2017 Fiscal Year State Budget, NC Budget and Tax Center

North Carolina does not have a $1.2 billion revenue surplus

North Carolina continues to struggle with too few dollars coming in to serve a growing state that needs good, quality schools, healthy environments, safe neighborhoods and supports for workforce training and economic development. In the final days as policymakers negotiate the differences in their original proposals to arrive at a final budget, relying on bad numbers to try and meet these real needs in an unsustainable manner would be a mistake.

One number that talking heads and others have suggested shows the strength of our current tax code (and to some could be used to meet unmet needs) is the $1.2 billion in excess dollars over appropriated expenditures noted in the May 2016 current monthly financial report from the state Controller. This number does not mean that revenue collections for the current fiscal year came in $1.2 billion over state officials’ initial projections. The consensus revenue estimates have that figure at about $330 million.

What that $1.2 billion figure reflects is revenue over-collections plus unspent revenue from the prior fiscal year in the current year budget and reverting state funds that were appropriated to state agencies back to the General Fund – all of which has resulted in not spending available revenue for the current fiscal year despite ongoing needs in many areas of the budget and communities across the state.

Not only are the majority of these dollars not sustainable sources to meet unmet and important recurring needs, they aren’t all that different from figures we’ve experienced in the past following a downturn. Before the Great Recession, when North Carolina was still in fiscal recovery from the 2001 recession, such excess revenue over appropriations was over $900 million when adjusted for inflation (see chart).


NC does not have a $1.2 billion revenue surplus (updated)

The reality is that these dollars fall far short of what is needed to ensure that all North Carolina communities can thrive. Given the potential one-time nature of these dollars, they shouldn’t be used to provide all teachers and state employees a raise, provide retirees with cost of living adjustments and ensure healthcare services for the elderly and poor.

Instead, North Carolina needs to re-examine the income tax cuts that lawmakers have already passed and make sure that further flexibility is available to make sure communities can thrive and aren’t hampered by unnecessary and arbitrarily low tax caps in the state Constitution. The $1.5 billion that already has been foregone with the low income tax rates could have been used to get teacher pay to the national average, reduce waitlists for early childhood programs, make a college education more affordable and help ensure safe and healthy communities.

No, North Carolina does not have a $1.2 billion revenue surplus. And no, this excess revenue does not mean we have enough resources to ensure that all communities can thrive. It is time to realize that the math won’t work under a tax-cutting regime when we aspire to grow and thrive.

NC Budget and Tax Center

Tax swap likely to create more problems than solutions

State leaders are on a relentless pursuit to radically change the state’s tax system to rely more and more on the sales tax, while working to eliminate the income tax. This tax swap is necessary, they say, to address the volatile nature of the income tax. What it means is that there will be a heavier tax load for middle and low income North Carolinians.

This is an approach to taxation that will likely create more problems than solutions.

Volatility refers to how the level of revenue collections is affected by what’s going on in the economy. Good economic times mean higher levels of overall tax revenue, while economic downturns typically result in state revenues plummeting. The strength of revenue collections, however, can be a product of both the business cycle and the design of the tax system. North Carolina’s current tax code is underperforming historic growth rates (see Gov.’s FY17 budget, Page 33), which could be a result of tax changes passed in recent years that have resulted in a flat income tax, for example.

A report by the Center on Budget & Policy Priorities highlights reasons that a tax swap—greater reliance on sales tax and less on income tax—will not only fail to address volatility concerns but also can generate additional problems.

  • Virtually all state taxes are volatile, albeit to varying degrees. Most major state taxes, including the sales tax, are subject to ups and downs with the economy. Indeed, under some circumstances, sales taxes can decline faster in recessions than income taxes.
  • While income taxes typically fall more steeply than sales taxes when the economy enters a recession, the reverse is also true:  income taxes rise more rapidly than sales taxes during periods of economic growth. Taking both periods of growth and decline together, only income taxes increase enough to fund normal expenditure growth and meet the evolving needs of residents and businesses. Sales taxes do not.
  • Eliminating the income tax won’t protect North Carolina from revenue losses in downturns. States without income taxes—Florida and Nevada for example—were among the hardest hit in the Great Recession. Most experts recommend a balance across various sources of revenue to offset the competing sensitivities and contributions that each can make to a revenue system seeking to achieve stability, equity and long-term adequacy.

