NC Budget and Tax Center

NC Budget and Tax Center

It hasn’t taken long for the costly tax plan passed last year to replace grandiose promises with an unfortunate reality. State officials recently confirmed that the 2013 tax plan passed by state policymakers will cost at least $200 million more each year than initially projected, with a price tag of at least $5.3 billion over the next five years. Our own estimates point to the potential for the total revenue loss to reach $1.1 billion by 2016.

As the prolonged negotiated budget for fiscal year 2015 highlights, North Carolina’s revenue challenge hampers our ability to invest in public education, healthcare services, and other public investments that serve as the foundation of economic growth.

The General Assembly’s Fiscal Research Division (FRD) was charged with assessing the fiscal impact of the tax plan and confirms that the personal income tax rate reduction is having a greater immediate impact on revenue collections. FRD attributes the larger-than-expected eventual revenue shortfall to slower wage growth. But it’s difficult to imagine that the income tax cuts are not driving the greater revenue losses given what we know about who benefits from the tax changes and slower wage growth suggests that the tax changes should cost less, not more. Moreover, slow wage growth raises additional concerns about the reality of a Carolina Comeback. Read More

Missing Workers, NC Budget and Tax Center

Yesterday’s release of the latest labor market numbers for July 2014 continues to show a slow recovery of jobs in North Carolina. Job growth, while occurring, is insufficient to ensure that the state’s growing working age population has employment opportunities. North Carolina has still not replaced the nearly 300,000 jobs lost during the Great Recession. In fact, the state’s job creation over the year (2.1 percent) is not significantly different than that for the nation (1.9 percent) over the same period. The state’s jobs deficit also remains high at 470,000, and at the current annual rate of job creation will require five years to close.

In this context, here is the missing workers update for July 2014: there still remain more than 256,000 North Carolinians who are missing from the labor force.  These are folks who would be seeking employment if job opportunities were stronger. If these workers were counted in the unemployment rate, that rate would be 12 percent rather than the official unemployment rate for July 2014 of 6.5 percent.

BTC - Missing Workers July 2014

NC Budget and Tax Center, Uncategorized

One of the fundamental claims made about North Carolina’s cuts to unemployment insurance payments was that such a policy change would create a greater incentive for jobless workers to take available jobs and employment in the state would rise as a result.

The Economic Policy InstituEPI Cuts to Unemployment Insurance Benefitste (EPI) posted a great graphic once again demonstrating that there is no evidence to suggest such a causal effect on employment from unemployment insurance cuts.  In this case, researchers at EPI compare North Carolina’s employment levels to our neighbors who are likely to have experienced similar macro-economic conditions. Their finding:

As the graph shows, North Carolina’s prime-age EPOP (employment to population ratio) began rising rapidly in the months prior to the duration cutback, began falling steadily just two months after the duration cutback, and differed very little in behavior after the cutback from prime-age EPOPs in surrounding states.

Bottom-line: North Carolina’s labor market has not improved as a result of unemployment insurance cuts.

Falling Behind in NC, NC Budget and Tax Center

Governor McCrory signed a final budget into law for the current 2015 fiscal year, which runs from July 2014 through June 2015, this morning. The $21.1 billion budget includes new spending initiatives – largely pay raises for teachers and state employees – but fails to include additional revenue to sustain this spending in the long-term. Contrary to fueling North Carolina’s economic comeback, as Governor McCrory claims, the final budget continues to fund core public services at diminished levels, well below pre-recession levels, and compromises the ability of the state to get ahead and prepare for the future.  Moreover, it puts North Carolina on a fiscally irresponsible path that will continue to create budget challenges in the years ahead, largely as a result of the tax plan that was little debated and discussed in the final budget.

North Carolina faces a revenue challenge, and actions taken within the final budget make this reality clear. The final budget signed by the Governor spends every available dollar and uses dollars from last year’s budget as a result of the Governor requiring agencies to cut their respective budgets. No funding is available to build up the state’s Savings Reserve fund, which is meant to position the state to weather a future economic downturn. Furthermore, the budget relies on one-time funding sources that, once depleted, cannot be replenished with such low revenue and shifts funding for core public investments such as K-12 education to lottery receipts and early childhood programming to federal block grants.

Such budget decisions are driven largely by the tax plan the governor signed into law last year, which significantly reduces revenue available for public investments. Revised analysis by the General Assembly’s Fiscal Research Division estimates that the income tax rate cuts in the plan will cost at least $200 million more annually than initially expected – more than $1 billion less in annual revenue once the plan is fully implemented. The Governor and state policymakers failed to account for this reality in the final budget, which means that, absent new revenue, more budget cuts to core public services are likely to occur in future years as the tax plan continues to be implemented. Another round of tax cuts is set to occur in January 2015.

Under the final budget signed by the Governor, state spending remains 6.6 percent below pre-recession levels (see chart below). Read More

NC Budget and Tax Center

Over the course of the past three days, nearly 10,000 North Carolinians signed a petition calling on legislators to address the rising cost of the tax cuts that passed last year.  Tax cuts that primarily benefit wealthy taxpayers and profitable corporations.  The petition was delivered yesterday to legislators and yet early this morning the Senate approved a budget that fails to stop future tax cuts or address the growing gap between the priorities of the state and the adequacy of our revenue system.

PetitionDelivery

As the House debates the budget today, it is time to turn to the Governor for leadership on this issue.  He had early in 2013 committed to revenue neutral tax reform but as is increasingly clear the plan passed last year is not revenue neutral and is growing in cost.  The income tax cuts alone are projected to cost more than $5 billion over five years.  And it is quite possible, as we have written before, that the revenue shortfall for this fiscal year could be as high as $600 million.  That would mean the total tax plan would lose the state $1 billion in revenue each fiscal year.

Without those dollars it will be difficult for policymakers to meet the priorities of North Carolinians, sustain their plans for a teacher pay raise or ensure that North Carolina is on competitive ground and delivering a high quality of life to all.  Let’s hope the House rethinks the budget and if not that the Governor will lead the state down a more fiscally responsible path.