Realism needed for sound budget

What does it mean to be a conservative? “I’ve always believed that conservatism is the politics of reality,” wrote National Review founder William F. Buckley, “and that reality ultimately asserts itself in a reasonably free society.” Former British Prime Minister Margaret Thatcher put it succinctly: “The facts of life are conservative.”

In that spirit, here is my realistic assessment of fiscal facts. The North Carolina General Assembly has a longstanding goal of reducing state income taxes. Lawmakers also began their 2025 session with an urgent need to fund Hurricane Helene recovery as well as other pressing priorities. And according to the latest consensus forecast from executive- and legislative-branch economists, General Fund revenues will grow by just $181 million in FY 2025-26, then drop by $823 million in FY 2026-27.

Revenue forecasts are just that: predictions. Perhaps this one will prove overly pessimistic. But legislative leaders haven’t spent the past 15 years skillfully piloting North Carolina’s ship of state by closing their eyes and hoping for the best. They’ve been clear-eyed, patient, and prudent. They’ve looked out for reefs and steered well clear of shoals.

It’s time to do so again.

The consensus forecast isn’t for an economic slowdown or recession. North Carolina continues to be a good place to work, live, invest, and create new jobs.

“Economic factors exerting upward pressure on the forecast,” state economists write, “are outweighed by downward pressure from reductions in the individual and corporate income tax rates.”

Lawmakers already enacted these reductions, to be phased in gradually. In January, North Carolina’s tax rate on personal income declined a quarter point to 4.25% and is scheduled to drop to 3.99% in 2026. Our corporate rate also dropped a quarter point in 2025, to 2.25%, and will go to 2% in 2026.

Moreover, the original legislation specified revenue triggers for future rate cuts. Right now, says the consensus forecast, General Fund collections will likely meet the threshold for reducing the personal-income tax to 3.49% in 2027. It might even meet the threshold for a 2.99% rate in 2028.

Keep in mind that those revenue triggers were set in 2021, before anyone could know the full extent of our post-COVID bout with inflation. Nor did anyone know large swaths of North Carolina would suffer hundred-year floods.

What fiscal conservatism now requires is prudence. First, House and Senate appropriators should prepare tight budgets for the next two fiscal years that address hurricane relief and reconstruction, maintain basic services, and identify hundreds of millions of dollars in savings to reallocate. Cast the net widely — waste and redundancy, yes, but also worthwhile but lower-priority programs that have crept into the base budget during years of surging revenues.

Yes, state lawmakers have built up billions of dollars in the rainy-day reserve and other accounts. This money can finance much of the state’s share of Helene recovery. It’s too risky to withdraw it all, however. What if the economy takes an unforeseen downward turn? North Carolina should maintain reserves sufficient to stabilize the budget and deliver core services in such a scenario.

Second, postpone potential action on other tax reforms. House Bill 11, for example, would eliminate state tax on overtime pay and tip income. Even if this were not a departure from sound principles of taxation — which shouldn’t play favorites or skew compensation decisions — now is not the time to act on it.

Third, revise the revenue triggers. While the fiscal impact of phasing out North Carolina’s corporate tax is relatively small, and its economic benefits sizable, adjusting the pace of our other income-tax changes is a reasonable response to inflation and other changing conditions.

If economic conditions improve faster than expected, generating stronger revenue growth than currently forecast, then the scheduled rate reductions can still occur. If not, state lawmakers will have wisely aligned their tax-reform strategy with their other priorities and, by creating a more realistic base budget, position North Carolina well for future growth and investment.

Fiscal conservatism? You bet.

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