After N.C.’s tax-cut frenzy, deficits loom

For the Republican-led General Assembly, the con is finally up.

For years Republican state leaders told North Carolinians that it’s possible to cut taxes sharply and still meet the state’s needs and even – presto – generate a budget surplus. The idea defied economics and mathematics. What they were doing was simply giving tax breaks that disproportionately favored the wealthy and corporations and letting support for state services shrivel. Then they lowballed revenue estimates and declared a “surplus” when tax revenue exceeded those estimates.

But just days after the legislature approved a new $23 billion budget full of spending austerity and more tax cuts, the legislature’s nonpartisan Fiscal Research Division delivered the truth. It said state expenses will grow faster than revenue starting in 2019 and that could produce budget shortfalls of $1.2 billion to $1.4 billion in years 2019-2020 to 2021-2022.

The deficit projections are based on annual spending growth of 4.1 to 5.3 percent. That’s not elective spending growth. It’s the increased spending needed to keep up with population growth, inflation and higher education and health care costs.

The Republicans, who infamously passed a 2012 law limiting sea-level rise, now are now taking a similar approach to the rise in basic costs. By their logic, the bill is only as big as what they’re willing to pay.

Amy Auth, spokeswoman for Senate Republicans, said in a statement that Republicans aren’t going to let government grow as much as the projection shows: “Legislative Republicans have no plans to expand government by a whopping 20 percent over the next five years.”

There’s nothing “whopping” about the projected rise in state costs. What is whopping is how much the legislature has declined to spend as needs have risen and how much it has given away in revenue to the groups that need it least – wealthy people who’ve enjoyed the lion’s share of gains from the recovery and corporations that are enjoying near-record profits.

A sobering new report from the Budget & Tax Center of the NC Justice Center, which advocates for low- and middle-income North Carolinians, lays out the numbers starkly. It says the new state budget marks nine consecutive years that state spending has declined as a share of the state’s economy (the decline started with Democratic cuts during the recession and has continued since Republicans took control in 2011). The 45-year average for state spending as a share of the state economy is 6 percent. In fiscal year 2019, it will be 4.9 percent. In other terms, state spending in FY 2019 will be about 18 percent below its historic share.

While real spending declines, tax cuts rise. The Budget & Tax Center report says the full cost of tax cuts in the new budget will reduce available revenue by $900 million. When that’s added to tax cuts passed since 2013, the total is an estimated $3.5 billion reduction in annual revenue.

If numbers were letters, that total would spell Kansas.

State Sen. Dan Blue, the Senate’s Democratic leader, requested the budget projections from the Fiscal Research Division. On seeing the deficit projections, he said, “The numbers are clear – tax cuts have taken priority over our state’s core responsibilities. This is not healthy, and it is not a responsible way to operate.”

The Republican plan to hold back spending to avoid the projected deficits is draconian enough. But that plan ignores a major threat coming from Republicans in Washington. Between President Trump’s proposed budget and Congress’ plans to change or repeal the Affordable Care Act, states should be braced for significant reductions in federal funding. In North Carolina, however, all the flexibility in the budget has been surrendered to tax cuts.

North Carolina’s Republicans boast about their “conservative budgeting approach,” but they actually have taken a radical path of deferring basic spending and cutting revenue in prosperous times. When the economy falters or the federal government cuts funding, or both, an already weakened North Carolina will pay a heavy price to balance its budget.

That fiscal reckoning appeared on the horizon last week. Denial won’t make it go away. Fair and adequate taxation will.

This story was originally published July 15, 2017 at 9:00 AM with the headline "After N.C.’s tax-cut frenzy, deficits loom."