Revenues are now predicted to fall 2.1 percent short of the $20.6 billion the legislature said it needed to carry out this year's budget, according to a memo written by the General Assembly's top economist and a state budget official and obtained by The Associated Press.
The adjustment is based in part on April 15 tax filings and other trends related to last year's tax overhaul and the federal budget agreement in late 2012 that led to higher tax rates from Washington, the memo said. Before April 15, analysts had reported that overall revenues for the first nine months of the year were on track with projections.
The lower projections also will affect revenues for the 2014-15 fiscal year. The analysts downgraded collections by $191 million compared to what was predicted when the legislature assembled a two-year budget last summer.
The news means more money will have to be siphoned off to fill this year's hole beyond a predicted Medicaid shortfall of as much as $140 million, as well as requiring more revenue or reduced spending in next year's plan. The General Assembly convenes May 14 for its budget-adjustment work session.
Gov. Pat McCrory's administration said late Friday there is almost $600 million available to fill the holes. In addition to reserves, McCrory asked state agencies in March to perform more belt-tightening in case the Medicaid shortfall widened or tax collections fell, too.
"It is disappointing that state revenue is coming in under budget, but the state prudently prepared for such a possibility," according to a statement from McCrory's Office of State Budget and Management.
McCrory and legislative leaders have already committed to a proposal this year to raise the minimum state salary for school teachers to $33,000 next fall and $35,000 the following year. The total cost is roughly $200 million over two years.
The governor said his goal was to provide raises to all teachers and state employees in next year's adjusted budget. The downgrades could make it harder to do that.
McCrory "is still reviewing several budget proposals that include raises for all teachers and state employees," the state budget office statement said.
A key House leader was optimistic a broad pay proposal would still be approved. The workers have only had one raise since 2008.
"I anticipate that we will be able to follow through on having a general increase for teachers and state employees," said Rep. Nelson Dollar, R-Wake, senior co-chairman of the House Appropriations Committee.
The shortfall is related to the personal income tax. The state's coffers haven't taken in as much revenue in the form of taxes withheld from worker paychecks, the memo said.
The 2013 tax overhaul law reduced income tax rates and broadened the base of income subject to the income tax. While the new 5.8 percent income tax rate is lowering collections today, the base-broadening designed to keep the reduction in check probably won't kick in until taxpayers file return next year, the memo said.
"The result is a greater fall-off in collections this fiscal year than originally anticipated," the joint memo said. High-income taxpayers who shifted income to avoid higher federal taxes after 2012 also are probably shifting some earnings into 2014, the memo added.
Senate Minority Whip Josh Stein, D-Wake, blamed the tax overhaul approved last year for the shortfall, saying Democrats knew it would allow the very wealthy to keep more money instead of providing revenues for things like teacher pay raises.
"Now it turns out the tax (plan) doesn't provide enough to pay our bills," Stein said.
Dollar put a different spin on the shortfall and tax plan, saying "what you're seeing out there is more money in the pockets of working people and working families in North Carolina." Higher-than-projected sales taxes are the result of those people buying more goods and services, he said.
Rodney Ellis, president of the North Carolina Association of Educators, said the shortfall worries him but he's still trying to remain optimistic about across-the-board raises. North Carolina ranked 46th among the states and the District of Columbia in average pay during 2012-13.
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