John Hood: We were never in Kansas
RALEIGH — As the general election campaign begins in North Carolina, you can expect to hear a lot about Kansas.
Several years ago, Kansas and North Carolina each began a series of tax reforms and reductions. Because both sets of policies were championed by many conservatives and savaged by many liberals, they came to be associated with each other by national reporters and policy analysts. In reality, however, the two states made markedly different choices.
A couple of months ago, the Kansas legislature was forced to fill a large hole in its state budget by delaying a contribution to its pension fund as well as cutting its school, university, and road budgets across the board.
Here in North Carolina, the latest estimates (through May 31) show our state’s General Fund budget running an operating surplus for the current fiscal year of $1.2 billion.
This hefty surplus for the first 11 months of the fiscal year, combined with leftover money from last year and healthy revenue projections for next year, should explain why Gov. Pat McCrory and the legislature will soon enact a state budget that raises teacher pay substantially, boosts pay for some state employees, funds other services, saves money for a rainy day, and provides another round of tax relief.
How did Kansas and North Carolina end up in such different conditions? For one thing, while the two states both enacted major tax cuts, they weren’t structured the same way. Kansas punched a large hole in its income-tax base by excluding self-employment income. North Carolina briefly created a version of this exclusion in the immediate aftermath of the Great Recession, but then wisely eliminated it.
In Kansas, lawmakers also allowed themselves to be bamboozled by some out-of-state tax “experts” claiming that cutting income taxes would generate so much new investment, entrepreneurship, and population growth that the revenue loss to the state would be substantially offset. This can actually be true in the very long run, counted in decades. In the short run of state budgeting, however, policymakers are better off making far more conservative assumptions.
North Carolina policymakers didn’t just reduce and reform taxes. They also controlled expenditures. Since the enactment of the 2013 tax changes, their authorized budgets have never pushed spending growth above the combined rates of inflation and population growth. Actual spending, in fact, has often come in below even these budgeted amounts. Look at the first 11 months of this year. Most of the operating surplus comes from lower-than-expected spending ($1 billion), not higher-than-expected revenues ($224 million).
The real difference here was one of strategy. It’s clearly better to set conservative goals and then be pleasantly surprised, rather than let rosy scenarios lead to unpleasant shocks.
Liberals in our state can (and will) say that North Carolina should have kept taxes higher to fund more government spending. Conservatives obviously disagree. But what liberals can’t say now — even though they predicted it in 2013 — is that North Carolina’s tax reforms have created a fiscal crisis. Our operating budget and savings reserve are both in good shape.
“I’ve a feeling we’re not in Kansas anymore,” Dorothy told Toto. When it comes to state fiscal policy, North Carolina never was.
John Hood is the author of “Catalyst: Jim Martin and the Rise of North Carolina Republicans.”