NC House budget offers tweaks in face of looming deficits, continues tax cuts for corporations

Note: On 5/22/25, the NC House passed their budget proposal on its third reading by a vote of 86-20. You can see how each lawmaker voted here. The final version restored funding for the Office of Environmental Education and dropped plans to eliminate the Office of Health Equity, though transferred the former to the Department of Natural and Cultural Resources and transferred the latter to the Division of Public Health.

The NC House released its full budget proposal earlier this week, giving North Carolinians a look at lawmakers’ funding priorities over the next two years. While the House’s budget plan rejects the most harmful tax policies included by the Senate, it continues to prioritize tax cuts for corporations and the rich — as well as building up reserve funds for corporate giveaways — above raising employee pay, making child care more affordable, keeping college tuition low, and the numerous other issues impacting quality of life for the average North Carolinian.

House budget rejects harmful Senate tax ideas, but misses opportunity to help working families

In a bit of good news for North Carolinians concerned about underfunded services, a looming state budget deficit, and public finances that are unprepared to weather federal cuts to health care and food assistance, the House’s budget proposal rejects some of the worst tax policies included in the Senate’s version:

• The House plan raises revenue thresholds. Where the Senate plan eliminates pesky revenue thresholds that would prevent them from cutting the personal income tax (PIT) as quickly as they’d like, the House instead raises the revenue thresholds. This means that, after falling to 3.99 percent next year from its current 4.25 percent, the rate under the House’s plan would likely remain at 3.99 percent through 2030.
• The House plan doesn’t schedule additional reductions in the PIT. Where the Senate plan schedules even more rate reductions that would take the PIT down to 1.99 percent as soon as 2031, the House plan maintains the current schedule of reductions, only allowing the PIT to drop as low as 2.49 percent if revenue thresholds are met.

While those two moves avoid the biggest harms in the Senate’s tax plan, the House’s remaining tax proposals continue to favor corporate interests and the wealthy few, instead of using the tax code to target relief where it’s needed:

• The House plan gives millions to out-of-state shareholders and executives while asking UNC System families to pick up the tab. North Carolina’s current corporate income tax (CIT) rate is already the lowest in the nation among the 44 states with the tax, and the average rate among our neighboring states is more than twice as high. Even so, the House plan allows the CIT to decline from 2.25 percent to 2 percent next year before phasing out completely in 2030. The House’s plan to continue the CIT cuts will cost the state about $235 million over the biennium, and 94 percent of that tax giveaway will flow to out-of-state residents. Over the same two years, the House plan cuts UNC System funding by $130 million and instructs the system to raise tuition rates to make up $30 million of the cut. That’s unacceptable.
• The House plan offers tax gimmicks to working families rather than meaningful relief. Compared to the already-low current rate of 4.25 percent, the House’s plan to allow the personal income tax rate to decline to 3.99 percent next year will cost NC at least $1 billion each year in lost revenue, and more than two-thirds of that cut will flow to the richest 20 percent of North Carolinians.
  • The Governor’s recommended budget showed that it was possible to stop tax cuts for the wealthy few, and instead provide a state Working Families Tax Credit and Child Tax Credit — worth up to $1,600 and up to $150 per child, respectively — under which the majority of the cut would flow to households with incomes less than about $56,000.
  • The House instead offers tax gimmicks: a personal income tax deduction for up to $5,000 in tips (putting at most $200 back into a taxpayer’s pocket) and a sales tax holiday that’s estimated to save families a maximum of just $60 a year. Unlike the Governor’s tax credits, neither policy is targeted to the lowest-income North Carolinians who pay the largest share of their income each year in state and local tax under our upside-down tax code. Combined with the House’s proposed increase in the standard deduction, these tax gimmicks cost the state about $260 million in lost revenue over the biennium, which could have been used for targeted tax credits or public investments in things that working families are asking for, like affordable child care.

House budget makes sweeping cuts to state government

The House plan pays for continued tax cuts for corporations and the wealthy few by proposing an overall level of spending that would be the lowest in 50 years, compared to the size of the state’s economy. State spending in the House’s plan would equal just 4.3 percent of the state’s economy in Fiscal Year 2026 and 4.2 percent of the state’s economy in Fiscal Year 2027. As the chart below shows, before tax cuts for the rich began in 2013, North Carolina’s General Fund historically amounted to between 5 and 7 percent of the state’s economy.

To put that drop in context, the General Fund proposed by the House for next year would be more than $12.5 billion larger (nearly 40% larger) if the General Assembly were still spending at pre-Great Recession levels. That $12.5 billion could fully fund the Leandro plan, increase the supply of affordable housing, slash wait times at the DMV, make child care accessible to all, and so much more.

And if those numbers sound familiar, it’s because the Senate proposed the exact same level of spending in their budget. After learning how much revenue the state would bring in under scheduled tax cuts this biennium, leaders in the House and Senate agreed on an overall level of spending for their proposals. Rather than doing the hard work of estimating residents’ needs and raising the necessary revenue as equitably as possible — as so many local governments are struggling to do right now — legislative leaders continue to commit to tax cuts for the rich first, funding what little they can with whatever revenue results.

In addition to massive cuts to the UNC System, here’s what else the House budget does to achieve this historically low spending and pave the way for continued tax cuts for the rich:

• Cuts 20 percent of vacant jobs across state agencies, many of which are vacant due to pay and benefits that are often far lower than private sector jobs
• Gives state employees an across-the-board raise of 2.5 percent next year, which is less than the rate of inflation
• Over the biennium, cuts over $10 million in state programs that create a level playing field for all North Carolinians, including the elimination of the Office of Health Equity ($6.4 million), the Office of Historically Underutilized Businesses ($1.8 million), the Minority Male Success Initiative ($1.6 million), and the Environmental Justice Program ($780,000)
• Over the biennium, eliminates programs that provide educational opportunities to the next generation of North Carolinians, including the Office of Environmental Education ($538,000) and the Future Teachers of North Carolina program symposiums, which introduce high school students to teaching as a profession ($556,000)

These “savings” are a mere fraction of the revenue that North Carolina has already lost and will continue to lose to tax cuts for the rich, and they will leave our state worse off.

House budget makes large transfers to reserve funds with little transparency

The House’s plan to continue tax cuts for corporations and the rich will cost NC dearly, yet the House budget plan also continues to divert what little revenue the state does have this biennium to discretionary reserves, to the tune of $2 billion next year.

• Adds over $1 billion beyond what is required by law to the Savings Reserve, which currently has a balance of $3.6 billion
• Adds $250 million to the Economic Development Reserve, which already has a balance of $677 million, and $600 million to the Regional Economic Development Reserve — yet another example of sweetheart deals for corporate interests, while regular North Carolinians experience cuts and poorly resourced state services.

That $2 billion could instead be used to hold tuition at current rates at UNC system campuses or give larger raises and Cost of Living Adjustments (COLAs) to current and retired state employees. It could be used to meet child-care advocates’ demands for $280 million to increase subsidy rates and provide child-care for the child-care workforce, preventing more child-care centers from closing and allowing more parents to work the hours that they’d like to. The House budget simply chooses not to, and North Carolinians deserve better.

Note: For a more detailed breakdown of how the House pays for their FY 2026 spending plan, please see the following table.