North Carolina policymakers have made some bold moves over the past several years, and with a new year upon us, it’s a good time to take stock. According to our new research, things are looking up for the state. The question is: Will recent reforms be enough to solidify its long-term future?

North Carolina’s tax reforms appear to be succeeding by cutting tax rates while increasing tax revenues. This may be shocking to those who view higher taxes as a way to solve social ills, but for those who study state tax policy, the phenomenon is well known.

Taxes can be lowered without reducing revenue by eliminating tax breaks and privileges for special interests. Research shows that states with higher income taxes than their neighbors experience less economic growth. Today, the benefits of tax reform are playing out in North Carolina, and other states are noticing.

But taxes are one thing, and spending is another. Surprisingly, public finance research shows that state spending is typically the larger drag on economic growth. Despite North Carolina’s balanced-budget requirement, its spending is poorly constrained by its tax revenues.

How is that possible? Our brand-new fiscal diagnosis of North Carolina for the Mercatus Center, explains: First, state spending has grown faster than tax revenues — because federal aid has been growing over the past few decades — and is now about a third of North Carolina’s revenue. Second, the state has more than tripled its inflation-adjusted debt per person since 1970.

It’s easy to see the positive effects of higher state spending: more roads, state employees, schools, etc. The costs, however, are disguised as higher federal spending and — importantly — as long-term state debts for which Tar Heel taxpayers are on the hook. North Carolina’s fiscal approach appears far more efficient than it is. This is what we call its “fiscal illusion.”

But there is good news. The tax reforms have been accompanied by efforts to slow the growth of state spending. North Carolina has avoided huge commitments like Medicaid expansion. Claims that the entitlement expansion is “free money” from the federal government are short-sighted. Federal entitlements are gifts in the same way that a baby elephant would be a gift. The initial gift is free, but continuing to feed and care for that gift becomes more and more expensive as it grows and grows. Census Bureau data show that federal aid as a percentage of the state’s general revenue has been falling since 2010. Even worse, Medicaid is not even good health care for the poor. Never mind the lack of hard evidence that Medicaid coverage improves health outcomes; physician surveys show that over a third of family doctors don’t accept new Medicaid patients. Expanding health coverage is not the same as expanding health care.

There’s also good news on debt: Taxpayer supported debt has been falling since 2012, and according to North Carolina’s Department of State treasurer, is projected to continue falling. If the state can continue to decrease its reliance on debt and federal dollars, it will go a long way toward securing long-term fiscal responsibility and transparency.

However, North Carolina’s move toward fiscal responsibility is only a few years old. To truly make a difference, it requires a long-term legislative and executive commitment to fiscal responsibility, and the current trend may not last. Stronger institutional restraints, perhaps Constitutional ones, are one way to protect it.

Some state services may well be worth paying for, and that’s why fiscal responsibility is so important. If politicians — some of whom are beholden to interest groups and short-term political concerns — have the ability to spend more than the state can afford, eventually they will. When that happens, government services are in real danger — and the results are always higher taxes, more debt, or painful cuts to programs people rely on.