NC revenue forecast shows $544M surplus amid scheduled tax cuts

On Friday, the North Carolina’s Office of State Budget and Management and the General Assembly’s Fiscal Research Division released a consensus revenue forecast projecting a $544 million surplus for the current fiscal year, bringing total General Fund revenues to $34.71 billion — 1.6% above initial estimates. This increase is attributed to robust economic growth, with higher-than-expected income tax revenues resulting from rising wages, profits, and consumer spending.

Gov. Josh Stein expressed concern over the state’s financial trajectory.

“While today’s consensus revenue forecast for this year is positive, North Carolina is approaching a fiscal cliff that threatens our ability to invest in rebuilding western North Carolina, strong public schools, people’s health, infrastructure, and other services we need to make North Carolina safer and stronger,” said Stein in a press release. “With a growing economy and population, it shouldn’t be this way. I am committed to working with the legislature to develop solutions that allow us to continue to invest in our state’s future.” 

The forecast comes as state lawmakers kick off the long legislative session and the biennial budget process starts in earnest.

“The handwringing about revenue shortfalls at the state level is similar to what we are seeing at the federal level and has everything to do with the difference between using a static model versus a dynamic model of revenue forecasting,” said Donald Bryson, CEO of the John Locke Foundation.

Static revenue forecasting estimates tax revenue based on existing trends and assumes tax policy changes will not significantly impact economic behavior. This method offers simplicity but may miscalculate revenue changes by ignoring how individuals and businesses respond to tax adjustments. Dynamic forecasting, on the other hand, accounts for behavioral changes by using economic models to predict effects like shifts in spending, investment, or job creation. While dynamic forecasting provides a more comprehensive outlook, it relies on assumptions that can make projections uncertain.

“If we think that people don’t react to tax changes, then we are kidding ourselves,” Bryson added.

Governments often use a mix of both methods for a more balanced revenue estimate. The forecast also anticipates challenges ahead due to scheduled tax reductions passed by the Republican-led North Carolina General Assembly. The individual income tax rate is set to decrease from 4.25% in 2024 to 3.49% by 2027, and the corporate income tax rate will drop from 2.5% in 2024 to 2% in 2026.

“Although inflation has decelerated from the post-pandemic peak and job and wage growth have slowed, inflation remains above the Federal Reserve’s 2% target with little sign of further cooling in recent months,” the report reads. “The revenue forecast assumes the recent momentum of strong economic growth will continue into the beginning of the next biennium, with gradual slowing starting in late 2025.”

The report is produced by the Consensus Forecasting Group (CFG), which consists of economists from the Office of State Budget and Management (OSBM) and the General Assembly’s Fiscal Research Division.

“This alarming projection comes in the context of huge unmet needs in our state, including a chronically underfunded K-12 public education system, a child-care system and workforce in urgent need of support, and Western and Eastern NC residents still struggling to recover from disasters,” said Alexandra Sirota, executive director of the left-of-center, NC Budget & Tax Center, in a press release after the forecast was released.

As legislative budget discussions get underway in the long legislative session, lawmakers face the challenge of balancing planned tax reductions with the need to fund essential services and address unforeseen expenditures, such as recovery efforts from Hurricane Helene.

The post NC revenue forecast shows $544M surplus amid scheduled tax cuts first appeared on Carolina Journal.