John Hood's Syndicated Weekly Column
RALEIGH – As the North Carolina House and Senate work out their differences over a 2012-13 spending plan, it’s not too early to be thinking about what the state’s fiscal policy choices will be in 2013.
There will be a new governor. There will be many new members of the General Assembly, although it seems likely that Republicans will retain control. I think 2013 may prove to be an opportune time for North Carolina to make fundamental changes in fiscal policy.
There’s already a lot of talk in Raleigh political circles about the possibility of major tax reform in 2013. Some lawmakers want to phase out income taxes in favor of a broad-based sales tax. Others want to keep both systems, reforming them to broaden the tax base and lower rates. I have my preferences, but I am also on record as favoring anything that reduces the current reliance on high marginal tax rates on work, savings, and investment. Our anti-investment tax structure is likely one of the main reasons why North Carolina is lagging behind in economic growth.
That having been said, to reform the tax code isn’t enough. Unless North Carolina also reforms the budgeting process, we may rue the day we broadened the tax base – because some future governor or legislature might respond to a future budget deficit by raising tax rates. To the extent the tax base will be broader, a future tax increase could be more burdensome to households and businesses than under the previous tax system.
There’s a way to hedge this risk. If any tax reform passes in 2013, it should be accompanied by a Taxpayer Bill of Rights (TABOR) that caps spending growth, discourages tax hikes, and rebuilds the government’s balance sheet through prudent savings and debt-retirement strategies. I discuss these ideas at length in my new book Our Best Foot Forward.
Critics often respond to such proposals by arguing that there should be no institutional constraints on the ability of elected representatives to craft and enact budgets. But political representation, while necessary, is not a sufficient protection for taxpayers. The framers of North Carolina’s constitution agreed. Our state budget is already subject to constitutional constraints, such as the requirement that our operating budget must be balanced with current revenue.
Unfortunately, existing constraints have proven to be insufficient to the task of aligning the short-term decisions of politicians with long-term interest of taxpayers. Instead, lawmakers have taken North Carolinians on a rollercoaster ride of surging budgets, falling budgets, ever-changing tax laws, and escalating levels of debt and other financial liabilities that have never been submitted to voter approval. Because of ambiguities, loopholes, and a lack of enforcement tools, the current constitutional safeguards do not sufficiently balance legislative power with that of the executive or judicial branches, or the interest of current spending recipients with the interest of future taxpayers.
A TABOR for North Carolina should cap annual spending growth to a combination of inflation and population growth. It should require a legislative supermajority to raise tax rates. It should abolish loopholes that have allowed the state to issue hundreds of millions of dollars worth of bonded debt without a vote of the people.
Also, many state constitutional constraints lack effective enforcement mechanisms. A North Carolina TABOR should require all revenues in excess of allowable spending growth to be deposited in the state’s rainy day reserve. Once the reserve reaches 10 percent of the General Fund, additional revenues should be rebated to taxpayers within a fiscal year. The state constitution should also clearly recognize the standing of individual state taxpayers to file lawsuits to enforce TABOR.
Stronger constitutional limits on fiscal recklessness will strengthen North Carolina’s economy by ensuring that today’s pro-growth reforms are not undone during future budget crises. Even if North Carolina uses tax policy to lower the cost of doing business today, firms and households may not respond accordingly if they suspect such a change will only be temporary.
Let’s send them a message of permanence.
Hood is president of the John Locke Foundation and author of Our Best Foot Forward, a book on North Carolina’s economy.