NC Budget and Tax Center

The latest quarterly revenue report by the General Assembly’s Fiscal Research Division (FRD) highlights that tax cuts do not explain the better-than-projected income tax revenue collections for the most recent fiscal year 2015.

According to FRD, two factors likely affected income tax collections for the most recent fiscal year.

  • Corporate taxable profits accelerated as wages remained low and write-offs on losses from the recession dwindled. This pushed collections 21.2% above forecast expectations.
  • Timing in personal income tax collections from changes enacted beginning with the 2014 tax year meant lower monthly withholding revenue – but higher final payments and smaller refunds in April. The forecast didn’t fully capture those dynamics leading to a shortfall the previous fiscal year and a surplus in FY 2014-15.

There’s evidence to support these two points. Corporate profits are at a record high as the economy recovers in part due to a steady increase in productivity. Meanwhile, wages for workers have remained stagnant – an indication that workers have not participated in the economic gains during the ongoing recovery. Furthermore, FRD notes that tax changes in recent years made it difficult to determine the timing of income tax revenue collections, resulting in a projection that was well below actual collections for FY 2014-15. Read More

NC Budget and Tax Center

The General Assembly used a few of the last hours of the 2015 session to cut back how long unemployed North Carolinians in economically distressed counties can receive food assistance. Even though this weeks’ labor market data show that 9 out of 10 counties have more out of work people than job openings, the new rule would cut unemployed people off regardless of how hard it is to find work. The change could take food off more than 100,000 tables across North Carolina, and will pull money out of already struggling local economies, a doubly bad deal.

The one-sentence provision in the ratified bill (see section 16.a) permanently prevents the state from seeking to extend food assistance for people who can’t find work in their local economies, except in times of emergency. The federal Supplemental Nutrition Assistance Program (SNAP) allows states to temporarily waive a three-month time limit for unemployed childless adults who live in areas where few jobs are available.77 waiver counties - Updated for Blog Post

Recognizing that cutting off food aid to areas where there aren’t enough jobs hurts entire local economies, North Carolina sought this waiver for 77 of our 100 counties earlier this year. If the Governor signs this measure and SB119 into law, the ban on the waiver would go into effect in July 2016. Without the modest support of SNAP (formerly known as food stamps), between 85,000 and 105,000 North Carolinians would be subject to the three month-time limit and potentially will not be able to purchase food at their local grocery stores, depressing consumer demand further and driving use of food banks already stretched to capacity. Read More

NC Budget and Tax Center

State policymakers seem to think we can spare the money for another $1 billion tax cut, but also need to run up $2 billion* in new debt for core investments. The NC Senate this week takes up the Connect NC Bond Act of 2015 (HB 943), which would use debt instead of regular appropriations to pay for a range of repair and renovation projects. While now is a great time to borrow for major new investments, cutting taxes at the same time is bad news for North Carolina’s long-term fiscal house.

There are good reasons to issue debt right now. Interest rates are still pegged to the floor and low oil prices make it cheaper to complete construction projects. After seven years of below average appropriations, especially during the recovery, the list of overdue repair and upgrade projects is as long as your arm (assuming you’re on the tall side).

Simultaneously running up debt and cutting taxes is risky business. Together, the cost of tax cuts passed last week and repaying new debt will set North Carolina up for future cuts to core government functions that are already stretched beyond the breaking point. More tax cuts may also topple North Carolina’s credit rating, which already happened to states like Kansas when they cut taxes.  If lenders get even more edgy about North Carolina’s shaky fiscal house, they may demand higher interest rates in a few years’ time when the last of the bonds authorized by HB 943 would go to the credit market.

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NC Budget and Tax Center

The budget passed by state lawmakers last week expanded the sales tax base to include additional services that are not currently taxed. Accordingly, the repair or upkeep of a vehicle, the repair of a broken washer or dryer, or the maintenance of an air conditioning unit will now be subject to the sales tax.

