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The Voice of Business,
Industry & the Professions Since 1942
North Carolina's largest
business group proudly serves as the state chamber of commerce
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State Government February 2005
'Structural Budget Gap' Comes Home to Roost
By Steve Tuttle
There’s
so much good news these days about the state economy and state tax revenues that
it’s a shame the story probably won’t have a happy ending.
The first chapters of this story were written during the recession of 2001,
which saddled North Carolina with one of the nation’s highest unemployment
rates. The tide began turning in 2003, and mammoth red ink in state financial
plans began drying up. In fact, the state ended last fiscal year with a surplus
of $553.8 million.
Since then more good economic news has dominated the headlines. Over the past
year North Carolina’s unemployment rate has improved the most of all 17 states
in the Southeast. Our jobless rate fell below the national average last March
and has stayed there since then. We added almost 90,000 jobs last year.
The uptick in the economy is continuing to have a positive impact on the state
budget. So far this fiscal year, tax collections are $78.5 million, or 1.6
percent, ahead of budget Actual tax receipts are 6.7 percent higher than last
year, which means the state is raking in about 22 percent more than it projected
it would when the budget was written last July.
Business growth can be directly seen in corporate tax collections. They are
running 27 percent ahead of budget at $302.8 million vs. a forecast of $237.7
million through November, the latest month for which complete figures were
available.
Consumers also are feeling confident, which can be seen in greater-than-expected
sales taxes. That column of the state budget is $21.8 million ahead of plan at
$1,512.4 million vs. $1,490.6 million projected.
Beverage, privilege license and inheritance taxes also are stronger than
expected. More of the same is expected through the end of the fiscal year on
June 30.
With so much good economic news, one would expect smiles on the faces of state
officials. Instead, all you see are frowns and furrowed brows and the surprising
prediction of a $1.1 billion budget gap for the year beginning July 1. What
happened?
David Crotts, chief fiscal analyst at the General Assembly’s Research Division,
says the huge revenue hole in next year’s budget is due to what didn’t happen
when this year’s budget was written last July: The General Assembly funded about
$1.1 billion in continuing budget needs with money legislators knew was drying
up, Crotts notes.
About half of what Crotts calls the state’s “structural budget gap” comes from
the legislature’s reliance on taxes they knew will expire this year, including
the additional half-cent state sales tax (worth $397 million), the 8.25 percent
top personal income tax rate ($46 million) and federal repeal of the estate tax
($49 million).
The other half of the budget cap comes from the legislature’s reliance on
one-time sources of revenue. The current budget contains $575 million in revenue
legislators diverted from the Highway Fund, the Highway Trust Fund, money that
had been set aside for disaster relief, tobacco settlement money and other
resources that may— or may not — be available this year. In addition, state bond
payments will rise $114 million next fiscal year.
And that’s just looking at the money coming in. There’s an equally sobering
situation for the money going out. Officials warn that the state should expect
to incur about $1.1 billion in additional continuing budget costs next fiscal
year, mainly due to swelling school enrollments, ABC teacher bonuses, state
employee pay raises and the like. That adds up to a total “structural budget
gap” of $2.2 billion against baseline revenue growth of perhaps $900 million.
The difference is a $1.3 billion hole that lawmakers will be trying to climb out
of as the session begins. |
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