Despite the growing revenue challenge North Carolina faces, a new round of tax cuts went into effect with the start of the new year. While the growing revenue shortfall warrants immediate attention during the upcoming General Assembly legislative session that begins next week, inaction up to this point has already dug a deeper hole as of January 1, 2015.
New personal income and corporate income tax rates are now in effect for 2015. The now-flat personal income tax rate dropped to 5.75 from 5.8 percent (the top marginal rate was 7.75 percent in 2013) and the corporate income tax rate dropped to 5 percent from 6 percent (it was 6.9 percent in 2013). These tax cuts will further reduce revenue for public investments and will largely benefit the wealthy and profitable corporation at the expense of low- and middle-income taxpayers.
The cost of the tax plan continues to grow higher than what state officials originally estimated. As of the end of the November, revenue collections are coming in $190 million below expectations. This loss is built on top of the already revised and anticipated revenue loss of $704 million due to the tax plan. Combined, this result in a nearly $900 million revenue loss for the state – much higher than the original $512 million cost estimate.
By the end of the fiscal year, BTC estimates a total revenue loss of around $1.1 billion — roughly the amount the state invests in the Community College system each year. Addressing yet another revenue shortfall will likely mean continued cuts to the state budget in the form of forced cuts to agencies that tend to get little media attention. What gets placed on the chopping board is yet to be revealed and will be determined by the size of the end-of-year revenue shortfall.
The new round of tax cuts going into effect continues the same flawed policies that are creating and compounding these budget challenges. Conservative leaders in other states are acknowledging the damage that costly tax cuts have created and are distancing themselves from the tax cut experiments in states such as North Carolina, Kansas, and Wisconsin.
Let’s hope that policymakers take a fiscally responsible path in the upcoming legislative session. Retroactively undoing the most recent rate reductions that went into effect on January 1 is one small step. Ultimately though, policymakers will need to go back to the drawing board on the 2013 tax changes to ensure adequate revenue is available. Pursuing further tax cuts certainly doesn’t make fiscal sense.