RALEIGH — Tax experts will tell anyone who listens that one of the biggest problems that accompanies any major rewrite of tax law is predicting how people will comply with the changes.
Some portion of taxpayers are always willing to take advantage of any ambiguity in tax rules to avoid paying. If new rules provide an avenue to do that, they will gladly drive down it.
A bigger issue is that tax changes test taxpayer knowledge. Complying with tax rules that you don’t understand can prove difficult.
Late last year, most North Carolinians had their tax knowledge tested when the tax overhaul approved by state legislators earlier in the year required residents to redo their income tax withholdings.
A few months into the calendar year, those withholdings have dropped drastically below projections. They are now $221 million below forecasts. If the trend continues, by the end of the fiscal year, on June 30, that number could double and the state’s general operating budget could end up experiencing a shortfall.
Whether that happens, and the extent of any shortfall, will be determined by tax collections this month, which are based mostly on taxes owed in the 2013 tax year. With Tax Day coming and going, it is easy to understand that April is always the most important month to state’s ledger sheet.
What that drop in personal income tax withholding means for the long haul is anyone’s guess.
It may mean that a lot of people have underestimated their state taxes for the 2014 tax year and are not withholding enough money from their paychecks. If so, that will be bad news for them next April or whenever they file their tax returns in 2015.
Or, maybe it is a temporary drop created by some unexplained economic phenomenon.
Or, does it mean that those who calculated the costs of the tax overhaul failed to fully account for how some taxpayers might be able to use the new law to avoid tax liability?
Again, no one is likely to know the answer until next year.
Meanwhile, sales taxes and corporate income taxes that are running slightly ahead of schedule have kept the state in the black through March.
If the numbers do move into the red through the rest of the year, and legislators and Gov. Pat McCrory face a Medicaid shortfall that pushes toward $200 million, they will be able to come up with the dollars to balance the budget without too much trouble.
What they may not be able to do is deliver the level of pay raises to teachers, or any other state employees, that some had hoped for.
No matter what the ultimate truth is regarding the drop in personal income tax withholdings, Democratic officeholders will enjoy a new line of attack to bludgeon their Republican counterparts over the tax rewrite. In North Carolina, a lot is riding on Tax Day in 2014.
Capitol Press Association