NC's revenue shortfall is no mystery
Published August 27, 2014
by Cedric Johnson, NC Budget and Tax Center, August 27, 2014.
our reasons that the 2013 tax cut plan is likely the main culprit
It hasn’t taken long for the costly tax plan passed last year to replace grandiose promises with an unfortunate reality. State officials recently confirmed that the 2013 tax plan passed by state policymakers will cost at least $200 million more each year than initially projected, with a price tag of at least $5.3 billion over the next five years. Our own estimates point to the potential for the total revenue loss to reach $1.1 billion by 2016.
As the much-delayed budget for fiscal year 2015 highlights, North Carolina’s revenue challenge hampers our ability to invest in public education, healthcare services, and other public investments that serve as the foundation of economic growth.
The General Assembly’s Fiscal Research Division (FRD) was charged with assessing the fiscal impact of the tax plan and confirms that the personal income tax rate reduction is having a greater immediate impact on revenue collections. FRD attributes the larger-than-expected eventual revenue shortfall to slower wage growth. But it’s difficult to imagine that the income tax cuts are not driving the greater revenue losses given what we know about who benefits from the tax changes and slower wage growth suggests that the tax changes should cost less, not more. Moreover, slow wage growth raises additional concerns about the reality of a “Carolina Comeback.”
Failure to connect the costly tax cuts to the state’s revenue challenge disregards the skewed nature of the economic recovery. In the first three years of the economic recovery, the top one percent of income earners captured 95 percent of the income gains nationally. North Carolina has experienced a similar trend. During the recovery, income for the top one percent of income earners in the state grew by 6.2 percent from 2009 to 2011 while the bottom 99 percent saw their income decline by 2.9 percent. The income tax cuts in the tax plan largely benefit the wealthiest taxpayers; therefore, the cost of the tax plan will increase as this group captures more and more of the economic gains.
The original cost estimates for the tax plan are based on assumptions and income data reflective of an economic downturn, not an economic recovery. Federal income tax data available at the time the tax plan was crafted represented an economy at its worst – federal income tax data for tax year 2010 was the most current information available. Incomes from all sources (salaries, wages, capital gains, etc.) at all income levels took a hit. Federal income tax statistics recently released for 2012 provide insight into how the economic recovery has played out across income groups.
Here are four reasons why the income tax cuts in the 2013 tax plan are likely the major driver of the larger-than-expected revenue shortfall reported by FRD.
- The huge income tax cuts in the tax plans largely benefits the wealthy and this group has captured a disproportionate share of economic gains during recovery. For tax year 2012, tax returns with adjusted gross income (AGI) of $1 million or more represented just 0.2 percent (2 out of every 1,000 tax returns) of all tax returns in North Carolina. This group captured 31 percent of the total AGI growth for the state.
- Low and middle-income North Carolina taxpayers have seen little growth in their income during the economic recovery. Salaries and wages for North Carolina taxpayers with AGI of $100,000 or less (88 percent of all North Carolina tax returns for tax year 2012) grew a dismal 1.9 percent for 2012 compared to 2010. This outcome further confirms the uneven nature of the economic recovery, in which low- and middle-income North Carolinians are not participating in the productivity and economic gains during the recovery.
- Income growth from capital gains has grown substantially and flowed overwhelmingly to the wealthy in North Carolina. Growth in capital gains income generated from owning various assets and commercial interests – stocks and bonds, for example – have flowed to a small group of wealthy individuals. Total income from net capital gains in North Carolina grew 86 percent for the 2012 tax year compared to the 2010 tax year. Nearly 71 percent of this income was captured by North Carolina taxpayers with AGI of $1 million or more.
- Changes to itemized deductions claimed by North Carolina taxpayers are likely to drive up the cost of the tax plan. The 2013 tax plan limited the amount of itemized deductions for mortgage interest and property taxes that can be claimed to a combined $20,000 and allows unlimited deductions for charitable contributions for taxpayers who itemize expenses rather than take a standard deduction allowance. For North Carolina, the total value of itemized expenses grew only 0.6 percent for 2012 compared to 2010. However, a deeper assessment reveals that itemized dedications for charitable contributions increased 12 percent while itemized deductions for home mortgage interest and real estate taxes decreased 11 percent. Accordingly, with charitable contributions remaining uncapped under the new tax changes, growth in itemized deductions for this category will increase the cost of the tax plan, as this deduction reduces the amount of income subject to state income taxes.
What becomes clear from analyzing federal income tax data for North Carolina is that the economic recovery has been very uneven. The wealthiest income earners in the state have fared particularly well while low- and middle-income families and individuals have yet to experience an economic recovery.
This is the reality that is driving the larger-than-expected cost of the tax plan passed last year. The income tax cuts in the tax plan serves as an additional benefit to a small group that has captured a disproportionate share of the economic gains. Stopping the next round of income tax rate cuts set to go into effect on January 1, 2015 would therefore be at least a good first step toward addressing the state’s revenue challenge and putting us on a path towards economic prosperity for all North Carolinians.
