Budget delay is not all bad

RALEIGH — The state of North Carolina has begun its 2015-16 fiscal year with a continuing resolution instead of a budget. While it would have been better if lawmakers and Gov. Pat McCrory had inked a formal budget by now, the situation could be much worse.

For example, one way they could have gotten to a signed budget by June 30 would have been for the Senate to agree to the plan passed by the House back in May. While the House budget had some praiseworthy features, it simply spent too much money. By the official scoring, the House called for $22.2 billion in General Fund spending in FY 2015-16, a growth rate of 5.1 percent. If you include off-budget spending on capital and business subsidies, the House total was actually $22.4 billion, or 6.2 percent more than last year.

We have a healthy revenue surplus in the General Fund. But much of it is one-time money. Revenue growth for the coming year is currently pegged at 3.1 percent. While some new spending in the House budget was also treated as nonrecurring, it still set expectations in future years that may prove impossible to meet without tax hikes.

It would be better, then, to keep any increase from exceeding that 3.1 percent — and preferably to come in below it. Furthermore, the House budget put only $200 million into the state’s rainy-day reserve. That’s inadequate, and arguably not even the minimum required by current statute (it depends on how you define the budget surplus).

So the Senate was wise to reject the House budget and present its own plan in mid-June. Properly measured, its spending increase was an affordable 2.6 percent. Its rainy-day deposit was an impressive $500 million, raising the account balance to nearly $1.2 billion. Together with separate accounts for potential natural disasters and Medicaid overruns, this would give North Carolina reserves equivalent to 6 percent of the General Fund operating budget, a major step in the right direction (keep in mind that the state typically requires localities to maintain 8 percent reserves).

However, it wouldn’t have been a good idea for the House and Gov. McCrory simply to accede to the Senate budget by the June 30 deadline, either. It had some problematic elements of its own. In addition to containing too many substantive changes to public policy, in my view, the Senate plan contained a large number of new tax provisions. Some are unwise on their face or deserve far more study and debate.

For example, the Senate budget extends the sales tax to cover the sale of advertising. But the vast majority of advertising purchases are business-to-business transactions, which ought not to be subject to a retail sales tax in the first place. For customers who buy satellite or cable TV, satellite radio, or newspaper and magazines over the counter, that retail transaction is already taxed. There should not then be another layer of tax imposed on the advertising they receive through these sources. For over-the-air broadcasting, admittedly, there is no retail transaction with the audience to tax. And certain newspaper and magazine sales are tax-exempt. But the solution is not to impose a sweeping and poorly defined sales tax on advertising.

Similarly, the Senate expanded the retail sales taxes to include those providing veterinary, grooming, and other services to domesticated animals. While the intent might have been to minimize the tax-collection burden, since there are retailers selling these services that already collect sales tax on goods, the provision is too broad. It appears to force some businesses to start collecting sales tax for the first time. We don’t need to dragoon more people into the tax-collection business in order to tax consumption. We can do it through the income tax code, by excluding net savings from the tax base.

So while it would have been better to pass a final budget deal before June 30, it’s more important that the budget be a good one. The two chambers and the governor now have some time to get it right.