RALEIGH — You may have read in the past few days that the North Carolina Senate has approved its version of a state budget to go into effect on July 1. Depending on your source for the information, however, your perception of the Senate’s work might differ markedly from that of other North Carolinians.
Did state senators just limit spending to the bare essentials so they could approve a billion-dollar tax cut? Or did they just boost spending substantially on teacher pay raises and other state priorities? The answers to both questions depend on which of two fiscal years we are referencing.
In odd-numbered years, state leaders enact a biennial budget — that is, a revenue and spending plan for the next two fiscal years. Therefore, the budget approved by senators this month covers the 2017-18 fiscal year that begins July 1 as well as the 2018-19 fiscal year that begins the following July 1.
Coming up with a two-year budget doesn’t mean state leaders place the budget on autopilot and return to it two years later. In even-numbered years, they come to Raleigh for a shorter legislative session during which they “adjust” that two-year budget to reflect the first year’s actual revenues and expenditures. Unless there is a recession, that typically means revenues will come in higher than expected and spending will come up lower than expected. The governor and lawmakers then make plans for the resulting difference — both the budget surplus for the current year and the higher-than-projected revenue for the second year of the biennium.
In effect, then, state leaders enact a budget every year. That’s why I always urge North Carolinians to pay closer attention to the first year of a biennial budget than to the second-year budget, because the latter is never implemented the way it looks on paper.
For the 2017-18 fiscal year, legislative staff projects that North Carolina will collect a little over $23 billion in tax and fee revenue for the General Fund (the part of the budget that doesn’t include federal funds, highway funds, and other special or dedicated revenue streams). That’s about a billion-dollar increase in General Fund revenue over the 2016-17 fiscal year. For the following year, 2018-19, the projection is for another billion dollars or so in new General Fund revenues.
A useful way to think about the budget the North Carolina Senate came up with is that of the roughly one billion dollars in new revenue projected for the coming year, the state would allocate 54 percent of it to General Fund spending (to fund enrollment growth, pay increases, new programs, and other items). It would allocate 31 percent of the new revenue to the Senate’s tax-cut package, the primary elements of which would reduce personal and corporate tax rates and expand the standard deduction to exempt more North Carolinians’ income from tax. The remaining revenue will be stowed away in savings in one form or another, a prudent practice that state lawmakers have been following for several years.
What happens in the second year? Well, if the Senate’s budget plan were implemented as written, the proportions would flip around. More than 70 percent of the new revenue in 2018-19 would be allocated to the tax-relief package, budgeted at $710 million. General Fund expenditures would still grow, but at a more modest pace.
When lawmakers of both parties talk about a “billion-dollar tax cut,” in other words, they are combining the revenue impact over two years. But even on paper, that’s only about half the expected growth in revenue, and represents just two percent of the $46 billion the plan allocates to General Fund expenditures over those two years.
More importantly, revenue and expenditures will likely be higher in the second year of the budget biennium — unless the economy dips into recession. If that happens, we’ll be grateful for the large savings reserves that lawmakers and former Gov. Pat McCrory have built up.
In short, don’t overreact to the Senate’s budget. Let’s see how the House responds.
John Hood is chairman of the John Locke Foundation.