North Carolina now expects $400M surplus this budget year; McCrory recommends how to use it

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RALEIGH, North Carolina — North Carolina state government now expects a $400 million surplus this fiscal year, state Republican leaders announced Wednesday after a budget shortfall evaporated thanks to a surge in personal income tax collections in recent months.

The announcement contrasts with a $271 million gap between revenues and expenses predicted three months ago by government economists. Fuller state coffers also will mean additional revenues that budget-writers can work with while crafting the next two-year state spending plan.

Strong growth in business income was the predominant reason for the surplus, according to a memo from two state government economists. McCrory and legislative leaders praised the news, which they said can be attributed in part to 2013 tax law changes that lowered income tax rates, narrowed deductions and expanded slightly the sales tax base.

They contend the tax changes helped spur business activity. Democrats opposed to the law say it shifted the tax burden toward the middle class.

While the changes were expected to reduce the growth of overall income, revenues are still now predicted to be 6 percent higher overall — or $1.25 billion — for the year ending June 30 compared to a year ago.

"We have a growing economy in North Carolina for the first time in probably five or six years," McCrory said while unveiling the news at a meeting of the North Carolina Association of County Commissioners. The surplus, he added, also shows "that fiscal responsibility does work."

State Budget Director Lee Roberts said the February forecast from the legislative and executive branches was intentionally conservative as volatile April 15 tax collections approached. Personal income tax collections, which include taxes from dividends, capital gains and some business income, are now expected to grow nearly 2 percent above the original forecast.

Wednesday's memo predicts lawmakers now have $564 million to work with in forming the budget compared to the February revenue forecast, or almost $22 billion. The House aims to pass its version of the budget in two weeks.

McCrory told county commissioners he wants some of the money held in reserve. State law requires half of all over-collections be placed in reserve accounts, split evenly for emergencies and for repairs and renovations of state buildings. But legislators have been known to tweak the earmark amount over time.

The governor also wants to reinstate an item repealed in the 2013 tax law that eliminated an income tax deduction for older adults with lots of medical expenses. A House bill that attempts to fix the problem would mean losing $23 million annually. He wants more money for state employee raises and to help repay debt in a proposed bond package he wants voters to approve.

House Speaker Tim Moore, R-Cleveland, and Senate leader Phil Berger, R-Rockingham, were happy with the collections report, affirming the 2013 tax overhaul's benefits and sounding willing to restore the medical expense deduction. Berger suggested some excess money could be returned to taxpayers.

"We don't need to forget that the money came from the pockets of taxpayers around the state," Berger said.

Higher projected revenue levels already are poised to lower taxes further. They exceed revenue thresholds set in the 2013 legislation that would automatically lower the corporate income tax — already reduced from 6.9 percent to 5 percent — to 4 percent starting next year and 3 percent in 2017.

Democrats and their allies who opposed the 2013 tax law had complained the projected shortfall showed the tax cuts were too deep and eliminated revenues that could be used for education and health care. On Wednesday, they argued the surplus was tainted because working families and small businesses paid more due to tax changes and higher tax bills on April 15 is proof.

If the corporate income tax continues to fall, "middle class families are going to suffer," House Minority Leader Larry Hall, D-Durham, told reporters. "They'll pay more taxes and suffer more."

Republicans say such arguments aren't true and that, on average, people in all income groups have benefited from the income tax changes. "The dire predictions of problems with state revenues were not just overstated but just plain wrong," Berger said.

The economists' memo said income tax refunds declined 57 percent this year compared to a year ago. That's because new withholding formulas in the 2013 law resulted in more accurate levels of income taxes being withheld from worker paychecks, the memo said. The result, according to Roberts, was lower refunds when workers filed their tax returns.

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