In Washington, President Donald Trump and members of Congress are working to pass a tax bill that will prevent income tax rates from rising at the end of the year. Meanwhile in Raleigh, Governor Josh Stein (D-N.C.) wants to stop North Carolina’s 4.25 percent flat income tax rate from falling to 3.99 percent at the end of 2025, as is scheduled under current law.
The first budget proposed by Governor Stein asks state lawmakers to not only block the planned rate cut to 3.99 percent next year, but also the subsequent cuts that are scheduled to bring the rate as low as 2.49 percent by the end of the decade so long as revenue triggers are met. Fortunately for North Carolina taxpayers, Governor Stein’s budget is dead on arrival in the North Carolina General Assembly, where Republicans have a supermajority in the Senate and a near supermajority in the House.
The North Carolina Senate budget passed in April includes much good news for taxpayers. Not only does the Senate budget remove triggers, thereby guaranteeing that the personal income tax rate falls to 3.49 percent in 2027, it schedules further rate reduction, cutting the state’s flat income tax to 1.99 percent by the end of the decade if revenue triggers are met.
The North Carolina House, meanwhile, introduced and passed their budget proposal this week. Under the North Carolina House budget, the cut from 4.25 percent to 3.99 percent scheduled to take effect on January 1, 2026 is maintained. The House budget, however, adjusts the revenue triggers such that the cut to 3.49 percent in 2027 and all of the subsequent rate reductions will be harder to achieve. According to the fiscal note, under the House budget North Carolinians would pay an additional $8 billion in income tax over the next few years.
“The House’s budget proposal recommends substantially increasing the revenue trigger amounts,” writes Joseph Harris, fiscal policy analyst for the John Locke Foundation. “For example, the trigger amount for FY 2026 would be increased from $33 billion to $36.3 billion; for FY 2033, from $39 billion to $46.2 billion. These changes would, in effect, make further reductions beyond 3.99 percent much less likely. By contrast, the Senate proposed eliminating the triggers to 2.99 percent and implementing further trigger-based cuts down to 1.99 percent.”
The House-passed budget does not include the franchise tax relief that was in the Senate budget. The good news for some taxpayers, however, is that the House budget also does not include the sports betting tax hike found in the Senate budget. The House budget includes additional tax relief, but it is more narrowly targeted than that proposed by the Senate.
“Instead of following the Senate’s plan to solidify and expand across-the-board tax cuts, the House wants to exempt the first $5,000 of tipped wages from the personal income tax,” Harris adds. “While this policy might sound politically appealing, it would introduce compliance issues and benefit only a small, targeted set of workers. The House also proposes increasing the standard deduction from $12,750 to $13,250 for individual filers and from $25,500 to $26,500 for married couples filing jointly.”
The budget passed by the Senate in April includes other reforms long-sought by conservatives, such as repeal of Certificate of Need mandates that are inflating the cost of health care, along with repeal of the state’s carbon emissions reduction target that would drive up utility bills if left in place. Neither of those provisions were included in the budget passed by the House this week, but ATR will urge for their inclusion in the final budget deal.
“The best outcome for North Carolina taxpayers and the state’s economy, would be a final budget deal that takes the best parts of each chamber’s proposal,” said Grover Norquist, president of Americans for Tax Reform. “An optimal budget deal would marry the additional income tax relief found in the Senate budget with the House’s decision to not rely on any excise tax hikes. Such an approach is particularly prudent at a time when competing states are having so much success in lowering, flattening, and even phasing out their income taxes. I encourage legislators in Raleigh to craft a new budget that sends a message that North Carolina will remain a leader in pro-growth tax reform.”
