State isn’t prepared for bad times

Is there an immediate prospect of resolving the budget standoff between the North Carolina Senate and House? I hear conflicting signals.

When fiscal analysts for the governor and legislature recently updated their consensus revenue forecast, both sides claimed vindication. Senate leaders pointed to higher-than-expected General Fund collections in this fiscal year (+$370 million) and 2026-27 (+$951 million). As the economy continues to expand, they argue, state government can deliver its core services while continuing a rapid reduction in income-tax rates.

House leaders pointed to the same numbers but observed that General Fund collections are still projected to decline in 2026-27 (by $359 million) and that nearly all the above-baseline revenue will be immediately consumed by higher Medicaid spending. Let’s keep reducing the personal-income tax, they argue, but at a slower pace to leave fiscal room for other fiscal priorities.

While state government is not operating without a budget — the law allows ongoing expenditures based on the last enacted budget — there are many compelling reasons for state lawmakers to strike a deal. This dispute is not, at its root, a sharply ideological one. The Senate still wants to maintain public assets and raise salaries for correction officers, teachers, and other public employees. The House still wants to strengthen our state’s competitive position and let North Carolinians keep more of what they earn.

I am told that talks continue. I hope they prove fruitful. And I hope that the final deal takes another factor into consideration: the inescapable uncertainty of our present moment.

No one can say for sure when traffic through the Strait of Hormuz will return to normal. No one can reliably forecast what the Trump administration’s tariff policies will be in a year, a month, or even a week, or when it will refund some $160 billion in illegally imposed import taxes. No one has a firm handle on the short-term employment effects of artificial intelligence.

If the national economy were to falter, for whatever reason, North Carolina wouldn’t follow its own path. Our economy would stumble, too. Households and businesses would suffer. So would public revenues, while demands for public spending would intensify.

Although it may seem that state government is a strong position to ride out such a storm, given the billions of dollars stashed in North Carolina’s rainy-day fund and other reserves, that’s not what the latest data from the National Association of State Budget Officers show. When analysts from the Pew Charitable Trusts compared the overall fiscal position of all 50 states — representing not just formal rainy-day funds but other savings and the unreserved credit balance in each state’s equivalent of a General Fund — they found that North Carolina had about 53 days worth of state spending in the bank.

That is well below the national median of 92 days. Among our immediate neighbors, only Virginia is in a weaker position, at 48 days. Tennessee (72 days), Georgia (147 days), and South Carolina (174 days) are much better prepared, as are Pennsylvania (79), Florida (125), Texas (129), and even the likes of California (84) and New York (198).

The Carolina Comeback that began 15 years ago is a product of political courage and fiscal discipline. The conservatives now leading the North Carolina General Assembly continue to exhibit courage, across a range of issues. Now is the time to deploy it in the service of fiscal discipline.

Dozens of powerful interest groups lobby constantly for state expenditures. And taxpayers, understandably, want to spend their own money on their families, communities, and other priorities instead of surrendering it to government. There is, however, no extensive political constituency in favor of state savings — despite the fact that, should another natural or economic disaster strike, we’d all be immensely thankful for 90-to-120 days worth of state spending squirreled away for just such an eventuality.

Fiscal restraint is what has made it possible to reform and reduce taxes while preserving core state functions. Restraint, in turn, requires fortitude.

John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy and American history.

“State isn’t prepared for bad times” was originally published on www.carolinajournal.com.