Improving National Economy, Stock Market Surge Boosted Revenue Collections, not Tax Cuts

June 17, 2015

An improving national economy along with a surge in the stock market largely explains the news by state officials that personal income tax collections are coming in higher than projected in North Carolina.  In fact, 38 of the 41 states that have a broad-based personal income tax saw an average year over year growth in personal income tax collections of 11.5 percent according to a new report by the Rockefeller Institute of Government.

Overall, 36 of the 38 states saw growth in personal income tax collections, with only Kansas and Illinois seeing a decline. North Carolina joined 25 other states in reporting double-digit growth in year over year personal income tax collections. Notably, other states that experienced similarly strong growth in their personal income tax collections did not pursue tax cuts and some states, California and Connecticut for example, raised taxes.

Such findings highlight that the better-than-expected revenue collections in North Carolina are not the result of tax cuts passed in recent years. Whereas these tax cuts reduce the availability of dollars for public schools, courts and public health, research shows that over time, the revenue loss from tax cuts is unlikely to be made up. Consequently, the foundations of an economy that is attractive to businesses and supportive of sustained and shared prosperity are undercut.

The primary driver of the growth in personal income tax collections looks to be non-wage income – specifically capital gains income, which is an important component of taxable income and is highly volatile. In 2014, the strong performance of the stock market, which was up 17.5 percent, resulted in higher income from capital gains. This strong performance influenced taxpayer decisions regarding when to realize capital gains income.

This latest research provides additional evidence that the April Surprise in North Carolina is likely a one-time event. This surprise should not lead policymakers to pursue more tax cuts, but instead merits a cautious approach that focuses on building an economy that works for everyone.