NC Budget and Tax Center

The tax plan costs more

On late Friday, a consensus revenue forecast by the Fiscal Research Division and the Office of State Budget and Management was released which identifies a current year revenue shortfall of $445 million.  Next year, revenue is anticipated to be $191 million below projections.  These revisions mean policymakers will have to make immediate adjustments to the current fiscal year budget when they return next week as well as plan for fewer dollars than expected in the next year fiscal year as well.

While policymakers address the immediate challenge, they also should assess the damage of the tax plan passed last year which is now, and will continue to be, a primary driver of revenue shortfalls.

It is increasingly clear that the tax plan is more costly than originally estimated.  An earlier memo released in early April found that personal income tax withholdings in the first period were down $221 million below projections. In combination with Friday’s memo about the revenue shortfall,  it is personal income tax withholding that is contributing a great deal to the failure of personal income tax collections to come in as expected and is likely to continue to be an issue in future years.

Timing of the tax plan can’t explain all or most of the lower personal income tax collections. The largest base-broadening efforts in the tax plan included the elimination of the personal exemption, as well as changes to itemized deductions, both of which were taken into account when taxpayers completed their new withholdings this year.

The promised bump in revenue next April, if timing were the issue, is therefore unlikely to materialize as a significant improvement in the revenue outlook. It turns out the cost of cutting income taxes in a way that primarily benefits wealthy taxpayers is a lot more costly than is being acknowledged.

Given past presentations on the revenue outlook, part of the failure to meet the revenue target could also be attributable to a slow economy overall.  This, of course, runs counter to the arguments made by proponents of the tax plan that anticipated benefits of the tax changes would create immediate and positive improvements in the state’s economic and jobs outlook.

The news released on Friday doesn’t bode well for the upcoming budget debate and for North Carolina’s long-term efforts to build a strong foundation for the economy.  It is clear the fiscally responsible move now is for policymakers to stop further implementation of the tax plan and to assess and address the damage that’s already underway.

 

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