Yesterday the Fiscal Research Division, along with the state budget office, released its updated revenue projections for the remainder of the current fiscal year and next year.
Revenue projections are important because they are used by budget writers as a guide telling them how much revenue will be available to spend. This amount reflects state revenue dedicated to the state’s General Fund only and does not include federal funds or transportation funds.
It’s important to note that this March update comes a month before the annual “April surprise” for state revenue, which can see a surge in revenue from tax filers owing more to the state, or a decrease because the state owes more in refunds to filers. While meaningful, this March update can swing significantly by May once the April tallies are in.
Following are some key takeaways from the March revenue update:
- Revenue for the current fiscal year that ends June 30 was revised upward by $370 million to $35.08 billion compared with the $34.71 billion “certified” revenue projection presented last year as the basis for crafting the state budget (which we are still waiting for).
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- When actual revenues exceed projected revenues, it is considered a surplus.
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- Surpluses have become the norm over the past dozen years, as revenue forecasters consistently overestimated potential negative revenue impact from tax cuts. Indeed, backing out the Covid year, North Carolina revenues saw a total of more than $12.6 billion in surplus revenue from fiscal year 2015 to 2023.
- The new revenue projection now predicts revenue of $34.72 billion for fiscal year 2026-27, which begins July 1. While reflecting a decrease from the currently projected revenue for the current fiscal year, that number is up $951 million (2.8%) over the certified projection made last year.
- Importantly, if these new revenue projections are met or exceeded, they would exceed the revenue triggers currently in place to bring about personal income tax cuts in the next two years. The current rate of 3.99% would fall to 3.49% for tax year 2027, and then to 2.99% the following year.
- In April of 2024, an extended eight-year revenue projection made by Fiscal Research in October of 2023 sent many into a panic because it projected budget shortfalls beginning in FY 2026-27 and growing into the future. How did those projections hold up?
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- The extended projection predicted FY 2025-26 revenue to total $33.42 billion. Yesterday’s update projects revenue to come in at $35.08 billion, about $1.66 billion more than the October 2023 projection, a miss of 5 percent.
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- The October 2023 projection predicted FY 2026-27 revenue to come in at $32.99 billion. Yesterday’s update projects $34.72 billion, $1.73 billion more, a miss of 5.2%.
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- At the time others were panicking, we at the John Locke Foundation urged caution when looking at revenue projections because they have proved to be consistently underestimating future revenues.
The bottom line is this: Revenue projections just one and two years out can miss by hundreds of millions or even billions. Consensus forecasts have consistently underestimated revenue to the tune of more than $12 billion over the past dozen years.
If revenue projections are so unreliable even for one or two years out, why would legislators make policy decisions based on projections 7 or 8 years in the future?
Even so, some legislators are still relying on the eight-year revenue forecast made in October 2023 to insist that tax cuts should be halted due to a ‘fiscal cliff’ predicted in that report. But that report is already looking to have underestimated revenue by nearly $3.4 billion in just year three and four combined, why should we alter policy on projections seven or eight years out?
