NC revenues off slightly in 1st quarter, lower than anticipated income taxes is factor

North Carolina government took in slightly less than what state officials projected during the first quarter of the fiscal year, and questions persist about whether broad tax changes will crimp again the state budget for a second year in a row.

The legislature's chief staff economist told lawmakers this week state revenues were $62 million below expectations for the three months ending Sept. 30.

That's a preliminary gap between targeted and actual revenues of a little over 1 percent — not far out of line with first quarters of previous years, and if left in place, can be closed with unspent funds or reserves. This year's budget spends $21.1 billion in state funds.

Personal income tax collections contributed most to the early gap, missing projections by $102 million, economist Barry Boardman wrote in a presentation.

Income tax revenues have missed predictions since rate reductions went into effect last January following the approval of a wide-ranging tax overhaul bill the previous summer. Paycheck withholdings have fallen and helped create a $450 million gap between revenues and planned spending for the year ending last June 30.

The changes condensed three individual income tax brackets to one bracket with a lower flat 5.8 percent rate. So companies took out less money from worker paychecks to cover the lower rate than what state officials anticipated. Republican legislative leaders are counting on collections to improve when taxpayers file returns early next year. Lawmakers last year also eliminated or repealed some income tax deductions.

"With the first quarter running slightly behind target, pressure increases on the expectation that April 2015 collections will rise significantly as taxpayers make higher final payments and receive smaller refunds," wrote Boardman, who works for the General Assembly's nonpartisan staff.

Critics of the tax overhaul, primarily Democrats, say shortfalls are a symptom of a plan that benefits the highest wage earners the most and fails to provide adequate revenues for public schools and infrastructure. Overall revenues for the first three months of the year are $422 million less compared to a year ago, when most changes hadn't been implemented.

On the spending side of the budget, state Medicaid officials told legislators this week they were confident expenses for the massive health insurance program for the poor and disabled residents would remain on budget at the end of the fiscal year. Some lawmakers at Tuesday's health and human services oversight committee expressed skepticism after reviewing a financial report from Medicaid.

"In October, we're always in great shape," quipped Sen. Ralph Hise, R-Mitchell, a committee co-chairman.

While Medicaid has generated shortfalls in the hundreds of millions of dollars in recent years, the agency reported a positive cash balance at the close of the last fiscal year, not counting backlogs of pending claims. The legislature also set aside an additional $500 million last year for Medicaid.