Senate Finance Co-chairs: Senators Clodfelter, Hoyle and Jenkins
House Finance Co-chairs: Luebke, Gibson, Wainwright, and Weiss
Revenue and Budget Outlook
Barry Boardman, PhD, Economist, Fiscal Research Division, NCGA Collections for NC through December are $30 million above the $9.4 billion and they are there because the Department of Revenue had additional one-time collections of $272 million otherwise the State would be $240 million below their target for revenue. Withholding taxes were down by 4.1 percent in December (a measure of the higher unemployment) from November’s 3.8 percent figure. Sale Tax collections are down 11.3 percent, while tax law collections are up 6.5 percent, but they are still below the target of an 11.5 percent increase. North Carolina has lost more than 283,000 jobs between December 2007 and December 2009 with the major decrease occurring from October 2008 to present. Employment is expected to improve in the second-half of 2010, while personal income growth does not appear to be improving, and wage and salary income fell 4.4 percent last year. Expectations for economic growth are now being pushed out into 2011 and 2012. Three areas to continue to watch: employment, wages and salaries, and consumer spending.
Actions Taken by States in Response to Fiscal Conditions
Rodney Bizzell, Fiscal Research Division, NCGA Thirty-six states reduced their 2009-2010 budgets, while 29 states enacted net tax increases and 9 enacted decreases. Nationally, there was a 3.5 percent tax increase based on the previous year’s budget. Net State tax changes were expected to garner more than $27 billion in new funds. Personal Income tax was $10.7 billion, sales tax was $6.1 billion, fees were $5.3 billion and corporate income tax resulted in a ($202 million) loss, cigarettes, tobacco and alcohol accounted for $962 million. A majority of the increased revenue stream is primarily a result of two states, California and New York.
Personal Income Tax
Roby Sawyers, CPA, PhD, Department of Accounting, College of Management, NCSU In 1970, forty years ago personal income tax revenue in NC accounted for 33 percent of the state’s revenue stream. In 2009, 56 percent of NCs state tax revenue came from personal income taxes. NC relies more on personal income tax than most other states. Twenty-nine states use federal adjusted gross income as a starting point for determining state taxable income, but NC is among 6 states that use federal taxable income as the starting point. Federal taxable income is income after the standard deduction or sum of itemized deductions. NC’s current law is confusing and complex. There needs to be some consideration of moving to adjusted gross income as a starting point. Even if NC changed its approach to personal income taxes there would still be a need for further adjustments, specifically in the area of required exemptions (Bailey case). A change for NC could also mean that social security benefits would be subject to NC income tax, the same as federal tax. Taxpayers would not receive deductions for mortgages, charitable contributions, or other itemized deductions. The taxing of social security benefits was reviewed as well as itemized deductions (only 37 percent of taxpayers nationally itemize). Other states and what they do: 29 states exempt social security from tax while 15 tax a portion. Thirty four states allow a standard deduction, while all states allow either a personal exemption or credit to adjust for family size, 34 states allow itemized deductions, while 7 states have a flat tax rate. A spreadsheet chart was provided that reviewed the tax options, deductions exemption and other nuances for all the states. Dr. Roby provided a complete spreadsheet with information on how all the other states handle personal income tax if they collect it. A copy is available upon request from this office.
Personal Income Tax Structure in North Carolina
Cindy Avrette, Principal Legislative Analyst, Research Division, NCGA North Carolina’s personal income tax is the largest single source of state revenue. There are numerous exemptions, numerous credits, five tax brackets and the rates range from 3-5 percent. The Tax Fairness Act of 1989 modernized personal income tax, simplified it and provided relief to 65 percent of taxpayers and reduced the brackets to 6 and 7 percent. Ms. Avrette reviewed all categories of state tax exemptions. To calculate state tax liability you must take the state taxable income and multiple it by the tax rate and that equals your tax liability. In 2009, NC added a two percent surtax for married filing jointly whose income exceeds $100,000 and three percent for those with an income exceeding $250,000. Tax credits include children, health care, energy, business, property, charity, and earned income. Recommendations include: broaden the base and lower the rates, use adjusted gross income as your starting point, eliminate exemptions, deductions and credits, lessen the state’s exposure to the volatility of the current personal income tax structure and ensure tax equity in tax structure overall.
Fiscal Trends in North Carolina’s Personal Income Tax Collections and Tax Incidence Analysis
Barry Boardman, PhD, Economist, Fiscal Research Division, NCGA In 1970 personal income accounted for 32.7 percent of state taxes, corporate 12.1 percent, sales 31 percent, and other 24 percent. In 2008, personal income tax accounted for 56.4 percent, corporate 5 percent, sales 27.9 percent, and other 10.7 percent. In NC, 71.5 percent of taxes are paid by married filing jointing, while 20.4 percent are single with the remaining 8 percent married filing separate and Head of Household. Three percent of NC taxpayers pay 33 percent of personal income tax while 22 percent pay the other 63 percent. Reliance on non-withholding tax is increasing and this is a volatile source of revenue on which to rely.
Next Meeting: February 24, 2010