The second Quarterly General Fund Revenue Report from the Fiscal Research Division of the NC General Assembly reveals some underlying and troubling trends in the economy. It also foreshadows some of the particular challenges of the new tax plan—namely the tax rate reductions for profitable corporations.
On net, the General Fund was $83.5 million above the $10.02 billion revenue target for the first-half of the current fiscal year that ends in June. Revenue collections were ahead of target largely due to a “stronger-than-expected” performance by the corporate income tax. As the economy has slowly improved, corporate profits have been on an upward trend. Collections from the corporate income tax were ahead of target by nearly $90 million.
The new tax plan, however, diminishes the ability of corporate income tax collections to contribute to public investments and support revenue recovery after a downturn in the future. The plan reduces the corporate tax rate from 6.9 percent down to as low as 3 percent, assuming certain revenue targets are met. Even if the targets aren’t met, the rate will automatically drop to 5 percent in 2015, causing the state to lose an estimated $374.2 million annually by the 2018 fiscal year. This means that the state is set to lose even more if the rate drops further from a 5 percent rate to a 3 percent rate.
Gains on the corporate side were dragged down by the personal income tax collections—specifically, by a troublesome weakness in wages and salaries. Withholding income on wages and salaries came in 1.2 percent, or $60 million, below the target. This poor performance was offset in-part by higher-than-expected final tax payments from taxpayers. Once factoring for both withholding collections and payments, personal income tax revenue came in below target by nearly 2 percent, or $30.4 million. This is roughly equivalent to filling half of the state’s pre-kindergarten waiting list.
The weakness in withholdings from wages and salaries “may be a cause for some concern,” the Fiscal Research Division notes. Certainly the state’s persistent and deep jobs shortage and the boom in low-wage jobs are two factors that aren’t making it any easier to meet revenue targets. And hereagain, the state will be collecting far less through the personal income tax moving forward than otherwise would have occurred due to the rate reduction implemented on January 1.
It’s not surprising then that the tax plan adds another layer of “uncertainty.” Estimated income tax payments in the current fiscal year will be impacted because the tax plan broadened the tax base—by eliminating the cap on charitable contributions, for example—and lowered the rate. New changes to taxpayers’ withholding amount may also contribute to uncertainty. All told, in the current fiscal year, the tax plan is expected to reduce available revenue by $86.6 million—a number that balloons to nearly $650 million once fully implemented.
Fiscal Research Division’s latest revenue outlook only further confirms that the state’s economic and fiscal outlooks are intertwined. The ability to collect revenues is directly related to the conditions in the economy—businesses earning strong profits and workers continuing to earn wages—as well as policy decisions. With the new tax law, policymakers have undermined the state’s ability to collect revenue and invest in the foundations of a strong economy, at a time when the economy continues to fail to deliver for workers.