The Pulse

Context for the April surprise

By: - May 6, 2015 1:35 pm

We were surprised to learn today that the official estimates suggest North Carolina will have a $400 million surplus this fiscal year. This is certainly good news for our state – we won’t have to cut quite as much as we thought we would to the core public services that help our communities and families connect to economic opportunity and enjoy a high quality of life.

The revenue uptick, however, does not mean that the state has more than what we need to get families and the economy back on track. Nor is it a result of the failed economic theory that tax cuts spur economic growth and certainly it is not a sign that North Carolina is in a stronger position as a result of the tax cuts.

Here are a few things to keep in mind.

North Carolina’s economic recovery follows the national recovery. The April surprise in North Carolina is in line with the experience of other states during this period. The reality, however, is that the recovery has been very uneven, with many North Carolinians still waiting for their Carolina Comeback. There is no causal connection between the tax cuts passed in 2013 and growing revenue or the state’s recovering economy. Other states that didn’t cut taxes are also seeing bumps in their revenue as is noted in the memo released today. Given the preponderance of evidence that tax cuts don’t increase tax collections, the more likely explanation is that the economic recovery is strengthening.

Importantly, it was our state income tax that gave us this surplus. It’s designed to grow when the economy starts to recover to make up for when it falls during recessions and that is why it is a critical pillar to the adequacy of our state tax code. Additionally, given that all income growth during the ongoing economic recovery has accrued to the wealthiest North Carolinians and business profits are outpacing wage growth, it is clear that a tax code better aligned with ability to pay is still needed. The latest revenue forecast notes that revenue from business income paid through the personal income tax and capital gains is one of the estimated drivers of the revenue surplus. Further evidence that the economy is not working for everyone.

The tax cuts passed in 2013 reduced revenue that could have been used to help boost the state’s economy through investments in education, health and economic development initiatives. The revenue surplus does not erase the loss of revenue from those tax cuts. North Carolina is collecting less revenue than before the recession despite being nearly six years into a recovery and still is experiencing year-over-year revenue growth below historic performance. In this context, it is even more disturbing that future revenue growth will be driven into more tax cuts for profitable corporations blocking off our state’s progress in building an economy that works for everyone.

Yes, profitable corporations are given another tax cut that they don’t need at the expense of everyday North Carolinians and our state’s economy. The revenue announcement today means that another round of tax cuts for profitable corporations will go into effect, which further hinders our ability to make up the ground lost since the start of the Great Recession. This means that not only will some North Carolinians be paying more in taxes while profitable corporations pay less, it also means that many of the foundations of a strong economy will continue to forego adequate investment. The likelihood that profitable corporations will drive their tax cut into job creation or capital improvements in North Carolina is small to none. The result is a missed opportunity to invest in engines of growth—infrastructure and education, research and development, and consumers whose demand for goods and services—which far outstrip the potential of tax cuts to serve as an economic development strategy.

The 2013 tax plan was still a tax shift and North Carolina’s tax code is indeed upside down. The revenue forecast memo released today notes that tax refunds dropped by 57 percent, nearly twice the projected drop of 35 percent. This drop in tax refunds is more than double the next largest drop in refunds historically. Such an extremely low level of refunds at tax time, along with our own analysis of who pays under the new tax code, suggests that the tax plan neither delivered more money to more North Carolinians through their paychecks nor at tax time. Given what we know about the way in which policymakers chose to change the tax code, this finding is not surprising. A tax shift did occur and is hurting North Carolinians as their stories this tax season have made clear.

The revised revenue forecast shows a recovering economy and that is a good sign even if the growth is uneven and incomplete at this point. If we’re going to debate how much our state should raise and spend, we need to begin with a full and accurate picture of the state’s financial health. It’s misleading to imply that our state is in good shape just because revenues did better than expected. That ignores that our schools are hurting, roads and bridges are crumbling, and so many of our children are growing up in poverty. Policymakers should take that $400 million and invest in public services to ensure that the economy is working for everyone, not just a select few.

Driving those dollars into more tax cuts now would not only be imprudent, but would also lock in current low levels of spending. We are digging our way out of a very deep hole, but we aren’t out yet, so let’s not allow ourselves to slide right back down to where we were. A focus on making sure our economy works for everyone is needed now more than ever and can get a boost from this revenue news if the right choices are made.

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