John Hood: State Gets a Pleasant April Surprise
I’ve never been more delighted to be mistaken.
A couple of weeks ago, I wrote a column observing that, over the first eight months of the 2023-24 fiscal year, the state’s General Fund revenue was down slightly from what was collected during the first eight months of the previous fiscal year. North Carolina faced no “fiscal emergency,” I wrote, but unless revenue collections were “bountiful” this spring, the General Assembly wouldn’t have lots of extra cash to work with during its short session.
Well, state economists have just released their consensus revenue forecast — and bountiful isn’t too strong a description. For the current fiscal year, they now expect $34.1 billion in General Fund revenues. That’s $413 million more than originally projected. As for the $34.4 billion now expected for FY 2024-25, that’s a full $1 billion more than the budgeted amount.
Why was this year’s “April surprise” so pleasant? Collections from the personal income tax finance about half our General Fund and typically drive our revenue trends. That’s true this time, as well, as income taxes are now expected to run 2.6% above the baseline this year and 4.2% next year. Sales taxes are also up, albeit more modestly.
Contrary to the expectations they formed last year, economists for the legislature’s Fiscal Research Division and the governor’s Office of State Budget and Management say our economy “demonstrated greater resilience and avoided a predicted period of stagnant growth, or ‘slowcession,’ in late 2023 and 2024. Instead, the April 2024 consensus forecast expects a ‘soft landing,’ with inflation easing toward the Federal Reserve’s 2% target even as the economy continues to grow at a modestly slower pace than in 2023.”
Could their new judgment be overly sanguine? Sure. Forecasting isn’t an exact science. But it’s now very likely the state will experience a surplus in General Fund revenue of about 1.2% for the fiscal year ending in June. And it is now reasonable for state legislators to assume something like a 3% overage when adjusting the General Fund budget for next year.
They’ll have more transportation dollars to work with, as well. Strong collections from the state tax on motor fuels will generate about $104 million more than projected this year for the Highway Fund and Highway Trust Fund, plus another $101 million next year.
Given the circumstances, you’d expect every state agency, local government, or private interest to line up at the Legislative Building, ready to pitch — and you’d be right!
As I have previously argued, some of these pitches ought to deliver results, as they are in the public interest and consistent with fundamental principles of fiscal conservatism. Lawmakers ought to raise pay for public employees, for example, with a particular emphasis on merit-based increases and hard-to-fill positions such as correction officers, lab technicians, and science teachers. Also deserving consideration is the community college system’s Propel NC initiative, which would allocate more funds to high-demand fields such as advanced manufacturing, public safety, and allied health while instituting a three-year cycle for reevaluate spending based on job and salary data.
North Carolina is already in the process of phasing out its tax on corporate income and reducing its flat tax on personal income. That’s why next year’s revenue, while likely to exceed original projections, will rise just 0.7% over 2023-24. Tax cuts are already baked in the cake, as it were. Still, the revenue revisions give lawmakers more fiscal space to tackle other tax-reform priorities while devoting additional funds to the Opportunity Scholarship program, which has attracted far more parents seeking educational alternatives for their children than currently funding can accommodate.
Under existing law, a portion of the General Fund revenue surpluses will flow automatically into state reserves and fund the construction and maintenance of public facilities. Prudence argues for devoting additional funds to high-priority infrastructure projects and to shrinking the unfunded liability in the state’s health plan.
There’s good news on revenues. Now, let’s keep delivering good policy.
John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history (FolkloreCycle.com).
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