Most fundamentally, North Carolina Senators proposal to eliminate the income tax would require policymakers to find other sources for more than half of the revenue that the state currently collects. A proposal that will likely lead to further erosion in the state’s commitment to public investments that help families, seniors and communities thrive.

Moreover, it is a solution that is unnecessary given the better tool of a Rainy Day Fund to address volatility—one that state leaders have committed to aggressively.  And while the timing and pace of state leaders’ contribution to the Rainy Day Fund now raises concern, it is clear that a responsible Rainy Day Fund policy, relying on a mix of state taxes that include an income tax and not restricting tools to generate revenue at the local level, are ways that can help address and manage volatility.

Shifting to greater reliance on the sales tax and eliminating the income tax will not give North Carolina the flexibility it needs to change with the ebb and flow of the economy. It will only shift the tax load and undercut the state’s tax code’s ability to achieve a core responsibility of funding the services that support thriving communities.

NC Budget and Tax Center

State leaders’ so-called tax reform can’t be trusted

State leaders continue to talk out of both sides of their mouths when it comes to their supposed tax reform efforts. In one breath, lawmakers scold the decision to temporarily increase the sales tax rate in the wake of the Great Recession, which caused revenue collections to plummet. In the very next breath, however, state leaders laud their desire to steadily increase the amount of sales taxes North Carolinians pay as a transformative, game-changing move.

How can they praise the very action they supposedly disavow?

This demonstrates why state leaders cannot be trusted regarding tax policy decisions they’ve pushed through in recent years and their stated plans going forward. Their rhetoric doesn’t align with their inconsistent actions.

State leaders have made it explicitly clear that they would like to make radical changes to North Carolina’s tax system. Their goal is to shift our tax system to rely more and more on sales taxes while working to eliminate the income tax. This tax swap does not bode well for most North Carolinians and jeopardizes the ability of our tax system to provide adequate resources to ensure that all communities can thrive.

Hardworking middle- and low-income North Carolinians are particularly harmed by this tax swap, as they pay a larger share of their income in sales taxes. So the more they are asked to pay in sales taxes, the less income they have to make ends meet. Income tax cuts largely benefit the wealthy and powerful corporations, so continuing to cut income taxes means giving more and more tax breaks to well-off households.

Since 2013, lawmakers have delivered nearly $15,000, on average, in tax cuts for millionaires, while hardworking middle-income North Carolinian have received just $6, on average, each year. Meanwhile, low-income North Carolinians who struggle the most to put food on the table and keep the lights on have received a $30 tax increase, on average.

The fact that this tax swap harms middle- and low-income families and individuals while greatly benefiting the wealthy and powerful has not stopped state leaders from ushering it in. In fact, it seems to embolden them to charge forward even faster.

The claim by state leaders that all North Carolinians have benefited from their tax swap efforts in recent years is more of their talking out of both sides of their mouths: Giving large tax cuts to the wealthy and powerful is a good thing. Raising taxes for lower income North Carolinians is good. And somehow all North Carolinians benefit. This flawed logic cannot be trusted.

NC Budget and Tax Center

Senate tax measure would increase costs, hurt N.C. communities

North Carolina Senators are pushing to make changes to the state constitution, and, in doing so, would sacrifice things we need to help ensure that communities across the state thrive. The proposal, Senate Bill 817, would change the state’s constitution to prevent the rate of the state income tax from ever going up. This would lock in and forever guarantee the large income tax cuts pushed through by state leaders since 2013 that have largely benefited the wealthy and powerful corporations.

