North Carolina’s government is on track for a 1%, $370 million revenue surplus this year, but the state will soon hit tax cut triggers that will result in decreasing annual revenue.
The projections were released Tuesday as part of the “consensus revenue forecast” produced by the Office of State Budget and Management and the legislature’s nonpartisan Fiscal Research Division.
The forecast provides ammunition for Democrats and House Republicans who’d like to delay scheduled income tax cuts to avoid a projected “fiscal cliff” that could leave state government with insufficient revenue to fund education, healthcare and other needs. Their dispute with Senate Republicans, who want the tax cuts to proceed, has fueled a lengthy budget impasse.
North Carolina is the only legislature in the country that didn’t pass a budget for the current fiscal year. While the surplus figure represents a change in revenue projections from a forecast issued last year, the lack of a budget means North Carolina has collected more than $2 billion more than it's spending under the current budget, according to the Office of State Controller. The current operating budget was passed in 2023 and has seen only minor modifications since.
Under the revenue forecast, the state would hit the first tax-cut trigger in 2027, dropping the personal income tax rate from 3.99% to 3.49%. Another trigger would take effect the following year, lowering the rate to 2.99% with a third reduction still to come.
That means that while the state is projected to bring in $35.08 billion this year, it would only take in $34.72 billion during the next fiscal year that begins in July — despite inflation and continued population growth.
House Speaker Destin Hall’s office said in a news release that the new numbers are “increasing the chances of a significant recurring deficit and underscoring the need for a responsible budget. House Republicans support continuing North Carolina’s successful tax reform model of gradual, thoughtful tax cuts.”
Gov. Josh Stein voiced similar worries in a news release Tuesday.
"Today's forecast means that we will soon fall into a budget gap of at least $2.8 billion, causing the state to have to make painful cuts to critical services like public safety, education, and health care," he said. "There is still time to act to keep up North Carolina's positive momentum. As our population rapidly grows and the federal government becomes a less reliable partner, I urge this General Assembly to study these new realities, hit pause on outdated, irresponsible tax triggers, and invest in our most important resource: our people.”
Hall also raised concerns that increases in the Medicaid budget could eat up this year’s $370 million surplus. Stein has asked the legislature to immediately approve $319 million to keep the program from running out of money before the current fiscal year ends in June.
Republican legislators have been skeptical of the cost increases. “This surplus revenue will be entirely consumed by a projected billion-dollar Medicaid rebase,” Hall said in the news release. “This program must be reformed in order to preserve our ability to fund public safety, education and other priorities.”
Berger responded to the new revenue numbers without commenting on Medicaid funding or tax cuts. “Today’s forecast once again confirms that Republican-led, pro-growth fiscal policies have transformed North Carolina into an economic juggernaut," Berger said in an emailed statement. "As we prepare for the legislative session, this forecast provides a roadmap to continue those efforts and ease the tax burden for hardworking North Carolinians.”
The revenue forecast report says the surplus stems from higher tax collections due to “robust business profits, stable wage growth, and having a third consecutive year of double-digit growth in equity values.”
But the economists who authored the report warn that could soon change. “Beginning in 2027, the economic outlook anticipates slowing growth in consumer spending and wages,” they wrote.
The forecast numbers could also change based on what happens with the war in Iran.
“The forecast assumes the ongoing conflict in the Middle East will stabilize and move toward resolution by mid-April,” the report says. “A prolonged Iran conflict could lead to persistently high prices and potential shortages of energy commodities. This would raise prices for businesses and consumers across the globe, reducing business investment and consumer spending on other goods and services and raising the risk of global recession.”
