A few things to remember on the unexpected budget surplus
Published May 8, 2015
by Chris Fitzsimon, NC Policy Watch and NC SPIN panelist, May 7, 2015.
There was a surprise bit of good news in Raleigh this week as the consensus revenue forecast released by economists from the General Assembly and the Office of State Budget and Management Wednesday projects a $400 million revenue surplus at the end of the fiscal year that ends June 30th.
No one expected that.
Less than two months ago the same economists were still projecting a revenue shortfall at the end of year. Last fall the shortfall was estimated to be close to $300 million with some analysts believing it would get even worse.
Wednesday’s news that the shortfall had changed into a surplus set off a round of celebrating among many Republican politicians and their supporters.
Senate President Pro Tem Phil Berger blasted the “Chicken Littles on the left” who he claimed predicted that a shortfall created by the 2013 tax cuts would mean that students wouldn’t have teachers and that universities would have to close, though it’s not clear who actually predicted that.
House Speaker Tim Moore took a more measured and less spiteful tone, saying that politicians shouldn’t take credit for all of the surplus and that while he believes that the General Assembly’s tax cuts and economic development policies played a role, the improving economy was also a major factor.
Moore is on to something. Here a few things to remember amid all the crowing on the Right about the pleasant April surprise.
Economists in North Carolina and around the country underestimated how well the overall national economy has been doing and how much the economic growth would benefit state budgets.
The memo about the revised revenue forecast noted that the North Carolina’s big turnaround in April was “consistent with other state’s experiences.”
Minnesota has a $1.9 billion surplus after raising taxes on the wealthy and increasing investments in public education and human services. Arizona’s income tax revenues were way up in April too and California’s budget surplus is setting records.
Many states are doing better than predicted and they haven’t all cut taxes like North Carolina.
2) The surplus does not mean that everybody in North Carolina is doing better.
The memo about the state revenue says the surplus is “predominately the result of strong growth in business income, which resulted in a surge of final payments in April.” It also notes that some of the surplus came from capital gains and sales of stock and real estate.
Many people in the state actually paid higher taxes, most notably people who were no longer able to take certain deductions for medical expenses, retirement, etc. The state Earned Income Tax Credit for low-wage workers was also repealed.
The economist’s memo also notes that wage growth in the state is predicted to be one percent below forecast for the year.
3) The surplus does not mean the General Assembly has enough money to meet the state’s basic needs for the next two years. The surplus at the end of this year is one-time money that shouldn’t be used for ongoing expenses like teacher salaries or mental health services.
The rosier April numbers did prompt a revision of the revenue forecast for next year too, with economists projecting that lawmakers will have $562 million in new money available as they put next year’s budget together.
That may sound like a hefty sum, but not when you consider it in the context of $21 billion budget and the necessary inflationary adjustments. The General Assembly’s fiscal research staff in March identified $448 million in “budget pressures”— things that have to be done—like funding enrollment increases, paying for the growth in Medicaid and the state health plan and fulfilling the promise to raise starting teacher salaries to $35,000 a year.
That does not include the cost of a 2 percent raise for all state employees or a step increase on the salary schedule for all teachers. Add those to the mix and now you are talking about almost $800 million.
And the pressure doesn’t stop there. The newly forecasted budget surplus also activates a trigger in 2013 tax cut law to lower the corporate income tax rate by another percent next year. That will cost $109 million, pushing the minimal budget needs for next year to almost a billion dollars.
And even that doesn’t include anything to replace the deep cuts to public school classrooms, university campuses and human services programs made in the last few years.
The memo announcing the surplus also acknowledges that some of the explanation for brighter revenue news won’t be available until detailed data from the IRS is available a year from now.
What is clear at the moment is that North Carolina, despite the unexpected and welcome good revenue news, still faces significant budget challenges funding the vital services and institutions that the state needs and the people deserve.
Students without textbooks and ailing seniors no longer getting Meals on Wheels have nothing to do with Chicken Little.
Let’s hope lawmakers take a moment after their celebrating to think about how they can use this good budget news to improve the lives of the people they represent. Cutting corporate taxes again is not the answer. It’s time to make some investments
May 8, 2015 at 8:32 am
Richard L Bunce says:
Chicken Little lamely trying to explain the sky actually did fall... IF students are without textbooks it is due to the incompetence of the traditional government school systems... all of them have nice football stadiums and performing arts centers though.
May 8, 2015 at 9:03 am
bruce stanley says:
"It's time to make some investments". In other words, it's time to start spending. Why does this not surprise me, Chris?
May 8, 2015 at 10:05 am
Norm Kelly says:
'surplus set off a round of celebrating among many Republican politicians and their supporters'. But not a single lib. Doom turned into a potential boon and libs still wring their hands. Libs are still whining about the budget even though there's a surplus. Some of us remember when libs ruled Raleigh and year after year after year we were told there would be a budget shortfall. Sometimes it came true. Sometimes it didn't. But libs celebrated when it didn't come true and there wasn't a shortfall. Did lib media allies also celebrate when the shortfall failed to materialize? How about spending the surplus? Did libs who ruled use the money wisely or did they just spend it? Did libs who ruled reduce the next years' budget? Did taxpayers get a break on the following years' taxes? Or is this just more lib whining? Default lib position? Imagine!
'Minnesota has a $1.9 billion surplus after ... increasing investments in public education and human services'. Increasing spending DID NOT help their budget create a surplus. Spending does NOT generate a surplus. Spending by governments almost never produces additional income. It generates additional OUTGO!
'The surplus does not mean that everybody in North Carolina is doing better'. However, the opposite is also true. Just because libs raise taxes on 'the wealthy' does not mean that everyone does better. Raising taxes does not always generate more revenue for the state either. There is the rule of diminishing returns. Libs need to re-educate themselves on this rule. When the unqualified community organizer socialist racist occupier said he wanted to raise the capital gains tax so 'the wealthy' pay 'their fare share' he said this knowing that raising this tax OFTEN reduces the amount of revenue to the government. His response was typical of libs: it might reduce revenue but it was the right thing to do so 'the wealthy' were penalized in the eyes of his socialist supporters.
