North Carolina Tax Revenues Increase After Tax Cuts

State tax revenues in North Carolina have increased roughly 6% this year, despite the state having recently instituted several major tax cuts.

The state budget office has reported that North Carolina will enjoy a roughly $400 million budget surplus because of the major increase in tax revenue.

In February, officials had predicted a budget shortfall of about $270 million.

But according to a report from the state budget office and the nonpartisan Fiscal Research Division, the state is now on track for a surplus because of “higher income tax payments and lower refunds from the 2014 tax year.”

The report explains that although sales tax receipts and withholdings from paychecks have stayed level or decreased, there was an increase in business activity, which fueled the surplus.

“It appears that the increase was driven by increases in business income, which is often paid under the personal income tax, and by capital gains from the sale of stocks and real estate holding.”

North Carolina now has a flat individual income tax rate of 5.75%, which is down from 7.75% just a few short years ago. The state has also streamlined its tax system by eliminating many deductions and tax credits, including the earned-income tax credit and deductions for retirement income, child care expenses, college 529 plans, and medical expenses.

Additionally, the corporate income tax, which has been reduced to 5% from 6.9%, has been outfitted with a mechanism that converts excess revenue into future rate cuts. For example, if the state meets revenue targets, the corporate income tax will fall to 4% in 2016 and then 3% in 2017.

Critics of reducing income taxes have pointed to Kansas, which has also recently instituted broad income tax cuts, as proof that lowering income tax rates leads to economic downturn. Kansas is facing severe budgetary issues and revenue shortfalls.

But the experience of North Carolina, and the state’s budgetary success seems to refute some of the arguments made by income tax supporters.

The difference between Kansas and North Carolina appears to be the fact that North Carolina also focused on expenditures in addition to revenue. As says Art Pope, North Carolina’s former budget director, “we cut spending too. Kansas didn’t.”