North Carolina government tax collections will smash the projections used to help fashion the first year of the current two-year state budget, officials announced Monday as lawmakers return next week to begin figuring out what to do with billions in surplus.
The legislature’s economists and Gov. Roy Cooper’s budget office now believe state coffers should take in $4.24 billion more in the fiscal year ending June 30 than predicted the previous June, according to a memo from the General Assembly Fiscal Research Division. That's a nearly 15% increase, bringing overall revenues this year above $32.65 billion.
A surplus had already been predicted in February, when the Cooper administration said actual revenues through January were almost $1.4 billion ahead of previous expectations. At the time, the Office of State Budget and Management estimated overcollections of $2.4 billion by June 30.
In addition to the $4.24 billion, the consensus forecast by the executive and legislative branches now expects nearly $2 billion, or nearly 7%, more will be collected in the next fiscal year starting July 1 above and beyond what was projected for the second year of the budget.
These new numbers will inform Cooper and Republican budget-writers when they consider changes to the second year that were approved in November. Such adjustments are traditionally the primary job of the General Assembly when it meets in even-numbered years. This “short” session begins this year on May 18.
These additional revenues can lead to additional tax cuts; higher salaries; greater spending on one-time projects or permanent programs; flusher reserves for fiscal or natural emergencies; or a combination of any or all of them.
Governors usually propose their adjustment ideas as the session is about to start. The surplus is likely to renew calls by Cooper and others for the legislature to spend more to address inequities in public education that the plaintiffs in long-standing “Leandro” litigation have sought to address.
The spring forecast is usually released after individual and business tax returns are filed in mid-April — usually the most volatile portion of the tax year.
The division memo from economist Emma Turner says detailed descriptions about final April tax collections were not available when the forecast was completed because the state Revenue Department was still processing returns. But Turner wrote that final income tax returns in April should exceed expectations by more than $1.4 billion.
Turner said it became evident in March that state employment had returned to pre-pandemic levels last summer and had exceeded them, resulting in wage gains. That leads to higher income tax collections. Sales and use tax collections also should finish well ahead of forecast due to strong consumer spending and inflation, she wrote.
“Record-breaking stock market returns and corporate profits in 2021 were also unanticipated and generated significant revisions to the forecast,” she wrote.
In a joint news release, Senate leader Phil Berger and House Speaker Tim Moore said the forecast “highlights the General Assembly’s winning formula of low taxes, reasonable regulations, and responsible spending.”
The fiscal forecast does project slower economic growth. While there's an elevated risk of a recession “given geopolitical uncertainty and evolving monetary policy by the Federal Reserve to address high inflation,” Turner wrote, the forecast “does not foresee a near-term recession.” Still the uncertainty could prompt legislators to avoid initiating expensive, multi-year programs.
“It is crucial that we continue on this track of responsible and disciplined spending in light of the potential for a recession as we begin the short session budget process," Moore and Berger added.
The projected overcollections for this fiscal year still are well below the additional $6.2 billion that the state’s coffers took in during the fiscal year that ended June 30, 2021. That surplus, however, swelled in large part because state economists kept to a conservative forecast following pandemic-related shortfalls in 2020.
