Let’s give the Republicans running state government in Raleigh a round of applause. They clearly feel they deserve it. The state’s consensus forecast in recent months predicted a budget shortfall of $271 million, but the experts say now that the tax-season dust has settled, the state boasts a $400 million surplus instead.
Gov. Pat McCrory credited “a growing economy, fiscally responsible budget, and tax reform that’s putting more money in the pockets of North Carolinians.” Senate leader Phil Berger released his own touchdown dance of a statement, chiding the “Chicken Littles on the left” who worried that the big tax cut GOP lawmakers passed two years ago would cripple the state.
News of a surplus is indeed cause for relief. But before GOP leaders dislocate their elbows in over-exuberant back patting, let’s look closer to see how they achieved it.
Berger pointed to a memo from the Fiscal Research Division and the Office of State Budget and Management, the staff experts who crunch budget numbers, and predicted the multimillion dollar shortfalls that worried this editorial board and other tax reform critics. The staff explained that its previous projections erred on the side of caution, since it was uncertain how the 2014 tax year – the first full tax-filing season under the revamped tax code – would shake out.
The returns are in. And the numbers don’t point to an expanding economy as the main cause of the huge swing from deficit projections to surplus. Instead, the memo noted that tax refunds dropped by 57 percent this year (not the 35 percent predicted). It was by far the biggest drop-off in 25 years.
Personal income tax collections surged, giving the state $375 million more than the staff expected. Some of that came from bigger collections in small business income. No surprise there, since tax reform killed the $50,000 business income exemption such establishments enjoyed.
GOP leaders say lower tax rates will draw more corporations and jobs to the state. But the new-found surplus didn’t come from new-found corporations. Wage growth is expected to be 1 percentage point below forecast for the current budget year, the memo says, and withholding tax revenue is projected at 3 percentage points below forecast. Corporate income tax and franchise taxes moved up only slightly since the staff’s February budget projections.
That means surging collections from small businesses and individual taxpayers – not corporations – turned the deficit forecast into a surplus.
All of which points back to the concern this editorial board and other critics have long held about the GOP’s tax reform vision: it shifts the tax burden from wealthy companies and individuals to smaller businesses and rank-and-file taxpayers such as the senior citizens who lost medical expense deductions.
GOP leaders say refunds are shrinking because they made paycheck withholding more accurate. The state’s keeping less of your money through the year. Even if true, that doesn’t change the bottom line fact that personal income tax revenue has surged.
Make no mistake. We do believe the state needs more money for schools and other public investments. But its leaders are lifting money from everyday taxpayers’ pockets while seeking praise for supposedly putting more money in them.
And for that sleight of hand, perhaps they do deserve a round of applause.
A sarcastic one.
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