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Legislature, Cooper diverge on how to spend extra $6 billion

By Dallas Woodhouse, Carolina Journal News Service, Published: June 16, 2021

RALEIGH — North Carolina has collected more than $6 billion in state taxes than was originally forecast in May 2020 by state economists, the Legislature's official forecasting operation said.

The nonpartisan Fiscal Research Division at the General Assembly and the Office of State Budget and Management said Tuesday that for the fiscal year ending June 30, 2021 North Carolina has collected $7.3 billion more than the state has budgeted to spend, with revenue collections totaling $29.5 billion.

Some of the over-collection is the result of delayed tax payments because of COVID. After adjusting for those delayed payments, over-collection stands at approximately $6.04 billion and individual income tax payments are up 12.5 percent. The state portion of the sales tax is up 14.5 percent, and corporate and franchise tax payments are up more than 35 percent.

“A huge surplus does not mean we’re spending too little. It means we’re taxing too much,” Senate Leader Phil Berger, R-Rockingham, said in a press statement emailed on Tuesday afternoon.

The June 2021 revised General Fund consensus revenue forecast now estimates growth over the next two years of 8 percent. State economists now predict a growth rate of 4.5 percent for 2021-22 and another 3.4 percent for 2022-23. Official release of the information is pending.

“There is no question that the strength of North Carolina’s economic outlook is proof that Republican policies work, and it is no coincidence that our state is the No. 2 destination for Americans fleeing other states with bleak economic outlooks,” House Speaker Tim Moore, R-Cleveland, said in a statement. “North Carolina’s overall fiscal policy has set the stage for a commitment to conservative tax policies and we will continue to work collaboratively with the governor and the Senate to keep our state on an upward trajectory of economic growth.”

As Carolina Journal has reported, state House and state Senate Republicans have already agreed to top-line spending numbers for the next two years. The deal spends $25.7 billion in the first year of the two-year budget cycle and $26.7 in the second year. That’s a spending increase of 3.45 percent in year one and 3.65 percent in year two.

While Gov. Roy Cooper and legislative Democrats argue that the surplus revenue should be used to meet Cooper’s demand for more spending, Republicans will likely focus their efforts on already-promised tax relief and reform. The Senate passed a tax plan with eight Democrat votes that raises the standard deduction from $21,500 to $25,500 for joint filers, which would take about a quarter of a million of the lowest-income North Carolinians entirely off the tax rolls. It also reduces North Carolina’s flat income tax rate for remaining taxpayers from 5.25 percent to 4.99 percent.

Additionally, the tax package raises the per-child tax deduction by $500. Bill sponsors say that a family with two children earning $38,000 annually will get a 50 percent tax cut under this bill, while a family earning $200,000 gets a 7.1 percent cut. For North Carolina households earning the median income of $54,000, they will see a 21 percent decrease in their state taxes. By raising the minimum deduction, the poorest taxpayers move into the zero-tax bracket.

House Republican leaders have said they broadly support the Senate tax plan but have not signed onto all the details. The new surplus revenue numbers open the possibility that the Republican tax relief plan could go further and faster than initially planned, possibly accelerating the phased elimination of the corporate income tax and larger cuts to the state franchise tax, and even larger cuts to the state’s personal income tax.

“This provides the opportunity to do two great things; decrease the overall tax burden on North Carolina taxpayers, and it creates an alternative to pay for infrastructure needs outright,” said Donald Bryson, president of the John Locke Foundation. “There is no reason to saddle taxpayers with 30 years of debt at a needlessly higher tax rate.”

Cooper responded to the announcement with a call for more state spending.

“These new numbers show unprecedented resources are now available to make transformational investments for our state,” said Cooper in a statement posted on the governor’s official state government website. “Even though the Republican Senate bill giving big tax breaks to corporations and the wealthy is bad policy, we have enough money to pass my entire budget plus all those tax breaks with more money still remaining. We must now negotiate a responsible bipartisan budget that addresses everyone’s concerns.”

Cooper called for an approximate increase of 12 percent in state spending over the next two years in budget priorities released in March. He has vetoed every state budget presented by the legislature during his tenure as governor and recently anno