NC Budget and Tax Center

Revenue is up but North Carolina still falls short

Revenue remains up in North Carolina. This isn’t surprising as the national and state economies are growing. Revenue collections are expected to be $237 million above projections for this fiscal year, which is welcome news. However, as previously highlighted, this better-than-anticipated revenue does not mean we have adequate revenue to meet the needs and priorities of a growing state.

Costly income tax cuts enacted in 2013 greatly reduced revenue for public investment – reducing annual revenue by around $1 billon. Last year, state lawmakers passed more tax cuts that, once all tax changes are fully in place, will reduce annual revenue by more than $2 billion. These are dollars that otherwise would be available for public schools, affordable higher education, healthcare services for the elderly and poor, and helping ensure that economic growth extends to rural and distressed communities across the state.

The projected $237 million in better-then-anticipated revenue falls far short of what’s needed to adequately address challenges we face as a state. Getting average pay for North Carolina teachers closer to the national average, reducing Pre-K waitlists that totaled more than 7,200 children last year, helping promote economic growth in rural and distressed communities, and improving the states foster care system are among challenges that require additional state funding support. Many other challenges exist – ensuring affordable higher education and a growing elderly population – that have implications on the economic health and overall quality of life for North Carolinians.

While better-than-anticipated revenue is welcome news, such news does not serve as validation of costly tax cuts passed in recent years. Nor does this news mean that North Carolina is positioned for broadly shared economic prosperity in the years ahead. Rather, concern about whether our state will truly be able to keep up with the needs in a growing state that seeks to remain competitive and an attractive place to live should continue.

NC Budget and Tax Center

Latest sales tax expansion highlights need for state EITC

Today North Carolinians will begin paying sales tax on various installation, repair and maintenance services on everything from appliances to musical instruments to vehicles. This modest expansion of the sales tax base was included in the state budget passed by state lawmakers last year and represents another step towards aligning the state’s tax code with a more service-based economy. Today, the purchase of services is far more common than the purchase of goods compared to prior periods and this economic activity trend is likely to continue.

The effort to better align the state’s tax code with a 21st century economy is important. However, proponents of the sales tax move have used this good tax policy to fuel far more bad ones. The sales tax base expansion is part of a larger transformation of the state’s tax code that shifts away from the income tax, which is a better tax policy tool for achieving long-term revenue adequacy via a structure that’s based on ability to pay. Furthermore, this shift away from the income tax and to a greater reliance on the sales tax fails to acknowledge the increased tax responsibility on low- and middle-income taxpayers and away from the wealthiest who have reaped the greatest benefits from tax changes since 2013.

State lawmakers continue to be susceptible to special interests and this was highlighted with decisions regarding the expansion of the sales tax. Read more

NC Budget and Tax Center

Better tax policy tool available to address state’s upside-down tax system

State lawmakers are once again considering more tax changes that won’t address what’s wrong with our current tax code or what our economy needs. During the Revenue Laws Committee meeting on yesterday, the General Assembly’s Fiscal Research Division provided committee members information regarding how raising the state standard deduction would impact taxpayers and state revenue.  This tax change would reduce the income tax owed by a taxpayer but is an expensive one that fails to efficiently target the low- and middle-income taxpayers who carry a heavier tax load than wealthy taxpayers.  A refundable state Earned Income Tax Credit is the better tool for North Carolina policymakers concerned about tax equity.

Tax changes passed since 2013 that include large income tax cuts that largely benefit the already well-off and profitable corporations have made North Carolina’s upside-down tax system worst. State lawmakers expanded the sales tax to more goods and services to partially pay for these costly tax cuts. The regressive sales tax hits low-income North Carolinians particularly hard, as they spend a larger share of their income on goods and services subject to the sales tax. This deliberate move by lawmakers to a greater reliance on the sale tax and less reliance on the income tax has shifted the tax load to low- and middle-income taxpayers and away from the well-off and profitable corporations.

In a context in which many working families earn low-wages and struggle to meet basic needs, there is increased recognition at the national level that the Earned Income Tax Credit (EITC) is the best tool to ensure workers keep more of what they earn and in so doing move families out of poverty. Here’s why a refundable EITC makes the most sense for North Carolina: many low- and moderate- income North Carolinians are not subject to a state income tax because they don’t earn enough income. However, they pay a significant share of their income in other taxes—like sales and property taxes—and the EITC helps offset the higher tax responsibility they have overall relative to wealthier taxpayers. Moreover, increasing the standard deduction would reduce the income taxes paid for all tax filers who don’t itemize, not just those with low-incomes.

