Raleigh, N.C. — The state Senate on Tuesday gave preliminary approval to a proposed constitutional amendment that would make big changes in how the state takes in and spends money, but critics warned it could damage the state's fiscal stability and long-term growth.
The proposal would constitutionally limit state spending growth in any given year to no more than inflation plus population growth. It would also constitutionally cap the state's maximum income tax rate at 5 percent and would require legislators to create and maintain a rainy-day emergency fund of up to 12.5 percent of the state budget.
The three proposals would be rolled into a single constitutional question that would go before the voters in November 2016. It was approved by a 30-15 vote – topping the required three-fifths vote for approval of a constitutional amendment.
The proposal, said sponsor Sen. Brent Jackson, R-Sampson, "will ensure that future General Assemblies spend sensibly, save wisely and tax sparingly."
Critics argued that the spending cap, which would currently be around 2.5 percent, would prevent the state from making long-term investments in infrastructure, education or economic development and would hamper the state's ability to increase spending when needed.
"If we were to have another great recession – or even just a regular recession – where cuts had to be made, we could never recover from them," said Sen. Jane Smith, D-Robeson. "We are already in a deficit in education funding from the last recession."
Sen. Jeff Jackson, D-Mecklenburg, talked about the fate of a similar spending cap in Colorado in the 1990s. That legislation was modified and essentially repealed after years of disastrous budget shortfalls left schools and services in that state underfunded.
"We’re not playing with matches here. We're playing with dynamite," Jeff Jackson said. "All we know is that the last train that went this direction drove off a cliff."
However, Senate Republicans who back the bill say the rainy-day fund will act as a cushion that Colorado didn't have. Lawmakers could vote – with a two-thirds majority – to use the rainy-day fund or override the spending cap if needed. They also pointed out that they could raise sales or other consumption taxes if needed to make up for a revenue shortfall.
"There are a lot of safeguards in place as this plan goes forward to be able to make sure that the priority needs of North Carolina can be met," said Sen. Bob Rucho, R-Mecklenburg.
State Treasurer Janet Cowell warned senators last Friday that the amendment proposal could endanger North Carolina's credit rating and financial stability. Rucho said on the floor that he had spoken with Cowell since her letter was sent, making sure she understood that all three amendments would work together.
"I think it would be reasonable to ask again" whether she still opposes the proposal, Rucho said.
Asked again, Cowell said her position hasn't changed.
"Nothing has changed to relieve my concerns about the possible effects on the state’s bond rating and reputation,” she told WRAL News on Tuesday.
The proposal is scheduled for a final Senate vote Wednesday. It then moves to the House.