Gap between NC government revenues, forecast widens to $190 million through November

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RALEIGH, North Carolina — The gap between predicted and actual North Carolina state revenues is widening because of continued tepid personal income tax collections, but improving sales tax collections approaching the holidays helped keep it spreading further.

The legislature's top economist confirmed this week revenues are about $190 million below expectations for the first five months of the fiscal year ending Nov. 30. The first-quarter gap through September was $62 million.

Beyond common revenue ebbs and flows, economist Barry Boardman attributes much of the missed prediction to weak individual income tax collections. Withholdings — the money employers take out of workers' gross pay for taxes — have fallen more than expected since a wide-ranging tax overhaul law starting last January condensed three tax brackets into one lower rate of 5.8 percent.

A decline in withholdings in the first half of the calendar year contributed to a $450 million gap in the last fiscal year, making decisions for the current budget written by lawmakers last summer more difficult.

The current state budget requires $21.1 billion in revenues to carry out, so a $190 million gap remains less than 1 percent of the amount.

Such a gap could be closed with $840 million in savings and Medicaid reserves if it remains in place after the spring. But it may be necessary to adjust the budget and scale back hopes of expanding programs next year if the shortfall gets out of hand.

"We're not saying that we're not going to have a problem," State Budget Director Lee Roberts said Thursday. "We're saying it's too early to tell."

Republican lawmakers who wrote the tax law and fiscal analysts still are banking on income tax collections to pick up as taxpayers file their returns through April 15, with the belief that many will have additional payments to make to cover what withholdings didn't.

"We assume the refunds will be lower, and that will also help the revenue picture," Roberts said.

The current gap could be even larger were it not for sales taxes, which have remained particularly strong during the first five months and have outpaced expectations. The tax overhaul law broadened slightly the types of goods and services subject to the sales tax, the base of which is 6.75 percent.

Year-over-year figures through November show sales and use collections up 17 percent, or $397 million, according to the Office of the State Controller. Individual income tax revenues, which were expected to decline due to the lower rate, are $612 million lower than a year ago.

The Controller's Office, an executive branch agency, disclosed in a release Wednesday the overall $190 million revenue gap calculated by Boardman's Fiscal Research Division within the legislature.

Roberts said his office would keep a close watch on sales taxes during the Christmas shopping season, which if strong can help narrow the gap further. Those results won't be available until January, he said.

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