NC Governor’s budget proposal shows freezing tax rates is necessary — and insufficient to fund affordability and well-being priorities

Note: The release of the Governor’s recommended budget for Fiscal Year (FY) 2027 follows two other budget requests released by the governor this year: A critical needs budget request for the current fiscal year, FY 2026, as well as a request for additional funding for Hurricane Helene recovery in Western NC. This analysis covers only the FY 2027 recommendation.

 

This week, Governor Stein released his recommended budget for Fiscal Year (FY) 2027, which begins July 1. Following years of chronic underinvestment from the state, nearly ten months of operating without a comprehensive state budget for the current fiscal year, and continued cuts and chaos from the federal level, the proposal arrives at a time of great uncertainty and hardship for many North Carolina communities and households.

While the budget recommendation rightly stops scheduled tax cuts for corporations and the wealthy few to fund priorities in public education, health care, and more, unmet needs in communities will require state funding commitments beyond those included in the Governor’s recommendation. Those commitments are attainable in a prosperous state like North Carolina, but only if corporations and the wealthy few contribute their share in taxes to fund our future.

Governor keeps corporate and personal income tax at current rates, preserving essential public dollars and services

Following an updated forecast that continues to show state revenue declining next year due to scheduled income tax cuts, the Governor’s budget calls for the personal income tax rate to remain at 3.99 percent and the corporate income tax rate to remain at 2 percent. This modest measure protects almost $900 million in the upcoming fiscal year alone, a number that grows to over $6.5 billion in annual preserved revenue by FY 2031.

This preservation of public dollars is essential, and puts the needs of working families above additional tax breaks for corporations and the ultra-rich:

• In 2026, the richest 1 percent of North Carolinians — with incomes averaging $1.9 million — are already receiving a combined federal and state tax cut equal to about $5 billion, due to federal and state tax cuts since 2018.
• Without a freeze to the state personal income tax rate, the richest 1 percent of North Carolinians would once again disproportionately benefit from the next cut, with an average tax reduction of over $8,000, while the majority of NC households will receive a tax cut of less than $170.
• Revenue projections show that if scheduled tax rate cuts continue, the state by FY 2028 will bring in almost $3 billion less than it needs to sustain current levels of spending on state services (which are already quite low), after adjusting for population growth and inflation — requiring deep cuts to basic services like education and health care to close the gap.

Other tax policy changes are a mixed bag, with missed opportunities to address family priorities

The Governor’s budget also enacts a variety of other tax policy changes. The Working Families Tax Credit, which would establish a tax credit equal to 10 percent of the federal earned income tax credit (EITC), is a proven tool to increase earnings, improve family health outcomes, and reduce disparities in birth outcomes. The credit, worth up to $823 annually and reaching 700,000 households, would provide a meaningful boost to families who struggle most with rising costs and pay a disproportionately large share of their income in state and local taxes.

Notably, the proposed Working Families Tax Credit has been cut in half from the governor’s 2025 budget proposal, a painful illustration of how continued tax cuts for corporations and wealthy individuals are slashing commitments to regular North Carolinians and their families.

Other of the governor’s tax policy proposals fail to deliver on the cost-of-living priorities that North Carolinians have identified:

• Sales Tax Holiday: Sales tax holidays, unlike EITCs and well-designed Child Tax Credits, aren’t targeted to families who most need the boost and provide too little in resources. The Governor estimates the holiday will provide just $60 in savings to families.
• Increase Standard Deduction: The governor proposes increasing the standard deduction by $500 to $1000, depending on filing status. To be clear, the increase does not put $1000 back into working families’ budgets; it merely reduces the amount of income that families pay taxes on. Estimates from last year — when the NC House proposed its own increase in the standard deduction — showed that the change would provide an average tax cut of just $30 or less across income levels. Like the sales tax holiday, an increase in the standard deduction can also be utilized by wealthy households who have already benefitted from more than a decade of state tax cuts, diverting scarce public dollars that could otherwise be invested in communities’ well-being.
• Child and Dependent Care Tax Credit (CDCTC): This tax credit offsets a very small portion of child and dependent care expenses for 200,000 eligible families, with an average credit size of just $250. The credit size pales in comparison to the average cost of child care for an infant, which is more than $12,000 a year. While it’s not clear that this credit will meaningfully address affordability and access in the child-care system — which is experiencing record-setting losses of licensed programs — it is clear that nearly 80 percent of North Carolinians support increased state funding to provide more working families with access to affordable, quality care. The $55 million that the governor dedicates to the CDCTC could instead go a long way towards stabilizing and strengthening the foundations of the child-care industry for the working parents and children who depend upon it, through direct investment in providers through the child-care subsidy system.

Overall spending levels remain inadequate in face of affordability crisis and federal cost shifts

By starting to make corporations and the wealthy few pay more of their share in taxes — and by eliminating public funding for wealthy families’ private school tuition costs — the governor’s budget is able to fund important investments in North Carolinians’ well-being, including:

• Raising starting teachers’ salaries to the highest in the Southeast and giving an average 11 percent raise for all educators
• Full funding for the Medicaid “rebase,” which is the amount of funding needed to maintain current Medicaid services and payments to health-care providers
• Increasing NC Pre-K and child-care subsidy reimbursement rates, and putting in place a statewide floor for child-care rates that brings subsidy payments closer to the true cost of care across the state
• Free breakfast for public K-12 students
• Sizeable investments to help community colleges connect students with high-wage jobs

But nearly 15 years of state income tax cuts have caused an enormous scale of revenue loss, and we see those lost public dollars in all that this budget proposal fails to fund. As the chart below shows, the overall proposed spending level for FY 2027 is far below the historic average, at just 4.4 percent of the state’s economy.

If the governor had instead proposed a spending level equal to the 50-year average of 5.7 percent, an additional $10.7 billion could be invested in lowering costs and supporting well-being. Those public dollars could fully fund the Leandro Plan, ensuring that every public school student, regardless of their county’s wealth or their level of need, has the qualified teachers, principals, nurses, psychologists, counselors, social workers, safe facilities, and other supports necessary for a sound basic education. Those public dollars could additionally make a recurring commitment to create more affordable housing through the Housing Trust Fund and Workforce Housing Loan Program, reduce child poverty with a meaningful Child Tax Credit, and protect North Carolinians from federal cuts to food assistance and health care.

Those investments aren’t fanciful. They are what will be possible when the state’s leaders meet the people’s calls for a Well-Being Budget: A state budget that is crafted through an inclusive and transparent process, with opportunity for public input and debate. A budget that follows the evidence to spend our public dollars on North Carolinians’ priorities for well-being. And a budget that raises adequate and equitable revenue by making corporations and the wealthy few pay what they owe in taxes.

Please see the chart below for additional detail on how the governor pays for the FY 2027 budget recommendation.