Tax Revenue Revised Down, Slightly, Still Forecasting ~$1 Billion Surplus

By Carolina Journal Staff

The Office of State Budget and Management (OSBM), along with the Fiscal Research Division of the NC General Assembly, announced Friday downward revisions to their consensus tax revenue forecast for the biennium. The adjustments, representing a less than 1% change, were due to lower than anticipated processed tax filing revenues following the April 15 tax deadline.

“April, when income tax returns and payments for the prior tax year are due, is the most uncertain month for revenue collections,” reads the report. “The [Consensus Forecasting Group] issued the April 2024 consensus forecast before the Department of Revenue began processing the bulk of those payments, which required the CFG to project the amounts for those payments in the forecast.

When those collections were processed, CFG officials say, the actual numbers fell short of expectations set by their previous consensus forecast. As a result, they have what they describe as a “modest downward revision to the General Fund Forecast of $225 million (0.7%) in the current fiscal year and $205 million (0.6%) in the next fiscal year.”

May Revised Consensus General Fund Revenue Forecast

OSBM officials explained that a 2022 tax rules change regarding S Corps filings resulted in a lower than expected haul for the State’s Personal Income Tax (PIT), as individual business owners and shareholders adjust to new allowances for deducting state tax payments from federal tax filings.

“The implementation of the new law has led to an adjustment period for taxpayers as there is a need for greater coordination of tax payments between businesses and their shareholders,” reads the report. “The magnitude of this adjustment period has been a source of heightened uncertainty for individual income tax collections. Additionally, the business tax change has proven challenging to implement and track in real time with existing accounting systems, requiring manual transfers and disrupting the consistency of collections data.”

Because analysts were able to identify the source of uncertainty, they’re confident that this forecast revision will not materially affect longer range PIT revenue forecasts or economic growth. Ultimately, the adjustment is a relatively small one in which lawmakers are still faced with a significant surplus as they focus on budget modifications in the short legislative session. The State’s fiscal year ends in July.

Gov. Roy Cooper reacted to the announced revision with a pitch to spend more on his political priorities.

Republicans hold a veto-proof majority in the General Assembly, giving them full discretion on spending priorities.

In addition to possible raises for state employees and teachers, current items on the table for budget adjustments are additional funds for North Carolina’s Opportunity Scholarship Program, which exhausted this year’s funding following a deluge of applicants for the universal school choice program; possible tax rebates for those earning the money paid into government’s tax coffers, in light of the aforementioned surplus revenues; and, weighing planned taxpayer gifts to special projects, such as NCInnovation’s slated $250 million payment, versus the economic needs of North Carolina’s taxpayers.