Cedric Johnson is a Policy Analyst at the North Carolina Budget and Tax Center.
http://www.ncpolicywatch.com/2014/08/27/north-carolinas-revenue-shortfall-is-no-mystery/
August 28, 2014 at 8:40 am
Norm Kelly says:
Are ALL expenditures of tax dollars considered 'investments'? Of course not. Some tax dollars are simply 'spent'. Many times those tax dollars are just 'spent' but are actually 'wasted'. So when some tax dollars are 'wasted' or 'spent' there are fewer tax dollars to be 'invested'. One thing that ALL pols seem to forget is that there is a limited number of tax dollars. Whether I earn $1million per year or only $10thousand per year, I still am willing or able to allow the government, any level of government, to steal so much from me. It's not that I don't want to support the infrastructure that libs tell me is so important. It's that when I EARN money I EXPECT that I will be able to keep the majority of it. I don't expect, regardless of my income, that ANY government or all combined governments will take the majority of MY INCOME! There is NO JUSTIFICATION, regardless of which lib you listen to, for taking more money from me than you ALLOW me to keep. So if we start reading this editorial post from the perspective that the state does NOT have a bottomless pit of money to spend, that the majority of the money in the state actually, truly, belongs TO THE PEOPLE of the state, then the budget can be brought in line.
State expenditures should cover what is necessary, not what would be nice. The budget, tax policy, spending policies MUST create an environment that encourages investment in the state. But note that INVESTMENT happens BY businesses and People. When BUSINESS invests in the state, who benefits? Everyone. The state benefits through tax revenue. When the state gives money to a business to encourage that business because otherwise the tax base for that business is actually too high, it COSTS everyone in the state! It's not an incentive TO THAT business, it's actually a DISINCENTIVE to everyone else and every other business. When the state picks winners & losers, it automatically means that this WASTED money is prevented from being INVESTED in things like government monopoly schools. If the current legislature has attempted to set a tax policy/policies that encourage businesses to expand here or move here or attract residents to move here and bring their money with them, then the net effect and affect is that there will be more money in the state for the government to tax. If the tax policies of the state are such that it DISCOURAGES both business and people from being here, then there are fewer dollars in the state for the government to tax. This is NOT rocket science. Unless you are a lib of course!
'who benefits from the tax cuts'. Libs are always concerned that 'the rich' might be allowed to keep TOO MUCH of what they earn. Except it's NONE OF YOUR BUSINESS! However, the most important question to ask yourself, even if you are a lib, is who SPENDS more and INVESTS more in the state: 'the rich' or 'the poor'? By far 'the rich' have more disposable income. So it's logical, something that appears to escape libs, that 'the rich' will pay more in taxes. Even if the rate is the same, 'the rich' will pay much more. How many of 'the poor' buy a yacht? Libs worry about 'the rich' not paying enough taxes on yachts so let's use that example. Who buys them? When was the last time 'the poor' bought a yacht, not counting when the state purchased a boat using tax dollars!? So, if the tax rate on buying a yacht is set at 38% (example only; the actual rate does not matter!) and only 10 yachts are sold, there's only so much money the state will collect. But, doing what libs despise, cutting the tax rate on a yacht from 38% to, say, 20% is an actual rate reduction. And libs just lost their minds by giving a 'tax break to the rich'! But if the rich then buy 80 yachts that year, did the state actually take in MORE MONEY that they can SPEND? Do the math. If the average yacht costs, say, $150,000, 10 of them at 38% comes to a tax bite of $570,000. A goodly sum.
Now let's take those same boats at the new reduced tax rate and see what happens to the state take. $150,000, 80 of them, at 20% tax rate. That's a tax bite of $2,400,000. So, libs, when was the state better off: with only 570,000 or with 2.4mil? Which number is bigger? I know, the 38% rate makes you FEEL better, but nobody cares about YOUR feelings except you. So get over your feelings and start using the brain God gave you. Even if you graduated from a NC government monopoly school you realize that a lower tax rate just MIGHT allow the state to take in more tax dollars. There's a happy medium between the RATE and the TAKE. Set the RATE too high and it discourages that investment/spending. Lower the rate and it encourages the investment/spending. Which in turn brings MORE money to the state. So, libs need to stop looking at the RATE and concentrate on the TAKE!
'Total income from net capital gains in North Carolina grew 86 percent for the 2012 tax year compared to the 2010 tax year'. So, if the rate stayed the same, then the state take would be HUGE. If the rate were slightly lower, would it encourage MORE capital gains investment resulting in more capital gains income? Which would encourage MORE investment! And would encourage people who live in HIGHER TAXED states to do their investing in NC where the rate is lower and the state take is therefore lower. Which means MORE WEALTH moving to NC! Which means MORE REVENUE to the state! Why is this so hard for libs to understand? Is there too much logic involved for their poorly educated, low-information minds? I give up trying to understand libs. If you believe socialism is the way of the future, then look at Europe to see how well it works. It has demonstrated, through many years of experimenting, to be a total failure. Capitalism and free enterprise and personal freedom have proven to be much more successful than socialism. Any day of the week. Regardless of how you analyze it.
Busy day. Don't have time to preach to deaf people anymore. Some things take thought and logic. Some things take looking at facts. Which, combined, leaves libs in the dark!
August 28, 2014 at 9:25 am
Richard Bunce says:
You do not like that the State is not taxing the people we do not like quite as high a rate as they did under the Democratic Party majority in the NC Legislature therefore that must be the cause of our number 1 concern, less revenue from the citizens to the State to fund our social engineering agenda. Too bad... win elections.
