From poverty to job creation, North Carolina has been slow to bounce back from the Great Recession on the economic front. The storyline is much the same when it comes to tax collections. North Carolina’s tax revenues at the end of 2013 were lower than its previous peak that occured just prior to the economic downturn, according to new data released by the Pew Center on the States.
These findings fail to signal an economic comeback. In fact, they illustrate that there is a considerable amount of lost ground to regain even as state revenues are projected to slowly pick up as the economy grows stronger. Catching up will be all that much more difficult due to lawmakers’ decision to pass a costly and lopsided tax plan last year that primarily benefits the wealthy and profitable corporations.
State revenues were down 4.5 percent, or $287.4 million, in the last quarter of 2013 compared to the state’s previous peak quarter that occurred in the third quarter of 2007—just before the onset of the Great Recession. Note, this was under the old tax code. See the figure below. North Carolina fared better on this measure compared to all of its southern neighbors except for Tennessee and only 19 states in total. For the states that experienced a recovery to peak revenue levels by the end of 2013, more than half of them raised taxes to keep up with the growing demands of a growing population.
North Carolina will eventually bounce back to pre-recession levels; however, the time necessary to recover will now take longer. The tax plan enacted last year is a huge revenue loser that stretches the timeline for when revenues are able to recover. The Pew Center on the States succinctly explains why all of this matters:
“States with below-peak tax revenue have less purchasing power to fund essentials such as schools, safety-net programs, corrections, employee salaries and pensions, and road maintenance and construction…. Even when tax revenues bounce back, policymakers will face challenges because of competing demands that piled up during the recession. Getting back to peak returns states only to where they were in purchasing power years earlier, leaving little money available to start making up for investments and spending they postponed during the downturn.”
We saw this reality—a diminished baseline—in Governor McCrory’s budget that was just released. There’s no reason to expect any improvement in the Senate’s budget that will come out later this week. Lawmakers have options however. They can start by reversing course and stopping the next round of tax cuts that are scheduled for January 2015.