RALEIGH — There is no $200 million shortfall in the state budget caused by North Carolina’s newly lowered income tax rates, contrary to news reports in a number of media outlets.
“It was the slightly lower than expected growth in salaries and wages that was driving this number,” and had nothing to do with the income tax changes in 2013 that began reducing the top marginal income tax rate of 7.75 percent to 5.75 percent by 2015, said Brian Slivka of the legislative Fiscal Research Division.
The state uses wage and salary projections compiled by firms such as Moody’s Analytics and Global Insight. When the state plugged in those firms’ new projections as part of a routine update of budget impacts earlier this year, it was discovered that salaries and wages did not rise to the earlier projections.
But Fiscal Research staff noted the slight lag in its April Quarterly General Fund Revenue Report, and revised its economic outlook accordingly. By updating all numbers, what would have been a $205 million revenue shortfall due to lower wages and salaries in 2014, and a $200 million revenue shortfall for the same reason in 2015, was accounted for going forward.
A table included in a July 24 memorandum to Sen. Josh Stein, D-Wake, showed the $205 million and $200 million revenue differences as compared to original, unrevised July 2013 baseline estimates. Those differences have appeared in a number of subsequent media reports. But if that table had included an update with revised wage and salary projections for the 2013 baseline year, those revenue gaps would have disappeared, Slivka said.
Barry Boardman, the chief economist at Fiscal Research, addressed the press coverage of the revenue differences in a July 25 email to legislative leaders, legislative committee chairmen, and his Fiscal Research colleagues:
I wanted to notify you that press reports related to a memo we completed yesterday are completely mischaracherizing the results of that memo,” the email said. “Per a request, we used the tax model to see what if any changes would arise from the model when incorporating the latest IRS Statistics of Income data (2012) as it relates to H998. We could not discern any difference in outcomes. The tax model had also been updated to include the most current economic forecast and that is the predominate change in the results. The revenue reduction has nothing to do with provisions in H998. It is simply the fact (as noted in the May 2014 consensus forecast) that wages did not grow as fast as forecasters envisioned a year ago. Hopefully, it is obvious that if you project the same pace of growth but against a lower starting base you will end up with a lower number — that is all that the memo reported and I had thought rather clearly.
Slivka said, “We probably should have also included what forecasts would have done to 2013 [numbers] as well.”
Dan Way is an associate editor of Carolina Journal.