NC Lawmakers Fear Revenue Shortfall of Billions as They Consider Budget Moves

RALEIGH – For years Democrats whined that Republican tax (cuts) and (conservative) fiscal policies were going to lead to revenue shortfalls that would endanger core government services. That didn’t happen; instead, revenue surpluses became the norm, debts were paid down, and savings reserves were built up.

Fast forward to 2020 and lawmakers are anticipating a possible shortfall in the billions of dollars, and all it took was a Democratic governor exploiting emergency powers to unilaterally and arbitrarily shut down the economy for weeks.

Specifically, Senate Leader Phil Berger (R-Rockingham) stated earlier this week that, while final numbers aren’t set in stone, the shortfall could be anywhere from $2.5 to $4 billion. The most recent state budget (Cooper refused to sign the newest  budget over Medicaid expansion) appropriated approximately $24 billion in spending.

“When the last recession hit in 2008, 2009, the Democrats were forced to cut core state obligations and education, and teachers bore the brunt of those budget cuts. We do not want to see a repeat of that,” warned Berger.

Aside from the net drop in tax revenues because of the literal halt in economic activity, tax deadlines were extended from April 15 to July 15 as well, meaning tax revenue that is still out in the economy will not reach government coffers until midsummer. That certainly complicates matters for budget writers, but it highlights an important truth about tax revenues: $4 billion dollars that the government doesn’t “collect” in taxes is $4 billion that remains in the hands of families, workers, business owners. Remaining in the pocket of the person who earned it is honestly the best place for that money to be.

Still, lawmakers on Jones Street have all sorts of spending expectations, and they’re going to be forced to prioritize in ways they have not been required to do in over a decade. That’s where last year’s budget stand off offers a small benefit; a standard for continuity.

In his statement earlier this week, Berger said:

“Our state’s financial outlook is in a vastly different place than it was before this pandemic hit. Because of that, we will not be reconsidering the veto of the state budget this year. We’re staring down a multi-billion dollar revenue shortfall, which negatively impacts our ability to fund the vetoed budget. In order to ensure that we can continue to operate basic government services into the next fiscal year, it’s more prudent to keep operating on the certified budget.”

The fact that state government was forced by Governor Cooper’s budget veto to operate on a static spending plan, maintaining spending from previous budget levels, the bar to meet is already in better reach. Help may also come if congress approves the use of nearly $2 billion in federal CARES Act funds, left over from the $4 billion North Carolina received from the rescue bill, to go toward revenue shortfalls. Additionally, the Rainy Day Fund was over $1.5 billion.

With the new fiscal year beginning July 1, lawmakers have about six weeks to balance the books. It could drag on longer, however, depending on a few factors. For one, as Berger mentions, congressional malaise on the approved use of those CARES Act funds could require lawmakers to keep waiting past the deadline. Being that we’re nearly a year past the 2019 deadline, that’s not so scary, but 2020 is certainly a bit different.

Another possible sticking point, which would turn this into a volatile situation immediately, is the possibility that Governor Cooper and Democrats in the General Assembly exploit the situation to hold any budget agreement hostage to demands to satisfy their agenda preferences. Hopefully those lawmakers and Cooper focus on bridging the gap during this extraordinary time before, but having seen them take the budget hostage over Medicaid expansion and the like just last year, anything is possible.