State tax cut costs ballooning
Posted July 25, 2014
Raleigh, N.C. — New figures from legislative analysts confirm the 2013 cut to individual income tax rates is costing the state far more than originally projected.
Last year, Republican leaders authored a plan to cut income taxes from a three-tiered marginal system of 6 percent, 7 percent and 7.75 percent to a flat rate of 5.8 percent for 2014 tax year.
According to a memo Thursday from legislative analyst Brian Slivka and chief economist Barry Boardman, the updated cost of the tax cut is $680 million for the current tax year.
That's $205 million, or 43 percent, higher than the original projection of $475 million.
The cost for the 2015 tax year is also projected to be $200 million higher than original estimates – $890 million rather than $690 million. Additional tax cuts are set to take effect Jan. 1.
In the memo, Boardman and Slivka explain that the revision is due to the fact that North Carolina wages have not grown as quickly as projected last year.
"The modeled change in revenue is the result of new Internal Revenue Code data on North Carolina personal income taxpayers and an update to the economic forecast embedded in the model," the memo says.
According to the memo, the forecast does not account for corporate tax rate cuts.
It also doesn't figure in the additional money the state will receive as deductions are phased out, including the $50,000 deduction for small businesses ends, or extra revenue from broadening the sales tax to new items such as movie tickets, warranties and electric bills. Those new revenues could help offset the revised cost.
Republican leaders said last summer that lowering taxes would cause the economy to grow, helping more people find work and bringing in more revenue. They expressed confidence that the cost to the state would be actually be lower than initial projections.
The unwelcome news comes as lawmakers continue to struggle to find agreement on teacher pay raises, funding for teaching assistants and cuts to Medicaid in the 2014-15 budget.
The revision should not have an effect on the current budget negotiations. A Fiscal Research staffer said this fiscal year's budget adjustment already sets aside $445 million to cover the reduction in revenue from the tax cuts.
However, to put all those numbers in context, the cost of a 7 percent average teacher pay increase, according to the House's latest offer, is about $265 million.
The cost of a 6 percent average teacher raise, according to an earlier House offer, is about $178 million, while the cost of funding all current teaching assistants for 2015 is about $450 million.
The cost of the Senate's earlier proposed cuts to the Department of Health and Human Services, including cutting Medicaid eligibility for thousands of blind, disabled, and elderly patients, is about $228 million.
Democratic lawmakers, many of whom warned the tax cuts were too steep and too fast, were quick to chastise the Republicans who championed it.
"We have just learned that the cost of the Republican tax scheme over the next five years will be $5.3 billion, nearly $900 million more than previously estimated," said Sen. Josh Stein, D-Wake. "The Republican legislature chose tax giveaways to big corporations and wealthy people over investments in our schoolkids and teachers. Their fiscal irresponsibility has created the budget crisis we currently face."
Meanwhile, the House's chief sponsor of the tax cut bill, Rep. David Lewis, R-Harnett, said lawmakers may have to take another look at the legislation.
"The decisions we made were based on those estimates. Unfortunately, some of those estimates have proven to not be right," Lewis told WRAL News. "If there's additional indication that revenue's going to be down, we're probably going to have to take a look at – is it a short-term thing, is it a long-term thing – what the possible fixes will do.
"It does take a certain amount of money to run state government. Nobody doubts or disputes that," Lewis said. "Of course, folks like me believe the more money you can let people keep, the better off you are. But with that said, we also recognize the responsibility to keep state government running, and we certainly take that very seriously."