Earlier this month, North Carolina legislators began the months-long process of developing the two-year state budget that covers July 1, 2013 through June 30, 2015. To kick-off this endeavor, non-partisan staffers have been providing members with an overview of current fiscal conditions as well as past legislative budget actions. Perhaps the most important presentation to date centered on the revenue forecast, which sets the stage for legislators to begin building the next state budget.
Projections from the non-partisan Fiscal Research Division indicate that General Fund revenue collections are on target as of the end of December for FY2012-13. North Carolina’s economy has made improvements over the last fiscal year but continues to lag behind the nation across several economic indicators. And although the state does not face an imminent budget crisis—largely due to a tremendously diminished baseline—the forecast implies that we are not completely out of the woods.
The forecast has been downgraded since the projections were last released in May and remains tenuous for the reasons below.
- The second half of the fiscal year tends to be more volatile than the first half. This is especially true because legislators inked a $50,000 business exemption into the state budget. This tax break for large, profitable businesses and wealthy individuals is estimated to reduce revenues by $460 million, far more than was originally estimated.
- Sales tax and withholding income taxes are slightly behind projections. A further slowdown in these collections would create a gap that would need to be closed by the end of the fiscal year in June.
- North Carolina’s economy is subject to macroeconomic factors that are outside of state policymakers’ control, including factors such as the beleaguered European economy and number of housing starts. Global demand is improving but is still going through a rough patch.
- North Carolina is vulnerable to the “fiscal cliff’s” scheduled spending cuts, which is set to go into effect on March 1, 2013. If these cuts go into effect as scheduled, the state may experience a general economic slowdown due to cuts in federal aid and defense spending.
While some are touting bright news in the state’s revenue picture because revenue collections are running about $106 million above the $9.8 billion target through the end of December, it is important to put this figure in context. This represents just .53 percent of the state’s annual budget, even at a vastly diminished baseline compared to pre-recession levels. And even with a $106 million revenue surplus at the end of the fiscal year, revenue collections as a share of state personal income would still be far below the 40-year average.
Tax reform has the potential to significantly alter state revenue immediately and moving forward—especially if legislators’ efforts to eliminate entire revenue sources are successful. So while revenues are not projected to collapse in the near term like they did during the Great Recession, there remain lingering questions about the state’s available revenue this year and beyond. Certainly, tax reform will make a significant difference in this year’s budget process as well as the possibility of more robust revenue forecasts in the future.