2 tweaks for McCrory budget

First Posted: 3/9/2015

RALEIGH — Now that Gov. Pat McCrory has released his budget proposal for the 2015-17 biennium, there are at least two fiscal issues dividing North Carolina Republicans this year.

Before discussing them, however, two observations are obligatory. First, there is no substantial constituency in the GOP for fiscal liberalism. No one is proposing to roll back recent state tax cuts, or to return to the days of unsustainable budget growth. McCrory’s plan would increase the General Fund budget by 2.1 percent next year and 3.2 percent the following year, both growth rates lower than the projected growth of inflation and population. Over time, if policymakers stick to such a course, the incomes of North Carolinians will grow faster than the real cost of their state government, allowing for future tax relief and thus future increases in their take-home pay. Good.

Second, fiscal conservatism is not synonymous with maintaining the status quo. Even if the overall budget doesn’t grow rapidly, individual items can receive substantial increases. To fund higher priorities, responsible budgets identify savings elsewhere. For example, both McCrory and legislative leaders appear committed to the strategy initiated last year to raise starting teacher pay to $35,000, provide additional boosts to the pay schedule for early-career teachers, and differentiate pay by increased duties and higher performance. That’s one reason why the governor’s plan includes significantly higher funding growth for K-12 education than for the rest of the budget. Other programs and departments grow less, or not at all, to compensate. Good.

That having been said, some of what McCrory proposes won’t go over well with legislators in his own party. Moreover, there are also emerging differences between House and Senate Republicans, as well as between lawmakers on the one hand and conservative activists on the other. Here are two major points of contention:

— Targeted tax breaks. In North Carolina, at least, Republicans have traditionally favored across-the-board tax cuts over special deductions, exemptions, or credits designed to benefit particular industries or manipulate the marketplace. The 2013 tax-reform bill was a praiseworthy step in the right direction, including the decision to allow various special-interest tax credits to expire.

McCrory doesn’t fully agree. He recommends full or partial restoration of credits for research and development, historic property, and renewable energy. Separately, he and many lawmakers want to expand per-job tax credits and add more money to other incentive programs. Conservatives understand the tremendous pressure to “play the game” or risk projects going to other states. But we also recognize that it is, largely, a game — one rigged to benefit politically favored interests without delivering significant net benefits in employment and income growth.

• Gasoline taxes. Both the Senate and House have plans to raise North Carolina’s gas tax above the current baseline. McCrory favors it, too. Outside the Raleigh Beltline, the idea is broadly unpopular and enrages the Republican base.

State leaders insist they are merely heading off an unwise cut in the gas tax, but the distinction defies logic. The current formula includes a variable component tied to oil prices. Its justification was that when oil prices rise, the cost of asphalt — and thus of paving roadways — also rises. Now that falling oil prices will result in a drop in the gas tax, however, policymakers say the system can’t afford to lose the revenue. But isn’t the price of asphalt falling, too? Either oil prices and construction costs are linked or they aren’t.

Many conservatives agree that, for a variety of reasons, North Carolina’s transportation system has a long-term funding problem. But we prefer to solve it by ending all diversions of gas and car taxes to non-highway purposes and filling any remaining revenue gap with direct user fees such as tolls and higher charges for heavy trucks. Relying on higher gas taxes is bad policy and really bad politics.

Naturally, liberals are trying to magnify these differences into knockdown, drag-out fights to splinter the GOP coalition. They’ll likely fail, again. The differences are real, nevertheless, and promise to make the 2015 session exciting and momentous.

John Hood is chairman of the John Locke Foundation. Follow him @JohnHoodNC.