The bill permanently caps the state’s personal income tax rate at 5.5 percent. With the personal income tax rate already set to fall to 5.499 percent on Jan. 1, 2017, the cap would cut off a vital source of revenue. This is just the next phase of state leaders’ efforts to drastically alter the state’s tax system – which means that North Carolina cannot make sure that communities from the mountains to the coast can thrive. It also means that middle- and low-income communities are pushed into further economic straits because they have to carry a heavier tax load than the powerful.

Here are reasons why this proposal is bad for North Carolina.

  • Would lead to increased sales and property taxes. Proposal will force lawmakers to rely on other revenue sources—like the sales tax and property tax—and raise those rates to offset the loss of the income tax as a revenue source. Or it will just further drive an increased reliance on fees or other ways of financing public services like privatization or borrowing.
  • Would risk our state’s respected AAA bond rating. States that have set in place these kinds of tax and budget restrictions often face higher borrowing costs as their bond ratings are downgraded. This is a bad business decision for our state. It would mean higher costs to borrowing for everything from ConnectNC projects to local governments’ school construction.
  • Would make North Carolina unable to ensure communities thrive. We are already losing more than $1.5 billion per year due to deep income tax cuts, which primarily benefit the wealthy. The cuts are reducing opportunity—as illustrated by long waiting lists for early childhood education programs and in-home services for older adults, too few textbooks and teacher assistants, overburdened courts, and the gutting of environmental protections. The revenue loss is preventing us from catching up after the recession, let alone keeping up with growing needs.
  • Wouldn’t give lawmakers power to do anything they can’t already do through the legislative process. Policymakers have already cut income taxes and held the current budget proposals to the formula of population plus inflation growth. Changing the state constitution in this way would limit the tools available for future lawmakers to make fiscally responsible and timely choices. It would make lawmakers less accountable to North Carolinians. If this proposal goes into effect, it’s not going away, no matter how future voters feel.
  • It would lock in the tax decisions that have primarily benefited the wealthy. Low, flat income tax rates deliver the greatest benefit to the wealthiest North Carolinians, and this proposal to make the income tax rate structure permanent locks in the tax decisions made in recent years that have benefited the powerful.

We elect our legislators to use their judgment to make North Carolina a stronger, more prosperous state – not to take away from future lawmakers the ability to use their judgment to meet needs as they arise. This proposal threatens our future.

Here’s a link to BTC’s fact sheet on Senate Bill 817.

Learn more about how Senate Bill 817 would put N.C.’s AAA-bond rating at risk.

Learn more about how Senate Bill 817 would lock in tax giveaways for the powerful. 

Find out more about how we need to #GetNCBackonTrack.

2016 Fiscal Year State Budget, NC Budget and Tax Center

More “clarity” adds to tax shift taking place in North Carolina

North Carolinians are paying more in sales taxes than they did a few years ago. Lower income North Carolinians continue to pay a larger share of their income in state and local taxes compared to the wealthy. This is a result of state leaders’ deliberate efforts to create a state tax system that relies much more on the sales tax and much less on income taxes. Consequently, the tax load has shifted to low- and middle-income taxpayers and away from the state’s highest income earners.

North Carolinians now pay sales tax on a number of activities and services that were not subject to sales tax prior to 2014. In recent years, the sales tax has been expanded to include more than 40 services that were either not taxed at all or only partially taxed prior to tax changes passed by lawmakers. And the list of services subject to sales tax will likely grow under tax changes pushed through by state leaders that give large income tax cuts to the wealthy and profitable corporations and swap in the sales tax, which disproportionately hits middle- and low-income taxpayers. And because state leaders have not put in place a strong Earned Income Tax Credit (EITC) to offset this swap, this means most North Carolinians will likely see even more of their income going to state and local sales taxes.

For the current fiscal year, North Carolinians will pay more than $500 million in additional revenue as a result of lawmakers expanding the sales tax base. For the upcoming fiscal that begins July 1st, nearly $640 million in additional revenue will be raised from expanding the sales tax. Read more