As any tax policy analyst can tell you, framing across-the-board income tax rate reductions as a benefiting all income levels obscures the real impact on families' resources. It puts too much emphasis on the statutory rate, which very few people actually pay after accounting for various credits and deductions.

So, while income tax rates may be lowered, the benefits vary dramatically by income. With each additional reduction in North Carolina’s flat personal income tax rate, roughly two-thirds of our dollars are redirected to the richest 20 percent.

Tax changes since 2013 shake out to an average cut of $56,000 in 2025 for the richest 1 percent of North Carolinians — a cut that is 130 times larger than what North Carolinians with the lowest incomes have received.

Put another way, additional scheduled cuts to the personal income tax rate will give the richest 1 percent a tax cut equal to1.3 percent of their income, while the poorest 20 percent will get a cut equal to just 0.2 percent of their income.

North Carolinians with the lowest incomes pay 10.5 percent of their income toward total state and local taxes, a much greater share than the richest, who pay the lowest share of their income at just 6 percent.

North Carolina has increased the standard deductions as the income tax rate has been cut, which proponents claim addresses the concern about the state’s upside-down tax code. However, it is not well-targeted to households with low incomes as increasing the standard deduction benefits nearly all taxpayers, since most filers do not itemize. Continued proposals to increase the standard deduction further will do little to help the lowest 40 percent of households in terms of income — those who struggle most with affordability.

It is also important to note that initial income tax changes were paired with expansions of the sales tax to more goods and services, and more recently have been followed with increases in property tax. For many households with low incomes — who primarily pay state and local taxes through the sales and property taxes — changes to the standard deduction do nothing to offset these tax increases. Instead, they lead to chronic state underinvestment in essential services, shift a greater responsibility to local governments, and make everyday life harder and more expensive.

Companies that pay the corporate income tax aren’t mom-and-pop shops — roughly 75 percent of NC’s corporate income tax revenue comes from corporations that operate in multiple states and have profits above $25 million.

Some argue that tax breaks for big companies eventually reach working people — a claim not supported by the research on this topic. Most analyses find a significant share of the corporate income tax (and thus the tax cuts) flow to shareholders, who are disproportionately wealthy, with some new analysis suggesting a small share reaches highly paid executives. Because these shareholders often reside outside North Carolina, this also means that much of these dollars flow outside of the state. Research finds that more than 9 out of every 10 dollars in corporate tax cuts ultimately leave North Carolina.

Small businesses benefit when public investments that businesses need — like affordable child care, transportation, and workforce supports — are fully funded and help connect workers to jobs and markets and ensure consumers have the income to spend locally. When lawmakers reduce revenue through tax cuts, public investments are constrained, harming the businesses that depend on them.

Proponents of tax cuts often argue that state personal income tax cuts can boost a small businesses’ job creation, but there is virtually no evidence to support this claim. In reality, the “pass through” business income taxed under personal income does not often come from small businesses and is literally passed directly to owners and investors.

• Just 2.7 percent of personal income taxpayers own genuine small businesses with employees beyond the owner or owners.
• Just 13 percent of small businesses report $50,000 or more in taxable income in a given year, while the majority earn less or operate at a loss.

If the income tax rates on corporate profits and personal income in place today were the same as those in 2013, North Carolina would have $18 billion more in public money to fund priorities for our communities.

Proponents often claim that tax cuts have generated higher incomes or increased economic activity that offsets lost revenues — and in some cases claims are made that tax cuts generate even more revenue. This idea is rooted in the back-of-the-napkin theorizing of Arthur Laffer. In practice, however, the theory is much more complex, and the overwhelming body of evidence — and lived fiscal reality — shows that tax cuts reduce revenue. Lower revenue in turn leads to less spending on things that are core drivers of economic activity, such as education and workforce development.

