In Raleigh, North Carolina, state officials announced on Wednesday a reduction in their anticipated revenue collections, highlighting concerns about economic unpredictability and the looming threat of a U.S. recession. This financial adjustment comes amid various tax-cutting proposals put forth by the Republican-majority House and Senate, which are reflected in their competing budget plans and are soon to undergo negotiation.
The consensus revenue forecast from February had predicted a minor surplus for the fiscal year ending June 30. However, this surplus has diminished due to lower corporate income tax collections observed in April. As a result, the General Fund is expected to collect revenues exceeding last year’s figures by $364 million, although this is $180 million less than the February forecast predicted, bringing the total to over $34.5 billion.
The Office of State Budget and Management attributed these lower-than-anticipated collections to businesses making reduced estimated payments, likely due to decreased profits and increased costs—factors influenced by former President Donald Trump’s trade tariffs.
This revenue downgrade also affects future predictions, reducing the anticipated collections by an extra $218 million for the forthcoming fiscal year beginning July 1, and by $222 million for the year starting July 2026. Legislators and staff were informed by Nick Clerkin, an economist with the General Assembly’s Fiscal Research Division, that the likelihood of a recession has become more pronounced, alongside a decline in the economic outlook.
State economists have warned that slower growth in wage and employment rates could pressure income tax collections from corporations and individuals, contributing to slower sales tax growth as consumers shift their purchasing habits away from tariff-affected goods.
Despite these concerns, the February forecast still anticipated that planned and potential tax cuts would result in only modest year-over-year revenue growth in the 2025-26 fiscal year, and potentially a year-over-year revenue decline for 2026-27. The latest consensus pegs this reduction at $827 million for the 2026-27 fiscal year.
The revenue forecasts account for a 2023 law that temporarily reduces the state individual income tax rate from 4.25% this year to 3.99% by 2026. Should a specific revenue threshold be met, the rate could drop further to 3.49% in 2027—an outcome both Stein’s administration and legislative staff anticipate will be achieved.
Governor Josh Stein has criticized these fiscal thresholds, suggesting they create a substantial “fiscal cliff,” which poses risks due to potential revenue-expenditure imbalances in the coming years. His budget proposal suggested fixing the individual income tax rate at 4.25%.
Both the Senate’s budget proposal, passed in April, and the House’s plan, approved in May, support dropping the tax rate to 3.99% next year. However, the House proposes raising revenue thresholds before considering further reductions, while the Senate suggests a more aggressive path to potentially lower the rate to 1.99%.
Senate leader Phil Berger has contended that the House plan effectively renegotiates the existing 2023 tax law, which he argues would lead to an income tax increase. In contrast, House Speaker Destin Hall maintains that their proposal adjusts for inflation and is more fiscally responsible.
Resolving differences between the House and Senate’s competing budgets regarding tax rates, teacher pay raises, and the elimination of vacant state positions remains necessary before a unified proposal is presented to Governor Stein. With Republicans lacking a veto-proof majority by one seat, Stein’s veto power remains a significant bargaining tool.
Despite Democrats largely opposing provisions within the House’s budget plan, a majority of Democratic members approved it recently, attracted by the slower phased approach to income tax cuts. In a recent address on energy policy in Raleigh, Stein expressed preference for the House’s more fiscally cautious approach over the Senate’s plan, which he believes could further jeopardize revenue streams.