This is not a merely academic debate, although no serious academic, including Mr. Bush's own economists, has argued that tax cuts produce enough additional economic growth to make up for lost revenue.I mention that because the Magic Tax Cut Fairy reared her ugly, misbegotten head earlier this morning at a meeting of the North Carolina Senate Finance Committee, which was considering a handful of different tax cuts packages. Here I’ll focus on the most wide-reaching, Senate Bill 526, the Job Creation and Tax Relief Act of 2015, which builds upon tax cuts the General Assembly passed back in 2013. Without getting too deep in the weeds, SB 526 would further reduce the individual income tax rate over the next two years from the current 5.75 percent to 5.5 percent; replace the standard exemption (now $15,000) with a “zero tax bracket,” which will mean that the state won’t tax you on, eventually, your first $20,000 in income; reduce the corporate income tax; and change the way the state’s economic incentives program is divvied up, as Republicans think the current system favors advanced urban areas over rural ones.
Sen. Josh Stein, D-Wake, after discussing the nearly $7 billion hit: “Question for Sen. Brown: How does that feel? As an appropriations chair, is that practical?”
Sen. Harry Brown, R-Jones and Onslow: “There is no revenue particularly lost,” adding that what was lost would be made up in increased employment.
At this point, Sen. Bob Rucho, R-Mecklenburg, an SB 526 sponsor, chimed in: “We had a tax cut in fiscal year ’14-’15; the estimated new revenue is $780 million. Do you think it’s bad that you have nearly $780 million more money than you did the previous year?”
Stein: “I would love to have that.”
[Rucho’s assertion is] suspect indeed since we know that the ideological foundation for the idea that tax cuts lead to more revenue has largely been discredited. What Senator Rucho is referring to is the year over year growth in revenue that is part of any functioning revenue system particularly in a recovery period (obviously revenues have been known to fall). The fact that there is revenue growth does not negate the fact that the tax cuts passed in 2013 were very costly to the state. Moreover, based on the consensus forecast that was released recently, official analysis finds that revenues are growing at a rate far below the long-run average and below what they were projected to grow at for this year.
So yes, there is revenue growth (I can’t confirm the exact $780 million figure that he is using) but it isn't new revenue. It is largely committed to enrollment growth and would allow no new funding for initiatives that could make our state competitive. If Senate Bill 526 is enacted it would actually lock in current spending levels by putting natural revenue growth (and then some) towards income tax cuts. This is a bad idea for NC, we know that there are very real needs to be met in communities, classrooms and courts, for example and without revenue to make those investments we will not just stall but fall further behind.
Since the 2013 tax plan passed, revenue projections have been revised downward time and time again. In July 2013 when lawmakers passed the biennial budget, they anticipated having $21.35 billion available in general fund revenue in the current fiscal year. By July 2014 when lawmakers adjusted the second year budget, policymakers based their spending decisions on a revised and lower $21.08 billion in revenue. Current estimates now suggest that just $20.73 billion will be available this fiscal year which while more than what was actually available in FY 2013-14, is far less than was originally budgeted [before the tax cuts].
Moving forward, projected revenue growth for the next biennial budget cycle will continue to be constrained due to the economy and the 2013 tax plan. This will limit the ability of the state to make critical investments in core public services. A limited list of identified budget pressures—such as school enrollment growth—amounts to $448 million for FY 2015-16, roughly two-thirds of the current projected revenue growth of $679.8 million [ed. note: now, per Sen. Rucho, $780 million]. This means that policymakers are likely to face challenges in meeting ongoing commitments and will be unable to make progress towards replacing the worst of the cuts that have been made or pursuing new initiatives.
Again, year-over-year revenue growth is to be expected at this point in the recovery and does not mean that the state is experiencing a surplus. In fact, current levels of revenue growth are proving too sluggish to meet expectations meaning that policymakers face a current year shortfall and will be far more limited in their ability to reinvest in the next biennial budget.