“The claim that tax cuts pay for themselves also is contradicted by the historical record. In 1981, Congress substantially lowered marginal income-tax rates on the well off, while in 1990 and 1993, Congress raised marginal rates on the well off. The economy grew at virtually the same rate in the 1990s as in the 1980s (adjusted for inflation and population growth), but revenues grew about twice as fast in the 1990s, when tax rates were increased, as in the 1980s, when tax rates were cut. Similarly, since the 2001 tax cuts, the economy has grown at about the same pace as during the equivalent period of the 1990s business cycle, but revenues have grown far more slowly.” (Source)

It’s important to be clear that much of the research on this theory is at a national level. Because state tax cuts operate at a smaller scale, it is even less likely to generate any significant shift in economic activity required to offset revenue. North Carolina, in particular, did not begin with the highest rates — we were middle of the pack — and the tax cuts came with significant cuts to investments that support economic activity. Together, these make meaningful impact on economic activity is unlikely.

Supporting this point, recent analysis from the Urban Institute of median household income growth — a measure that reduces distortion from extreme wealth or poverty — shows North Carolina’s income growth since 1970 has been lower than the nation as a whole. Notably, the same analysis finds that “state sales and income taxes, whether higher or lower, had no association with changes in median household income.”

North Carolina’s revenue growth has weakened compared with historical trends. In the roughly 35 years leading up to the Great Recession, average annual revenue growth exceeded 8 percent. Since tax cuts for corporations and the rich were implemented starting in 2014, average annual growth has fallen to about half that. Excluding FY 2021 — an outlier year of 25 percent revenue growth attributable to the COVID-19 recovery — average annual revenue growth since the 2013 tax reforms has been just 2.6 percent.

This makes sense given that most economic gains have been concentrated among the richest North Carolinians and big corporations that are not paying taxes at the same level that they had. The shift away from income taxes weakens the connection between taxes and the highest rate of economic growth.

Claims that revenue growth is better under the lower tax rates in North Carolina often rely on selective starting points — such as measuring from recession lows — which can create the appearance of stronger growth. Regardless of the starting point, looking at revenue growth alone is not enough to understand the strength of the tax code. A more meaningful evaluation compares revenue growth to rising costs for delivering goods and services or to broader measures of economic performance.

To maintain current service levels, North Carolina’s spending must not only keep up with inflation and population growth, but also with changing needs — including new federal cost shifts and evolving models of delivering services that require new investments, for example.

Across multiple areas, evidence shows North Carolina’s spending is not keeping up.

• State employees and retirees have seen their wages and retirement stagnate
• Many state agencies, including the Department of Motor Vehicles, are not staffed sufficiently to deliver quality state services to a growing population.
• North Carolina’s public education funding effort, measured relative to the state’s wealth, is last in the nation. By many adequacy measures — including per-pupil spending and teacher salaries — North Carolina continues to underinvest in public schools.

North Carolina’s total state spending is best looked at over time as a share of the economy. This allows us to assess whether spending has been out of control or whether it is providing the stability to our communities amid changing economic conditions.

A look at North Carolina’s spending over the past 50 years shows that total state spending as a share of personal income has fallen to historic lows. North Carolina is simply not investing in the foundations of a strong state — the education, care and infrastructure that supports opportunity. Current House and Senate budget plans both propose a spending level that is more than a full percentage point below the historic average — equal to about $11 billion less in public money for people’s priorities.

Moreover, as evidenced in the graphic below, claims that spending has been out of control in our recent history are unfounded.

In North Carolina, the wealthiest households have experienced extraordinary income growth. In contrast, the majority of North Carolinians have seen very little change in their income over the past decade, even as taxes were slashed. Focusing on average or per-capita income growth obscures this reality by making it seem that income gains were widely shared.

But it’s not enough to look at changes in income alone. We also need to consider whether households have enough to make ends meet. By using estimates from BTC’s Living Income Standard, we can estimate living weekly wages — what it would take to make ends meet —for every county and compare them with average weekly wages.

In the map below, each county is shaded by how the average weekly wage compares with the living weekly wage in that county. The redder that a county is, the larger the gap between the average weekly wage and the wage required to make ends meet. The prevalence of red shading — even with the focus on average wages rather than median wages — shows that many North Carolinians across the state are struggling to meet their basic needs because employers have not paid enough, on average, to cover basic costs.

