Prosperity Watch Issue 37, No. 1: Revenue Shortfall Caused by Tax Plan Hinders Investments in a Strong Economy

As lawmakers return to Raleigh this week, they face a significant gap in the state budget between revenues and expected expenditures in the current and next fiscal years. Even more troubling, this gap may be much greater than anticipated, largely because the personal income tax changes passed by the General Assembly last year is likely to cost the state more.

The consensus revenue forecast produced by the Fiscal Research Division and the Office of State Budget and Management found that revenues will fall $445 million short of what was anticipated for the current fiscal year (FY 2013-2014), which ends on June 30.  Making the challenge for the current budget worse is the anticipated $140 million shortfall in the state’s Medicaid program.  While policy makers can partially address the resulting budget gap of $335 million by using one-time money available from unappropriated balances and possible reversions, there is a very real possibility that legislators will use spending cuts as well to close the gap.

Already, projections indicate that budget gaps will continue into next year (FY 2014-2015) as well—and in fact, may be even larger than expected. According to Fiscal Research and OSBM, the initial projected revenue shortfall for next year is approximately $191 million. When combined with necessary changes to Medicaid, these initial projections mean that policymakers will need to address at least a $228 million budget gap for the year starting July 1. 

But the budget gap for FY 2014-2015 may be much worse than this. Given analysis of the fiscal impact of the tax plan produced through the Institute on Taxation and Economic Policy’s economic incidence model, it is possible that the budget gap could be as much as $637 million.  That is because the cost of the personal income tax changes in particular are estimated to result in an additional loss of $600 million on top of what was already anticipated.

With fewer dollars coming in because of a tax plan that primarily benefits the wealthy and profitable corporations, policymakers will make limited progress towards much needed public investments in the foundations of a strong economy.  Research has shown that the strongest correlation to economic growth and productivity is the share of a state’s residents that have a Bachelor’s degree, an achievement that is facilitated through quality pre-K through 12 education and accessible, affordable higher education.  Beyond investments in education, research has also shown that taxes invested in infrastructure, research and development and other public services can contribute to greater economic opportunity and support business expansion and attraction.

Policymakers face a self-imposed challenge when they return to Raleigh this week: addressing the current and future budget gap created by their tax plan and investing in what works to strengthen the state’s economy and build pathways to the middle class for more North Carolinians.


 

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