 percent of General Fund appropriations. The legislature this year even had more than half-a-billion dollars in unspent funds to accelerate recovery from Hurricane Florence and prepare for lower tax revenues in fiscal year (FY) 2019-20. Gov. Perdue in 2011 and 2012 and Gov. Cooper in 2017 and 2018 would have spent far more than the Republicans with higher taxes.

“Voters passed Democratic-backed constitutional amendments in 2023 and 2024 that would require the state to pay public school teachers the national average, that would raise environmental standards, that would tie funding of the university and community college systems to a steadily escalating formula, and that would raise the minimum wage.”

  • As the state got control of Medicaid spending after 2013, more money was available to reduce tuition at four UNC System schools, teachers could receive larger raises, and educational opportunities could expand for families whose needs could not be met through public schools (district or charter). Legislators even raised the minimum wage for state employees, the one group that has an impact on state spending. These actions demonstrate it is possible to spend on priorities without breaking the bank. Though Christensen is right that enshrining unrealistic spending requirements in the constitution could cause trouble, the state has managed to meet existing constitutional requirements for education with prudence.
  • It is not clear why a constitutional amendment would be needed for a higher minimum wage in the private sector, but it would have no impact on state budgets except indirectly through lower or higher tax collections depending on who is right about the economic impact. Environmental regulations would have no impact on state spending except to the extent they raise the cost of running government.

“Both the Democratic legislature and Gov. Forest have been reluctant to raise the sales tax – a tax that disproportionally impacts lower income and middle-class residents – in the middle of a deep recession.”

  • This is possibly the most far-fetched element of Christensen’s scenario based on history, at least with regard to the future Democratic legislature. Sales taxes were the first resort for higher taxes from 2001 through 2011. In 2001, 2003, and 2005, Gov. Mike Easley and the Democratic legislature imposed a succession of temporary half-cent sales tax increases. In 2007, they let replaced the temporary taxes with a permanent quarter-cent increase, just in time for the next recession. Then Gov. Perdue and the Democratic legislature imposed a temporary one-cent sales tax in 2009 that raised roughly $1 billion per year. There were modest surtaxes on high earners and corporations, but they provided a fraction of the revenue raised from the sales tax hike.
  • When Republicans took office in 2011, they allowed the temporary tax to expire while Gov. Perdue fought to keep 75 percent of the tax. None of these Democratic governors, legislators, and few in the press or traditional advocates for the poor supported ending the sales tax. When the next recession comes, the desire for immediate tax revenue will outweigh concerns about the tax impact on poor and middle-class families, and Democrats will look to increase the sales tax again.

“The state constitution, unlike the federal government, requires the legislature to pass a balanced budget each year.”

  • Christensen got this one right.
  • What he failed to mention and what all but eliminates the possibility of a crisis like this arising in the way presented is that the constitution gives the governor to curb spending during the year to ensure the budget finishes the year in balance, and state law ensures that government will continue to operate without passage of a budget bill. If there is no budget when the fiscal year begins on July 1, spending simply continues at the previous year’s level with no action needed by the legislature or governor. Between the continuing budget authority and the governor’s authority to control spending, things would not unfold this way.

It would take a complete breakdown of the state’s fiscal culture and institutions to bring about the nightmare scenario presented by Christensen. The governor has the authority to balance budgets mid-year and safeguards now exist to prevent a government shutdown as a budget negotiation tactic. Tax cuts have not bankrupted the state because revenues have managed to outpace spending enough for the state to build a savings reserve of $2 billion. When Democrats have sought to raise taxes in the past to deal with recessions because state government did not have adequate savings, they chose the sales tax for its quick hit of revenue, regardless of its effect on the poor and middle class. In short, lowering the constitutional cap on income tax rates to a level one-third higher than the tax rate as of January 2019 should be the least of anyone’s concerns this November.

Joe Coletti is Director of Oversight Staff for the NC House Majority. Joe is a former Senior Fellow at Locke. Here, he examined fiscal and tax policy. He previously headed the North Carolina Government Efficiency and Reform initiative… ...

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