News: CJ Exclusives

Budget Provision Could Delay Corporate Rate Cut

Forecasts show state collecting less than previous General Fund revenue target

RALEIGH — A new round of tax cuts in the $21.735 billion state budget for 2015-16 may prevent the state from lowering the corporate income tax rate to 3 percent in 2017 because tax collections are projected to be $74.7 million lower than a revenue target set two years ago.

But a provision of the budget, which passed the Senate Tuesday by an initial 33-16 vote, would allow the rate to fall to 3 percent if that tax-collection mark is reached in a future budget year. The House has scheduled votes on the budget for Thursday night and early Friday morning.

Even so, legislative leaders say they are confident that tax collections will surpass the projections and the state will collect enough revenues to trigger a second cut in the corporate income tax that would take effect Jan. 1, 2017.

As part of the 2013 budget bill, the General Assembly inserted a trigger that — if General Fund tax revenues grew as projected — would reduce the corporate tax rate by 1 percent in two consecutive years. The trigger was inserted as a safeguard to protect state revenues in case of a recession or some other economic drain on tax collections.

The corporate income tax rate will drop to 4 percent on Jan. 1, 2016, because General Fund tax collections surpassed $20.2 billion at the end of the 2014-15 budget year, which ended June 30. For the rate to slip to 3 percent, General Fund tax collections for the current fiscal year ending June 30, 2016, would need to reach $20.975 billion. Failure to hit the target would leave the corporate tax rate at 4 percent.

The “money report” attached to the new budget bill projects net General Fund tax revenues, after applying newly enacted tax cuts, will be $20,900,300 — $74.7 million short of the target. On page 413 of the budget document, a provision repeals the June 30, 2016 deadline, so the 3 percent rate could take effect in a later year when revenues hit the target.

Legislative leaders insist that this year’s General Fund revenues will exceed the $20.975 billion threshold.

“The changes to the corporate rate trigger only repeal the sunset date on the trigger,” said Jason Soper, policy advisor for House Speaker Tim Moore, R-Cleveland.

“Nothing in the changes made in this year’s budget would allow for a corporate rate reduction without hitting the trigger first. It was important to the House Finance chairs that our agreement with the people of North Carolina be kept,” Soper said.

Shelly Carver, spokesman for Senate leader Phil Berger, R-Rockingham, agreed.

“Under current law, the only opportunity for the rate to go down to 3 percent is in tax year 2017. Under the new language, the opportunity is not constrained to that year only,” Carver said.

Berger’s staff believes that “the consensus revenue forecast will continue to include a corporate tax rate decrease next year, just as it does now,” Carver said.

“The current forecast and projected revenues next year have us on a path to hit the trigger in 2016,” Soper said.

Even so, the budget bill appears to show a different scenario.

It projects $20.981 billion in General Fund tax collections, or $6 million more than required to trigger the rate cut. Still, that forecast was made before the new tax cuts were inserted in the budget. Those tax cuts are projected to leave total General Fund collections $74.7 million short of the target.

The state would gain $6 million by modifying the corporate income tax rate, expanding the corporate tax base, and repealing the bank privilege tax. Another $44.5 million would be gained by expanding the sales tax base.

However, the report shows, the state would lose $7.9 million by phasing in a single sales factor apportionment, and $117.3 million by reducing the individual income tax rate, restoring medical tax deductions for everyone, and raising the standard deduction.

“I don’t dispute” that the budget numbers show tax collections below the mandatory trigger level, said Greg Gebhardt, policy advisor for state Rep. David Lewis, R-Harnett.

“Fiscal Research felt as long as that number was [less than] $125 million” below the target, legislative leaders continued to think “we would hit the triggers” for the 3 percent rate, Gebhardt said.

Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.