Both Georgia and South Carolina have higher annual Gross Domestic Product (GDP) growth over the past 10 years than North Carolina, while both states have higher personal and corporate income tax rates. In fact, both states have a corporate income tax rate that is more than double NC’s corporate income tax rate.

Recent analysis shows that North Carolina’s income growth has also fallen behind our neighbors.

The headlines around people moving to North Carolina and corporations choosing to locate here in North Carolina are often used as evidence that the state’s attractiveness is the result of low taxes.

In reality, the decisions people make to move between states are complex and largely driven by job- and family-related reasons. It is also clear that inter-state migration is far less common than headlines would suggest.

Research finds essentially no evidence that taxes drive low- and moderate-income people to leave higher-tax states; likewise, there is no evidence that high-income households in higher tax states are disproportionately moving to no-income-tax states.

Source

Taxes, according to a wide range of research, play a negligible role in interstate migration. Research shows that the considerations that are front of the mind for individuals and households in considering moving to a new state are things like weather, job opportunities, and the cost of housing.

Similarly, businesses prioritize considerations like consumer demand for their products and services, the availability of qualified workers, and, where relevant, proximity to essential supply chains. State and local taxes account for just one-quarter of 1 percent of all business expenses, so tax breaks are unlikely to drive relocation or hiring decisions.

Population and business growth create new pressures on public infrastructure, public schools, housing, and child care that must be met for this demographic growth to translate into increased economic opportunity.

Changes in North Carolina’s poverty rate and child poverty rate have largely mirrored neighboring states. This is likely because overall economic conditions are generally comparable across neighboring states to the south and west. Notably, only Virginia — which has significantly higher average incomes — has raised its minimum wage above the federal minimum of $7.25 an hour ($12.41 in 2025, rising to $12.77 in 2026).

Income tax cuts have little direct ability to address hardship for families with incomes below the federal poverty line, which for a family of four in 2026 is $33,000. The best tools are refundable tax credits, which recognize that most households with low incomes pay the greatest share of their total taxes through sales and property taxes.

Proponents of tax cuts rely on the assumption that necessary reductions in public funding for schools, child care, and other priorities carry no negative consequences for the well-being of people and the economy. Evidence shows the opposite: tax cuts that jeopardize public investments can slow long-term growth by weakening the systems that make people’s lives better and support people to reach their full potential.

When public investments produce better economic outcomes, people are better able to manage rising costs, connect to good-paying jobs, and access education and training that support economic mobility. Research consistently highlights the economic value of public investment in human capital and infrastructure, including:

• Educational Attainment: When students have access to educational opportunities without limits or barriers — through the publicly funded network of schools in every community of the state — they are better supported to reach their full potential. Affordable post-secondary education and lifelong job training further strengthen the economy by centering the people who fuel it. Numerous studies show that higher educational attainment is associated with boosting median household income and other measures important to well-being and economic progress, like physical and mental health.
• Child-care Funding and Child Tax Credit: NC’s broken child-care system reduces labor force participation and drains billions from the state economy. The lack of quality, affordable child care means parents must leave work more often, productivity declines, and employee turnover increases. When parents have to reduce their hours or leave the workforce, there is less consumer spending and tax revenue shrinks. Investments in child-care programs, while offsetting the cost of child-care for households through a fully refundable child tax credit, can increase workforce stability, boost consumer spending, and reduce child poverty.
• Investment in infrastructure: Investment in infrastructure — particularly in marginalized communities — improves quality of life, helps address the climate crisis, and serves as a powerful economic catalyst. Reliable public transit reduces carbon emissions while connecting residents to jobs that might otherwise be out of reach. Revitalized main streets and green spaces enhance local well-being while attracting commercial investment. Expanding broadband and high-speed internet reduces digital barriers, connecting people with new educational and employment opportunities.

Additionally, any discussion of how tax changes affect economic well-being must consider their connection to inequality. To the extent that tax changes grow income inequality, they slow growth.