The Pulse

Revenue surplus won’t solve state’s budget woes

By: - May 15, 2015 9:57 am

Last week, state officials announced that revenues are estimated to come in $400 million above projections set by the state. This is good news for North Carolina, as we previously noted, but it’s important to remember that it is a relatively small boost that doesn’t come close to covering the cuts to services made since the recession and is likely one-time money driven by the improving national economy, not North Carolina’s tax code. These considerations are timely as the House plans to fast track its budget, with the goal to release and approve a proposal by the end of next week ahead of the holiday weekend.

Most importantly, this revenue announcement will not come close to addressing the challenges that state budget writers face. There remains a very deep level of underinvestment in schools, higher education, and communities, and lawmakers’ choice to pass cut taxes that primarily benefit the wealthy and profitable corporations in 2014 and again in 2015 means that there are far fewer dollars available to position the state competitively.

Here are a few things about the revised revenue estimates that state lawmakers should keep in mind as they work on the state budget:

  1. A surplus means we have more than we expected, not that we have more than we need.

$400 million will certainly help the state budget but it won’t come close to fixing all of our state’s budget woes. In other words, this uptick in revenue (worth about 2 percent of the current state budget) is welcome news but still falls short of what’s needed to invest in our schools, colleges, and communities at the level we did before the recession hit, while also keeping up with the state’s changing needs and demographics.

Case in point: $400 million won’t cover the costs of enrollment growth next year in our public schools, university system, and health care services—much less also address other priorities such as pay raises for teachers and state employees.

But that’s not all. If we were to put a dollar figure on the erosion of state investments in children, families, and communities since the downturn it would be $3.2 billion. This is the additional amount of money the state would have to invest in if General Fund spending as a part of the economy today were at FY2007 (pre-recession) levels. The fallout from this is clear: 8,000 fewer kids going to pre-kindergarten today than in 2010; bigger class sizes; higher tuition rates for college; and long-waiting lists for home-delivered meals for our older adults.

  1. We would have significantly more revenue if not for the 2013 tax plan.

In 2013 when the tax plan was up for debate, state officials estimated that North Carolina would have $22.31 billion in revenue in the 2016 fiscal year. But the tax plan came with a hefty price tag, causing revenues to drop below that estimate. Now, despite coming in $400 million higher than expected, revenue is still projected to come at $21.97 billion. In other words, revenue would have been higher if the state hadn’t passed the tax plan.

  1. It’s likely that the $400 million is one-time money.

It appears that it is driven primarily by the national economic recovery and particularly a bump in income tax revenue from businesses as well as taxpayers who cashed in on capital gains. Like North Carolina’s official fiscal analysts and their colleagues in other states, we did not anticipate the scope of this phenomenon.

Budget writers should exercise caution when allocating the $400 million in their spending proposals. It is not clear if high-income people will continue to cash in their capital gains and assets—which is why the National Association of State Budget Officers labeled the resulting revenue gains to the state as “one-time occurrences.” Until we know more, these dollars should not be committed to recurring expenses nor should they be used as justification for more tax cuts.

Further cuts to the corporate income tax are on the horizon since revenue targets (which intentionally were set low) will be met, as my colleague explained. That means more budget woe and foregone investments in our public schools, health system, courts, and other economy-boosting public goods. Given the uncertainty, the trigger—at minimum—needs to be suspended until the state is on a better path.

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