Patrick Gannon: 4 points about the $400 million surplus

Published 12:00 am Wednesday, May 13, 2015

RALEIGH – The recently announced $400 million state budget surplus generated more discussion on Jones Street than just about anything this year. Here are four observations about it:

1. The surplus is based on conservative projections when the budget was crafted back in 2014. The state’s top budget officials didn’t know then what impact extensive 2013 tax changes would have on revenues. In February, the same budget officials released a “very cautious” outlook estimating a $271 million shortfall at the end of the fiscal year.

It’s also important to note that other states – from New York to California – are experiencing revenue surges because of a strengthening economy. North Carolina’s growth appears to be driven by increases in business income, often paid under the personal income tax, and by capital gains from stock and real estate sales, budget officials said.

The $400 million surplus is small potatoes when considered in the context of a $21 billion budget.

2. This year’s “April surprise,” the name given to large revenue swings as a result of final tax payments, was positive in large part because the 2013 tax changes allowed for more accurate withholding. Taxpayers saw more money in each paycheck, but were less likely to get refunds. Budget officials predicted in February a 35 percent reduction in refunds, but that wasn’t close. A 57 percent decline in refunds from last year resulted in $375 million in personal income tax collections over what was projected. This year, about 1,140,000 taxpayers sent in returns with final payments to the state, up 80 percent from last year.

“A few (read: many) people ended up writing $100 checks when they’re used to getting a $100 refund,” said Barry Boardman of the General Assembly’s Fiscal Research Division.

3. The spin from both sides of the aisle began immediately. Republicans said it’s proof that their economic policies are working to spur the economy, vowed to continue cutting tax rates and criticized Democrats for predicting dire financial consequences from the 2013 changes. Democrats said the extra revenue came from tax increases on the middle class, including the elimination of a medical expense deduction for seniors and a $50,000 deduction for businesses.

Neither side, as usual, is wholly right or wrong. Art Pope, who crafted the budget as Gov. Pat McCrory’s former budget director, told the News & Observer of Raleigh that the surplus isn’t a result of tax cuts. “I was never in a single meeting where we said if we reduce the corporate tax rate or the personal tax rate by X percent, then next year revenue will grow by Y percent,” Pope said. “There never was any prediction there. Long term, yes. Short term, or the fiscal year, no.”

Meanwhile, Democrats’ stated fears about huge revenue shortfalls stemming from tax reform didn’t materialize. But they are correct that some people paid more taxes, including seniors affected by the elimination of the medical expense deduction. The reinstatement of that credit appears to be gaining traction among lawmakers. The $50,000 income exemption for businesses, however, isn’t likely to come back. The repeal of that exemption, according to an early estimate, would bring an additional $400 million to the state coffers this year. But Boardman said it might have amounted to more new revenue than that in the end.

Republicans quickly countered Democrats’ arguments about tax increases on the middle class, pointing to hikes under Democratic watch prior to 2011, when the GOP took over the legislature.

4. What’s next? Fiscal conservatives want to put much of the surplus away for future needs. Republicans have said they want to further cut taxes. McCrory and others want to restore the senior medical expense deduction. Raises for state employees and teachers, more funding for the courts, education or infrastructure improvements also are possible.

How do you think the surplus should be used?

Patrick Gannon can be reached at