A curious trend you might have noticed of late: North Carolina’s leaders keep cutting taxes, yet the state keeps taking in more money.
We saw it happen last year, when the state found itself with a $400 million surplus, despite big cuts in personal and corporate tax rates. Many taxpayers were shocked at tax time to find that their usual refunds had shrunk, vanished or turned into deficits as state officials squeezed deductions and other carve-outs.
Now comes word that in the first six months of the 2016 budget year (July to December), the state has taken in $588 million more than it did in the same period the previous year.
Of course, anything could happen between now and the end of the budget cycle (last year we went from predictions of a deficit to that $400 million surplus). Still, the overall surge in tax receipts certainly shouldn’t go unnoticed, especially since most of the increased collections for the 2016 cycle so far come from higher individual income tax receipts. They’re up $489 million, 10 percent above the same period of the prior year.
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Corporate income tax revenue is down $46 million, while sales tax receipts are up $129 million.
The corporate and sales tax receipts reflect the state’s determination to cut taxes on companies and to increase sales tax collections. But lawmakers also cut personal income tax rates. So why aren’t we seeing lower personal income tax collections?
Perhaps an explanation can be found in the new North Carolina economic outlook report from Michael Walden, a N.C. State University professor whose analyses of the state’s economic performance are closely followed in Raleigh.
He says the state, buoyed by the ongoing national recovery from the recession, should add 90,000 payroll jobs in 2016. Labor force growth for 2015 came in five times stronger than the national rate, and job growth exceeded the national rate as well.
That perhaps bodes well for Gov. Pat McCrory and the “Carolina Comeback” theme he hopes to ride to reelection. Those 90,000 new jobs might also help explain why individual income tax collections are rising, even despite lowered tax rates.
But the governor shouldn’t rush to take all the credit. Walden says two-thirds of North Carolina’s economic growth is linked to the national economy. When the national economy’s booming, so does North Carolina’s. When it bottoms out, so does ours. That’s because we rely more heavily on manufacturing firms than other states. Those companies suffer more during downturns and gain more during expansions, so our economy tends to reflect that.
Walden says most of the job growth in 2016 should come in high-paying sectors like financial services, and in low-paying sectors such as leisure and hospitality. The middle-income, middle-class jobs, as has been the case nationally for so long, will keep growing the slowest. Rural areas saw good job growth in 2015, Walden said, but they’ll continue to lag the major cities.
With the state in the midst of a huge and ongoing shift in tax policy, we’re just beginning to see how it impacts our state budget. The rising personal tax collections have been one of the more ironic wrinkles as our GOP leaders in Raleigh regularly tout their own tax-cutting prowess.
Earlier this week, officials from the Washington, D.C.-based Tax Foundation urged them to cut personal income tax rates even further, while increasing sales tax collections even more.
Lawmakers would be wise to ignore that advice. As we saw from last year’s hand-wringing over vanished refunds, we’re still learning to cope with the current tax changes. --Eric Frazier