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North Carolina Tax Revenue Exceeding Expectations Following Tax Cuts

2 min readBy: Scott Drenkard

On Wednesday, the North Carolina Legislative Services Office issued a revised revenue forecast showing a $400 million surplus over expectations (coverage at State Tax Notes).

In 2013, the state enacted fundamental tax reform, changing its multi-bracket individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. that topped out at 7.75 percent into a simple single-rate system of 5.75 percent. Corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates are on a trigger schedule to reduce one percentage point each year when revenues are healthy, and this revised forecast makes it very likely that they will meet the trigger requirements this year.

There was some uncertainty of how revenues would change given how different the new tax structure was, and this led to a conservative revenue estimate back in January. This sent some observers into a tizzy, claiming North Carolina would have “huge budget holes”.

But April collections were strong, and here’s why, according to the NC LSO (emphasis mine):

“A cautious forecast meant greater upside risks: As noted in the February consensus forecast, “given the uncertainty surrounding the fiscal implication of major tax code changes (S.L. 2013-316), which affected over $2 billion in revenue items this fiscal year, the forecast adopts a very cautious approach.”

"Errors are inherent in estimating fiscal impacts of extensive and complex tax law changes, and lower-than-expected Personal Income tax revenue in the first half of the fiscal year heightened the sense of uncertainty. For these reasons, the Forecast erred on the high side by estimating larger negative revenue impacts for FY 2014-15 Personal Income tax revenue. While the choice to provide conservative estimates is prudent from a budgeting perspective, the cautious forecast left more room for a positive April “surprise”.

“Growth in April payments was consistent with other states’ experiences: Based on information from other budget and revenue officers across the nation, April tax payments were up 15-20%. North Carolina had yearly [revenue] growth of that magnitude, which was well above expectation given tax law changes. It appears that the increase was driven by increases in business income, which is often paid under the Personal Income tax, and by capital gains from the sale of stocks and real estate holdings. However, detailed IRS data will not be available until this time next year.

“Refunds declined an estimated fifty-seven percent: Tax law changes allowed for more accurate withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. tables, which reduced the refunds claimed by taxpayers. The 57 percent drop this year was much larger than the anticipated 35 percent reduction and resulted in an additional $375 million in Personal Income tax collections than projected in February. Looking over the last twenty-five years the drop-off in refunds was more than double the biggest year-over-year decline.

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Erratum: This post has been corrected to reflect that the surplus is projected at $400 million, not $400 billion. I regret the type-o.