North Carolina Set to Post Another Large Budget Surplus

May 8, 2017

Jared Walczak

Jared Walczak

North Carolina will post a substantial budget surplus for a third year in a row, at a time when an estimated thirty-one states are grappling with budget shortfalls.

In fiscal year 2015, North Carolina posted a $447 million surplus. Fiscal year 2016 closed with a $430 million surplus. Now, fiscal year 2017 is projected to end with a $581 million surplus. These continued surpluses belie alarmist claims that the state’s 2013 and subsequent tax reform efforts would imperil North Carolina’s finances.

Before North Carolina’s tax reforms began, the state had a two-bracket individual income tax with rates of 6.0 and 7.75 percent. Today, the state’s single-rate individual income tax stands at 5.499 percent. Prior to reform, the corporate income tax rate was 6.9 percent; today it is 3.0 percent. North Carolina accomplished this through a mix of base broadening and responsible cuts, and the state’s continued commitment to a competitive tax climate and fiscal prudence is paying dividends.

North Carolina’s present surplus is the product of continued economic growth paired with fiscal restraint. The state budget office attributes much of the surplus, which represents 2.5 percent growth above projections, to higher than expected wage growth boosting personal income and sales. The budget office also estimates that continued economic gains should provide close to $1.5 billion over the next two fiscal years.

Given sustained growth of state revenues, legislative Republicans hope to continue revisions to the state’s tax code, reducing the individual income tax rate to 5.35 percent, phasing the corporate income tax rate down to 2.5 percent over two years, and cutting franchise taxes on the first $1 million in net worth. The proposal, which would also increase the standard deduction and expand the child tax credit, among other changes, would reduce revenue by an estimated $710 million in fiscal year 2019, roughly in line with projected revenue growth.

This proposal is likely to meet with a frosty reception from Governor Roy Cooper (D), who has been skeptical of the state’s tax reforms to date. Nevertheless, the state’s full coffers continue to prove naysayers wrong, and to demonstrate North Carolina’s tax reform has a firm foundation.

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A 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.

The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.

An 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.

A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

Base broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.