NC Revenue Surplus Lowered Slightly, Still Largest in Years

Much of the surge in North Carolina income tax collections this spring can’t be counted on to repeat in 2020 and 2021, state government economists said Tuesday. That could limit options on further spending or tax breaks in the upcoming two-year budget.

An updated examination of April tax collections by legislative staff and Gov. Roy Cooper’s budget office forecasts a $643 million surplus for the year ending June 30, according to separate memos from the executive and legislative branches. That’s 2.7% above what was anticipated last summer when the current-year state budget was finalized.

The figure is slightly below the $700 million the legislature’s top economist said last week was possible when all April collections were examined. But it still marks the largest state government surplus since the Great Recession, and a surplus for the fifth consecutive year.

In February, state economists projected a $151 million surplus this year, but it grew because individual income tax payments in April were 46% higher compared to last year.

A memo from legislative economist Barry Boardman says most of these increased collections are one-time bumps due to investment capital gains, rather than from taxes from wage and salary income, which are tracking close to forecasts. These one-time revenues, combined with an unchanged state economic picture, means General Assembly budget-writers can’t anticipate all this extra money again to help fund the two-year spending plan they are currently writing.

“This means the forecast does not expect these historically high capital gain realizations to continue during the biennium,” Boardman wrote.

One-time windfalls are often earmarked for saving reserves, building projects or other short-term needs, rather than permanent tax cuts and salary increases for teachers and state employees that rely on permanent spending growth.

Still, the current revenue and economic picture led the legislature’s Fiscal Research Division and Cooper’s Office of State Budget and Management to agree to raise the permanent revenue forecast slightly — by another $106 million for the year starting July 1 and $179 million more for the year starting July 1, 2020.

The House passed a budget bill May 3, and the Senate is expected to pass a different plan by the end of the month. The two chambers, both controlled by Republicans, will negotiate a final plan and present it to Cooper, a Democrat. He could veto the final budget bill and, with more Democrats in the legislature than in recent years, he wields more negotiating powers.

In a letter to Republican legislators released earlier Tuesday, Cooper asked them to use the unexpected money to carry out public education and health care initiatives from his budget proposal. Some of his options include funding increases to hire more school nurses, psychologists and social workers and to provide better pay than House Republicans offered for teachers and school personnel.

“The opportunity to make up for neglected education and health care funding is now,” Cooper wrote.

In a news release, the Senate’s three top budget-writers said Cooper lacks credibility in budget discussions because his administration has predicted fiscal “catastrophe” with recent budget laws the GOP approved.

“We intend to stay the course on the responsible budgeting policies that created this surplus in the first place,” GOP Sens. Harry Brown, Kathy Harrington and Brent Jackson said.

Some Republicans have suggested returning some of the surplus to taxpayers. The Senate Finance Committee approved a GOP tax package Tuesday similar to a proposal in the House budget that reduces business franchise tax rates and increases the standard deduction for individual income tax filers. The bill did not address any sort of additional tax break in light of the surplus.

The Senate tax package could lower tax revenues by $200 million annually, according to the Fiscal Research Division. Without additional changes, the official forecast projects state revenues will grow by $1.4 billion over the next two years. Cooper has complained that Republicans have approved corporate tax breaks at the expense of public school spending.