Both House and Senate budget writers did the right thing by putting the $400 million projected surplus this year towards reserves. This is important because North Carolina’s revenue collection surprise in April was largely the result of national trends that saw strong performance in capital gains income, a likely one time event.
The challenge, of course, is that budget writers do reduce the corporate income tax rates in the context of this one-time event. The House allows the automatic trigger to go into effect reducing the rate profitable corporations pay down to 4 percent because the one-time collection above expectations meets the revenue threshold established in statute. The Senate makes permanent the tax cuts for corporations regardless of current or future revenue collections but does so, in part, using the latest revenue news as justification. Importantly, while collections are above expectations, as my colleague identified in a previous post, they are not above pre-recession levels or stronger than historic performance. Thus the decision to further reduce the state’s revenue sources based on a one-time event is not fiscally prudent.
In this week’s Prosperity Watch we wrote about more of the research into the national trend that drove an increase in personal income tax collections at tax time.
38 of the 41 states that have a broad-based personal income tax saw an average year over year growth in personal income tax collections of 11.5 percent according to a new report by the Rockefeller Institute of Government. Overall, 36 of the 38 states saw growth in personal income tax collections, with only Kansas and Illinois seeing a decline. North Carolina joined 25 other states in reporting double-digit growth in year over year personal income tax collections. Notably, other states that experienced similarly strong growth in their personal income tax collections did not pursue tax cuts and some states, California and Connecticut for example, raised taxes.
Read more here.