NC can pay its bills this year, but ‘sluggish revenue growth’ to come, budget director says

North Carolina collected about as much money as it spent this year. That means the state’s tax revenue is “steady,” the state’s budget director told The News & Observer on Wednesday.

That’s good news and not-as-good news. The days of repeated years of budget surpluses may be over, said State Budget Director Kristin Walker.

“Right now things are steady. That’s what I would I would say: they are steady,” she said.

She also predicted North Carolina will experience “sluggish revenue growth” in coming years.

Here’s what to know:

▪ North Carolina’s revenue was $33.69 billion for the 2023-2024 fiscal year, which ended June 30. That’s just 0.1% below the budgeted amount of $33.73 billion.

▪ During the previous three fiscal years, revenue exceeded budgets by 10% or more. The Office of State Budget and Management reports that past tax collection was so much higher than expected because of “unprecedented federal support for the economy and a rapid recovery from the pandemic, characterized by growing wages, business earnings, and retail sales amid a two-year period of rising prices.”

▪ Tax cuts are a factor in the “sluggish” prediction. Sales tax revenue was $156 million above budget, OSBM reports, but individual and corporate income tax revenue was $155 million below budget. Falling inflation is another reason, according to OSBM .

▪ Even so, for the new fiscal year that started July 1, “We are expecting $471 million more than what we expected last year,” Walker said.

No state budget bill this year

The General Assembly went home this summer without passing a compromise budget adjustment bill. That means the 2023-2025 budget remains in place. The House and the Senate each passed their own version of a budget adjustment bill, but leaders never came to an agreement on a final version of the bill. The legislature is totally controlled by Republicans.

State employees and most teachers received raises this year at the rate in the two-year budget plan.

In June, House Speaker Tim Moore suggested the summer recess would be a “cooling off” period. That hasn’t ended, though he told The N&O last week that he and Senate leader Phil Berger had spoken recently.

The legislature is set to be in session for a few days starting Sept. 9, but no votes are expected. There is a weeklong session — with planned votes — in November, after the election.

During that brief session, there’s a chance of a budget deal. The main priority for the Senate has been to fund the backlog of private school vouchers in what is called the Opportunity Scholarship Program, of about $500 million. But House Republican leaders don’t want to fund that waitlist — which is the result of vouchers being open to all income levels — unless there’s more money for public schools, too, Moore has said.

Tax revenue to come

Walker, who leads the Office of State Budget and Management, a Cabinet agency under Gov. Roy Cooper, said there are budget needs left unmet.

“They’ve collected people’s tax dollars, and people expect services and things from the government for those tax dollars. So to collect that revenue and not do anything with it doesn’t seem to be in keeping (with that),” Walker said.

She said the Medicaid rebase (adjustments for higher costs) is short $450 million and other budget needs include K-12 public schools enrollment growth, community colleges, UNC and “keep-the-lights running items,” which “have not been fully funded to the amount of money we are reasonably certain they’re going to need this year.”

Walker referenced a recent report from the nonpartisan Legislative Fiscal Research Division that stated the continuing tax cuts in the state will lead to a “structural imbalance” starting in 2026. She doesn’t think that sales tax revenue will be enough to make up for it, she said, and the state’s new sports betting revenue isn’t enough, either. She said if the legislature passes new revenue sources, like casinos or video lottery terminals, that could help.

Politics of tax cuts

Walker said that while the state’s revenues are tied to the economy, they also depend on how much tax revenue the legislature wants to collect from taxpayers. While the state’s economy shows higher wages, higher business earnings and higher retail sales, she said, tax cuts are predominantly “what is going to slow down and make sluggish tax revenue growth.”

Tax cuts, both for individuals and corporations, have long been a priority for Republican lawmakers. Democrats generally oppose tax cuts, particularly for corporations. Cooper, a Democrat, has criticized previous budget bills for cutting corporate taxes.

The individual state income tax rate for the 2024 tax year is 4.5% and will be reduced to 4.25% in 2025, then down to 3.99% the following year, according to the N.C. Department of Revenue . That has dropped steadily since a 5.25% tax rate in 2021.

In 2022, Berger told reporters that “As long as we continue to see revenue outpace the budget in ways that we’d seen, that means clearly that we’re taxing too much.”

“And I think it’s something that will be a personal priority of mine, to continue to move our rates down,” Berger said.

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