It appears that the weekend gave policymakers time for some second thoughts about their plan, however. This week, state lawmakers are now aiming to pass a bill that will roll back one particular aspect of the sales tax base expansion included in the budget.

House Bill 117 (HB 117) includes a provision that would exempt repair, maintenance, and installation services on tangible property and motor vehicles covered under manufacturer or dealer warranties from the sales tax. Accordingly, under HB 117, if your vehicle or tangible property is covered under a warranty then you don’t pay a sales tax on repair and upkeep services. To the contrary, if your vehicle or other tangible property is not covered under a manufacturer or dealer warranty then you will pay more in sales taxes.

This tax change means that two people can own similar tangible property, but one could potentially end up paying more in sales taxes simply because they don’t have a manufacturer or dealer warranty. This is troubling because it is likely to particularly harm low-income taxpayers who already pay a larger share of their income in taxes compared to the well-off. Low-income taxpayers who have to take their non-warranted vehicle to an auto shop for an unexpected repair will pay more in sales taxes, for example. Meanwhile, those who are able to afford costly warranties will escape having to pay more in sales taxes.

The backtracking on services included in the sales tax base expansion contradicts state lawmakers’ supposed commitment to base broadening on principle. Broadening the sales tax base has been sold as a way to make the state’s tax code more effective and ensure that it reflects a more service-oriented economy. That appears to be the case only if powerful lobbyists don’t object. Read More

NC Budget and Tax Center

After enacting huge, costly income tax cuts in recent years that largely benefited the state’s wealthiest people and biggest, most profitable corporations, pursuing more tax cuts would threaten North Carolina’s economy – and yet it appears state lawmakers are doing just that.

Questions remain about what will or won’t be in the budget the Legislature passes. What is known, though, is that the spending target agreed upon by the House and Senate is $230 million less than what the state is projected to take in over the year from tax revenue.

If that turns out to mean a tax-cut proposal, it will come in the face of strong evidence that such a strategy doesn’t deliver widespread economic benefits.  North Carolina is experiencing a very uneven economic recovery. Many people still can’t find jobs and many who are working are being paid less than what it takes to make ends meet. Tax cuts aren’t going to create the jobs North Carolina needs and they take resources away from what the state should invest in to promote real growth – quality public schools, affordable higher education, modern infrastructure, and safe and healthy communities, for example.

A continued pursuit of failed trickle-down economics policies would occur as investments in those public services and others are still below pre-recession levels and insufficient to meet growing needs.

State lawmakers are pursuing two paths to usher in more income tax cuts.

One path builds more tax cuts into the state budget. Budgets passed by both the House and the Senate lower the corporate income tax rate to 3 percent from 5 percent over the next two years. These tax cuts will result in more than $450 million less available to the state for public services over the next two years. As we’ve highlighted previously, cutting corporate income taxes won’t boost North Carolina’s economy; taxes are but a fraction of a business’s costs. Furthermore, the Senate’s budget changes how corporations apportion their income for state income tax purposes and reduces the corporate franchise tax rate. In total, tax changes included in the Senate’s budget would result in nearly $1 billion in less state revenue over the next two years.

The second path, Senate Bill 607, would amend the state constitution to arbitrarily cap the state income tax rate at 5 percent. This would reduce annual state revenue for public investments by around $1.5 billion. The result would mean more erosion of vital services and probably other tax increases – most likely the state sales tax. In combination with other proposed changes to the state constitution, this path would hamstring state lawmakers in the years ahead from meeting the priorities of North Carolinians by restricting the overall level of investment in our public schools, public colleges and universities, and other important areas.

These two paths that state lawmakers are pursuing are troublesome, particularly at a time when investing in North Carolina’s future is important to the state’s economic prospects. Consequently, the continued pursuit of trickle-down economics fails to promote broadly shared prosperity and prevents the entire state from moving forward together.