NC Budget and Tax Center

A whole lot of numbers converging on one truth

The flood of numbers associated with the state’s tax collections has created growing confusion.  However, what should not get lost in this confusion is that those numbers all converge on one truth: the tax plan passed in 2013 costs more than was originally projected and is likely to hamper our state’s ability to reinvest as the economy recovers. Yesterday’s announcement by state officials that the consensus revenue forecast expects revenue to be $271 million short of projections for the current fiscal year confirms the challenges ahead.

So here is a break down on the numbers.

The total cost of the tax plan is approaching $1 billion for the current fiscal year that runs from July 1, 2014 to June 30, 2015. This number measures the difference between the amount of tax revenue the state would have collected under the old tax structure and what the state is collecting under the new tax plan. The new tax plan was originally estimated to reduce tax revenue by $512.8 million for the current fiscal year, but that estimate is proving to be far lower than what we’re seeing today. BTC’s original estimates suggested that the total cost of the tax plan could reach $1 billion by the end of the current fiscal year.

In May 2014 – nearly one year after the 2013 tax plan passed – the General Assembly’s Fiscal Research Division (FRD) updated its original projections on how much revenue the state will be bringing in during the current fiscal year. It turned out that in the short time after the implementation of the tax plan, revenues were then projected to come in $191 million below original projections. Thus, the original $512.8 million cost of the tax plan became a $704 million price tag.­

Yesterday, FRD and the Governor’s Office of State Budget & Management provided a consensus revenue forecast update that found revenue collections are expected to fall $271 million short of the revised projections – this $271 million is the current revenue shortfall through the end of the fiscal year. So, after increasing the price tag of the tax plan to $704 million from $513 million, this revised revenue shortfall would put the final price tag on the tax plan at $975 million for this fiscal year.

FRD attributes this ongoing, growing revenue shortfall to slower than expected wage growth. However, we know that the economic recovery has been very uneven, with the bulk of economic gains going to the wealthy and that low- and middle- income North Carolinians are not participating much in productivity and economic gains. This reality contributes to driving up the cost of the tax plan because as the wealthy capture the majority of income growth, the income tax rate cut is likely driving greater revenue losses than were originally projected and will likely continue to be a long-term issue for the state.

The latest $271 million revenue shortfall could also lead to a budget shortfall for the current fiscal year. A budget shortfall could also occur or be widened as a result of spending needs outpacing projections, as has happened in the past with Medicaid. If not enough options exist to plug the budget shortfall, policymakers will need to address the problem by finding money elsewhere, which could include more state budget cuts.

The revenue shortfall currently projected in the consensus forecast could be closed using unspent fund balances and other monies in Trust Funds; however, this approach is not a sustainable funding path. The driver of the revenue shortfall is not temporary but rather a permanent structure of the new tax code that will continue to mean the state does not have enough revenue to meet core operating expenses.

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