RALEIGH, N.C. — On Friday, North Carolina officials released a projection indicating a slight revenue surplus for the current fiscal year, which is primarily attributed to stronger than expected economic performance. However, they cautioned that impending tax reductions may lead to decreased revenue in the future, potentially requiring more stringent budgetary decisions.
Economists from Governor Josh Stein’s administration, which has a Democratic majority, alongside analysts from the Republican-majority General Assembly, estimate that state revenue collections will exceed earlier projections by approximately $544 million, representing a 1.6% increase over the previously agreed figure of $34.2 billion for the fiscal year ending June 30. This information was communicated through the Office of State Budget and Management.
The increase in General Fund revenues is largely driven by unexpected gains in income tax contributions, which reflect an uptick in wages, business profits, and consumer expenditures. Memos from the state budget office and the legislature’s Fiscal Research Division indicate that while current revenues are robust, new income tax rate reductions, predominantly supported by Republican lawmakers and slated to take effect soon, will likely suppress future collections. Economists predict only minimal growth in revenues for the next fiscal year, predicting a 2.4% decrease, translating to a drop of $823 million for the fiscal year beginning July 1, 2026.
This baseline forecast will be reassessed in the spring to incorporate 2025 tax filings and will serve as a key framework for budget proposals from both Governor Stein and Republican legislators moving forward.
The anticipated budgetary constraints, alongside the significant financial challenges presented by Hurricane Helene, could lend credence to Democratic arguments advocating for the reversal of tax cuts aimed at corporations and high earners, as well as a withdrawal of new legislation that significantly increases government-funded educational grants for private schooling.
Currently, state law has already reduced the corporate income tax rate from 2.5% in 2024 to 2.25% this year, with a further cut planned to 2% in 2026. Individual income tax rates have similarly been decreased from 4.5% to 4.25%, and proposals are in place to lower it further to 3.99% in 2026 and possibly to 3.49% in 2027.
The General Assembly has allocated nearly $1 billion since October for recovery efforts following Hurricane Helene in the western regions of the state. Lawmakers are now deliberating an additional allocation of $500 million for continuing support, although Governor Stein is advocating for a significantly larger financial commitment.
Governor Stein expressed concerns about the potential fiscal downturn in a recent news release, emphasizing that while current projections appear positive, North Carolina is inching closer to a fiscal cliff that may jeopardize investments in crucial areas such as disaster recovery, public education, public health, infrastructure, and essential services required to enhance the state’s overall safety and strength. He has committed to collaborating with lawmakers to explore viable solutions.
Despite the past three years, during which revenue collections exceeded budget estimates by at least 10%, the most recent fiscal year saw revenues fall slightly below the predetermined budget levels. Subsequently, Republican budget drafters could face the challenge of identifying areas for spending reductions in the forthcoming two-year budget cycle due to the predicted decrease in revenues, though state reserves still hold several billion dollars.
Republican officials have previously argued that warnings from Democrats regarding tax reductions resulting in fiscal crises failed to materialize. “This forecast confirms that North Carolina’s economy remains on the upswing and highlights the success of the General Assembly’s financial strategies and tax cuts,” noted Lauren Horsch, a spokesperson for Senate leader Phil Berger. “Governor Stein’s concerns appear to be an attempt to revert our state to a period of excessive spending and taxing.”
The North Carolina legislature will begin deliberations on the budget next week. With the current Republican majority lacking a veto-proof coalition, Governor Stein’s veto power may play a critical role in shaping a budget that aligns with his administration’s priorities, assuming unification among all Democrats.
