The recently announced $400 million state budget surplus generated more discussion on Jones Street than just about anything this year. Here are four observations about it:
▪ The surplus is based on conservative revenue projections from when lawmakers crafted the budget back in 2014. The state’s top budget officials didn’t know then what impact extensive 2013 tax changes would have on revenues. In February, the same budget officials released a “very cautious” outlook estimating a $271 million shortfall at the end of the fiscal year.
The $400 million surplus is small potatoes when considered in the context of a $21 billion budget.
▪ This year’s “April surprise,” the name given to large revenue swings as a result of final tax payments, was positive in large part because the 2013 tax changes allowed for more accurate withholding. Taxpayers saw more money in each paycheck but were less likely to get refunds.
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Budget officials in February predicted a 35-percent reduction in refunds, but that wasn’t close. A 57-percent decline in refunds from last year resulted in $375 million more in personal income tax collections than projected. This year, about 1.14 million taxpayers sent in returns with final payments to the state, up 80 percent from 634,000 last year.
▪ The spin from both sides of the aisle began immediately. Republicans said the surplus was proof that their economic policies are working to spur the economy, and they vowed to continue cutting tax rates. Democrats said the extra revenue came from tax increases on the middle class, including the elimination of a medical-expense deduction for seniors and a $50,000 deduction for businesses.
Neither side, as usual, is wholly right or wrong. Art Pope, who crafted the budget as Gov. Pat McCrory’s former budget director, told The News & Observer of Raleigh that the surplus wasn’t a result of tax cuts. “I was never in a single meeting where we said if we reduce the corporate tax rate or the personal tax rate by X percent, then next year revenue will grow by Y percent,” Pope said. “There never was any prediction there. Long term, yes. Short term, or the fiscal year, no.”
Meanwhile, Democrats’ stated fears about huge revenue shortfalls stemming from tax reform didn’t materialize. But they are correct that some people paid more in taxes, including seniors affected by the elimination of the medical-expense deduction. The reinstatement of that credit appears to be gaining traction among lawmakers.
The $50,000 income exemption for businesses, however, isn’t likely to come back.
Republicans countered Democrats’ arguments about tax increases on the middle class, pointing to hikes under Democratic watch prior to 2011, when the GOP took over the legislature.
▪ What’s next? Fiscal conservatives want to put much of the surplus away for future needs. Republicans have said they want to cut taxes further. McCrory and others want to restore the senior medical-expense deduction. Raises for state employees and teachers, additional courts or education funding, or infrastructure improvements also are possible.
How do you think lawmakers should use the surplus?
Patrick Gannon writes about state government and politics.