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NC Budget and Tax Center

State policymakers return to Raleigh tomorrow challenged with addressing a budget gap of $335 million for the current fiscal year as a result of a huge forecasted revenue shortfall for the current fiscal year and a Medicaid shortfall. Next year, state policymakers face a budget gap of around $228 million, which could reach as high as $637 million based on higher costs estimated from the personal income tax changes.

In the face of underperforming revenue, today the General Assembly’s Revenue Laws Committee voted favorably to pursue changing an arcane tax policy that would FURTHER reduce annual revenue by $10 million next year, FY 2015, and by more than $23 million for FY 2016.

In pursuit of ultimately shifting to a single sales factor apportionment formula, today the Revenue Laws Committee voted to give greater weight to the sales component in determining the amount of state income taxes paid by corporations. The state’s current tax system uses a formula that considers a corporation’s property, payroll, and sales in North Carolina. The tax change would give two-thirds weight to the sales component.

This tax change would create winners and losers. Around 3,000 corporations would see their taxes decrease under the tax change while around 6,000 corporations would see their taxes increase, according to analysis by the General Assembly’s Fiscal Research Division.

Proponents of this tax change claim that doing so will improve the state’s business climate by making expansion of property and payroll in the state more attractive to businesses. Other states that have adopted an SSF formula based on this premise have not seen this happen, however, and there is no reason to believe that North Carolina will experience a different outcome.

Furthermore, reducing the amount of revenue available for public investment will make the self-imposed budget challenge resulting from the tax plan passed last year worse. And everyone will pay the price because this will require further reductions to investments in educating our children, maintaining our infrastructure and protecting the safety and well-being of North Carolina families—investments that are needed to support a strong economy.

NC Budget and Tax Center

The revised revenue forecast released today demonstrates how important the income tax is to our state’s ability to make investments that boost our economy. As legislators begin building the next state budget, they should protect the income tax, not scale it back or eliminate it as some have proposed.

The revenue forecast indicates that tax collections since the beginning of 2013 are on target to pay for critical services included in the Fiscal Year 2012-13 budget, thanks to the revenue generated by the personal income tax. The personal income tax has been the most consistent source of revenue to pay for education, transportation, and public safety in North Carolina, and recovered quickly after the Great Recession, according to the report released today by the non-partisan Fiscal Research Division.

Sales taxes have not rebounded nearly as well because consumer demand continues to be weighed down by economic concerns, including the state’s high unemployment rate. Read More

NC Budget and Tax Center

Earlier this month, North Carolina legislators began the months-long process of developing the two-year state budget that covers July 1, 2013 through June 30, 2015. To kick-off this endeavor, non-partisan staffers have been providing members with an overview of current fiscal conditions as well as past legislative budget actions. Perhaps the most important presentation to date centered on the revenue forecast, which sets the stage for legislators to begin building the next state budget.

Projections from the non-partisan Fiscal Research Division indicate that General Fund revenue collections are on target as of the end of December for FY2012-13. North Carolina’s economy has made improvements over the last fiscal year but continues to lag behind the nation across several economic indicators. And although the state does not face an imminent budget crisis—largely due to a tremendously diminished baseline—the forecast implies that we are not completely out of the woods. Read More