NC Budget and Tax Center

NC Budget and Tax Center

Policymakers are beginning to put the finishing touches on their budgets this week in the House. The Senate will soon follow.  While the April surprise has some thinking of investments in core services that are needed or, even more disturbing, proposing more tax cuts, a cautious approach is warranted.  Not only does the revenue announcement last week not signal that the state has what is needed to support strong and effective public services, it is quite possibly a one-time event.

The Washington Post today reported that a number of states  have announced revenue collections higher than anticipated largely on the personal income tax side and due to strong investment income performance.  North Carolina’s Fiscal Research Division and Office of State Budget Management identified similar sources for our own state’s revenue surplus.  From the article:

“This year’s April surprise will likely help more states meet or exceed revenue projections for fiscal 2015, which ends on June 30th for 46 states,” NASBO’s Brian Sigritz writes in the blogpost. “However, most of the gains are due to an increase in income tax collections, partly from the strong stock market performance in calendar year 2014, and are viewed as one-time occurrences.”

The fact that North Carolina appears to be mimicking national trends means that tax cuts also can’t serve as an explanation for the surplus. It also means, again, that policymakers should be very cautious in how they consider this money in their budgets.  It seems increasingly clear that a fiscally responsible approach would be not to expect the bump from current economic conditions to be a permanent feature of the new tax code and certainly not reason for more tax cuts.

NC Budget and Tax Center

The lesson this week in North Carolina is that when you dramatically lower expectations, you are bound to exceed them. Behind these low expectations is a state setting itself up for more cuts to things like schools and a slowed economic recovery.

When North Carolina’s revenue this month came in a bit higher than the low expectations the state set due to the 2013 tax cuts, it signaled that more tax cuts for profitable corporations are on the horizon. Triggers for these corporate tax cuts were included in the tax plan passed by state lawmakers in 2013, which stipulated that the tax rate would automatically drop if total revenue collections reached certain arbitrarily-selected thresholds.

State policymakers set a low bar of performance for the corporate tax rate reductions to kick in, and based on the revised consensus revenue forecast released last week, the revenue thresholds are expected to be reached. As a result, the corporate tax rate is expected to fall to 3 percent from 5 percent by 2017, reducing annual revenue by $100 million in the first year, $350 million the second year, and then by more than $500 million annually going forward.

Prior to passage of the 2013 tax plan, North Carolina’s tax system was projected to raise around $21.4 billion and $22.3 billion for FY 2015 and FY 2016, respectively. Under the 2013 tax plan, state lawmakers set revenue thresholds of $20.2 billion and $20.975 billion for FY 2015 and FY 2016, respectively. These thresholds are BELOW what would have been collected under prior law, thus providing plenty of room to lose revenue and still meet the thresholds.

In short, state lawmakers lowered the revenue performance bar and are now celebrating that the bar was surpassed.

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NC Budget and Tax Center

We were surprised to learn today that the official estimates suggest North Carolina will have a $400 million surplus this fiscal year. This is certainly good news for our state – we won’t have to cut quite as much as we thought we would to the core public services that help our communities and families connect to economic opportunity and enjoy a high quality of life.

The revenue uptick, however, does not mean that the state has more than what we need to get families and the economy back on track. Nor is it a result of the failed economic theory that tax cuts spur economic growth and certainly it is not a sign that North Carolina is in a stronger position as a result of the tax cuts.

Here are a few things to keep in mind. Read More

NC Budget and Tax Center

The announcement today that North Carolina has paid down its unemployment insurance debt to the federal government is just a first milestone in the path to a solvent system. It is one that has been achieved through a series of harmful cuts impacting jobless workers, their families and communities and an approach that will ultimately reduce the long run potential of the system to serve as stabilizing force in the economy.  So as far as milestones go, the celebration seems premature.

Here are few things to remember about the unemployment insurance debt and the choice that policymakers made to pay employers’ debt with cuts to unemployment insurance for jobless workers.

1. Yes, historic job loss contributed to the need for the state to borrow from the federal government to ensure payments during the Great Recession, but that wasn’t the driver. It was tax cuts in the 1990s that set the system up to fail even before the recession hit.

2. North Carolina’s unemployment insurance system was pretty much middle of the pack on most measures of adequacy, reach and financing when policymakers decided to make their changes to it in 2013.  These changes have reduced average weekly benefit amounts and the number of jobless workers accessing the system.

3. The dollars from cutting benefits for jobless workers contributed the most to debt repayment according to estimates by the Upjohn Institute and Fiscal Research Division.  Nearly two-thirds comes from cuts to benefits and just 0.7 percent from state taxes.

4.  The final payments on the debt mean employers will no longer pay the automatic federal tax increases that were the primary way by which they contributed to the success of this system that benefits them.  The automatic federal tax increases went up $21 per worker each year or, for a full time employee, about a penny for every hour that worker worked. By 2013, employers were paying three cents more per hour worked per employee. Unemployment insurance taxes total represent about 0.1 percent of total business costs.

5. Unemployment insurance taxes are not a barrier to job creation or strong economic performance.  The opposite is the case: ensuring that the unemployment insurance system can serve its temporary and adequate wage replacement function means that employers are less likely to have to eliminate jobs and more able to rebound from a downturn.

Failure to make changes now to the financing of the unemployment insurance system by ensuring that employers contribute adequately and do not receive more tax cuts (as they will under current law) before the Trust Fund is truly solvent will undermine the system’s stabilizing force in the economy.  Future downturns could require more borrowing, benefit cuts or tax increases if policymakers prematurely reduce the state taxes contributed by employers. Failure to revisit the benefit cuts and the harm they have created will undermine the support of this system to the economy.

 

NC Budget and Tax Center

The Budget and Tax Center’s weekly posting of Prosperity Watch takes a look at how North Carolina’s communities are grappling with stark racial income disparities. Economic exclusion has its roots in predatory and discriminatory economic policies dating back centuries.

The harm of that economic exclusion is stark. Communities of color are far more likely to live in poverty than their white counterparts. To match the state’s white poverty rate of 12.3 percent, approximately 464,000 North Carolinians of color would have to be lifted above the poverty line. Racial disparities keep the economy from reaching its full potential to the tune of $63.53 billion, meaning bringing down poverty among people of color is an economic imperative. It’s also a moral imperative too.

Check out the latest Prosperity Watch for the details.