Increasing the standard deduction by $2,000 not only is poorly targeted but is also costly. Fiscal Research estimates that such a proposal would reduce state revenue by as much as $205 million for tax year 2017. The actual cost may be higher considering that a higher percentage of NC taxpayers (beyond the 70 estimate by Fiscal Research) are likely to take the standard deduction as a result of tax changes since 2013. Restoring a state EITC at 5 percent of the federal amount would be half the cost of increasing the standard deduction at that level and reach nearly one million working but low-income families and their children.

If policymakers are willing to spend $200 million to address inequities in our state’s tax code then restoring a state refundable EITC and doubling its value to 10 percent of the federal amount is the better policy choice.

NC Budget and Tax Center

There’s a reason providing teachers a meaningful raise is seen as unrealistic

State Superintendent of Public Instruction June Atkinson recently proposed a 10 percent pay increase for public school teachers. In response, NC House Speaker Moore stated that he doesn’t think that’s a realistic goal because North Carolina can’t afford the price tag. Speaker Moore says he believes we must pay our teachers more than we do, but that this should be done in a responsible way.

The requested pay increase comes as North Carolina ranks among the very bottom of states for average teacher pay. State funding for pay increases in recent years has largely targeted early-career teachers, leaving more experienced educators wondering if they will ever get a meaningful pay increase.

The reason providing teachers a 10 percent pay increase is deemed a hefty, unrealistic task by state leaders is clear – costly tax cuts ushered through by state leaders in recent years. Tax cuts included in the current two-year budget, once fully phased in, will reduce annual state revenue by more than $1 billion. When you include the cost of the tax cuts passed in 2013, the combined reduction in annual revenue increases to more than $2 billion. These are dollars that would otherwise be available under the old tax code in place prior to the tax changes. The tax cuts largely benefited the already well-off and profitable corporations and shifted the tax load to low- and middle-income families and individuals.

State leaders have proven their ability to push through their priorities in recent years and tax cuts have certainly been a major priority. The self-inflicted challenge that North Carolina faces – providing all teachers a meaningful raise – is a result of state leaders’ dogged pursuit of more and more tax cuts. This challenge is not happenstance, but rather a consequence of choices made by state lawmakers.

North Carolina’s ability to make public investments that are crucial to promoting widespread prosperity and that support a growing economy requires a tax system that raises adequate revenue to meet the growing needs of our state. Tax cuts passed in recent years will increasingly challenge our ability to strengthen the foundation that ensures opportunity for all North Carolinians – quality public schools, affordable higher education, and healthy and vibrant communities, for example.

What is not realistic is for state lawmakers to continue cutting taxes, which reduces revenue for public investments, and expect our state to be able to compete for good-paying jobs and remain an attractive state to raise a family and operate a business. All North Carolinians lose as we are taken down this dangerous path of cutting taxes at the expense of investing in our people and our future.

NC Budget and Tax Center

Revenue bump doesn’t mean NC has what’s needed to meet growing needs

News that revenue is up in North Carolina doesn’t mean that we have what is needed to meet our state’s growing needs. In fact, total state revenue for the second quarter of fiscal year 2016 was below the level of revenue raised for the same period prior to the end of the Great Recession, fiscal year 2008, when adjusted for inflation.

By contrast, a majority of states experienced state tax receipts (adjusted for inflation) that exceeded their respective peak levels before the end of the recession in the third quarter of 2015, based on BTC’s analysis of most recent state tax collections data provided by the U.S. Census Bureau.* North Carolina ranked 34th worst among states, with tax revenue below its peak quarter prior to the end of the recession. The recent revenue outlook report from the General Assembly’s Fiscal Research Division highlights that we still have not reached this peak revenue level.

News from state officials that as of December 2015 revenue was up over the year still does not signal that North Carolina is collecting revenue in line with our state’s growing needs.

State leaders’ insatiable appetite for tax cuts largely explains why state tax revenue for North Carolina has yet to return to its peak pre-recession level, despite an improving national economy. The huge, costly tax cuts passed since 2013 greatly reduced annual revenue that otherwise would have been raised under the old tax system. Once all tax changes are fully implemented, annual revenue loss will total more than $2 billion dollars.

The massive revenue loss from tax cuts challenges our ability to make investments in the foundation that help move our state forward. State leaders claim that providing all teachers a meaningful raise is unrealistic. State funding per student for public schools remains below its pre-recession spending level when adjusted for inflation. State funding for our public universities is 16 percent below pre-recession spending while tuition and mandatory fees increased by nearly 43 percent during this period. Tuition at community colleges has increased by 81 percent since 2009. More than 6,400 fewer state-funded slots are available for NC Pre-K than in 2009 despite more than 7,200 children being on NC Pre-K wait lists last year. State support to help promote economic development in rural and distressed communities across the state has been cut drastically in recent years. Inadequate state support to help unemployed and underemployed North Carolinians retool and retrain in order to secure better paying jobs to support their families persists. These are examples of foregone opportunities to invest in our people and our future. Read more