The N&O’s “Budget Disaster” Narrative Highly Misleading

The N&O and their progressive allies have been going to great lengths to make hay over the recently reported projections of a $455 million shortfall of state budget revenue this fiscal year. But why is the newspaper making such a fuss this year, when many recent state budgets missed their revenue targets by larger amounts?

The narrative, of course, is to sound alarm bells about “budget disasters” and lay blame on the 2013 tax reforms. Their analyses of the reasons for this year’s shortfall miss the mark by a long shot, and could be construed as intended to mislead readers.

But I also believe some perspective is in order, because this year’s shortfall is significantly less than the average revenue shortfall reported in the last two decades.

When state budget analysts speak of a “revenue shortfall” or “surplus” what is really meant is a difference between the revenue analysts predicted the state would collect while crafting the state budget versus the actual amount of revenue collected.  These predictions are based on the structure of the tax code and economic trends. So really when you hear discussions about revenue shortfalls or surpluses you are looking at the accuracy of these prognostications.

In short, the $455 million shortfall being reported just means the revenue projections were inaccurate to the high side. Actual revenue is falling short of what was predicted. The key questions, therefore, are: how inaccurate were the projections, and was this year’s projection any more or less accurate than those of past years?

First off, total General Fund tax revenues were projected to be $19.57 billion, according to this Office of State Controller report (see pg. 3). So being off by $455 million misses the projections by 2.3 percent. This is what the N&O declares a “budget disaster”?

Moreover, when one looks at a 20-year history comparing projected tax revenue to actual revenue collections (from 1992-3 thru 2011-12), we can see that this year’s “shortfall” (i.e. inaccurate revenue projection) is smaller than average. This state budget office document (see pg. 303) provides the comparison, and we can see that the average difference between projected revenues vs. actual revenues for those 20 years is 4.3 percent – nearly twice as large as this year’s miss. Furthermore, six of the last 20 budgets ended with shortfalls that averaged 6.5 percent – close to three times this year’s shortfall.

So not only does the N&O get it wrong when blaming last year’s tax reform for the discrepancy between projected and actual revenue collections, the newspaper engages in over-the-top fear-mongering to exaggerate the effect of a shortfall smaller than average over the last two decades.  North Carolina survived those shortfalls; it seems a safe bet the state will survive this one.

The bottom line: there is no crystal ball for revenue projections. In the field of economics, attempting to make quantitative predictions is a fool’s errand and as such basing the state budget on these guesses will predictably result in persistent surpluses and shortfalls. Perhaps a better idea is to base the coming fiscal year’s revenue availability on the most recent calendar year’s actual revenue collections – still an imperfect measure but one which will likely result in smaller shortfalls and surpluses.

Meanwhile, we can only hope news organizations learn to describe budgets accurately – and without political spin.