N.C.’s economic outlook improving but risks remain

dbracken@newsobserver.comApril 23, 2013 

— North Carolina’s revenue and tax collections so far this fiscal year show an improving state economy that is still struggling to build up considerable momentum.

Through the first three-quarters of the fiscal year, North Carolina’s general fund revenues have exceeded the state’s $14.3 billion revenue target by $110 million, according to a new report by the state’s Fiscal Research Division. Tax revenues are $126 million ahead of a $13.5 billion target.

But sales tax collections have been below projections, with the state taking in $90 million less than the $4 billion targeted. Non-tax revenues, which include investment income and judicial fees, are also $16.3 million less than the state’s $513 million target.

The report attributes the shortfall in sales tax collections to the late summer slowdown in the economy and the ending of the 2 percent federal payroll tax cut earlier this year. The state now expects sales taxes to grow by 3.1 percent during the 2012-13 fiscal year, well below the 6.3 percent growth reported during the 2011-12 fiscal year.

Barry Boardman, an economist with the legislature’s Fiscal Research Division, told legislators on Tuesday that the state’s economy has stabilized and is growing steadily, but still lags behind the nation’s growth.

Legislators use the economic report and information they receive in early May on the year’s tax collections to prepare next year’s budget. Senate budget writers expect to have their budget proposal ready by the second or third week of May, said Sen. Pete Brunstetter, a Winston-Salem Republican and budget committee co-chairman.

North Carolina’s economic growth for the 2013-14 fiscal year has been downgraded since the Fiscal Research Division’s last report in January. The division now expects North Carolina’s gross state product to increase by 3.6 percent, down from 4.5 percent, and retail sales to increase by 2.7 percent, down from 3.8 percent.

The state’s budget is benefiting the most from an increase in personal income, with income tax collections tracking 1.5 percent ahead of budget targets through the first three-quarters of the fiscal year.

The report highlights several risks that could cause the state’s fiscal outlook to deteriorate in the coming months.

As the mandatory federal spending cuts known as sequestration take effect, North Carolina could see economic growth slow. The report also notes that the state’s tax revenue could be particularly volatile this year, as this is the first year that certain businesses can deduct up to $50,000 of active net business income on their personal state income tax returns.

The state’s fiscal researchers don’t expect job growth to be strong enough to significantly lower North Carolina’s unemployment rate until mid-2014. North Carolina has added 64,000 jobs over the past year, but over that same time the labor force grew by 64,500, according to seasonally adjusted figures from the state Department of Commerce’s Labor Economic and Analysis Division.

The state’s unemployment rate was 9.2 percent in March, still well above the national rate of 7.6 percent.

Staff writer Lynn Bonner contributed.

Bracken: 919-829-4548

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