Budget & Taxes Justice

NC leaders’ tax cuts for wealthy mean we will lose more than $13 billion for NC needs

Taxes are how we come together as North Carolinians — Black, brown, and white, in every county across the state — to fund the public services that all of us rely on. We deserve equitable tax policies that generate enough state revenue to fund excellent public schools, safe roads, beautiful state parks, robust social services, and more in our communities.

Instead, the final 2023-2025 state budget developed behind closed doors by Senate President Berger and House Speaker Moore continues the project that began in 2013 to eliminate income taxes in North Carolina. The budget, which became law on Oct. 3, moves up already scheduled personal income tax reductions and adds further cuts that will go into place if arbitrary revenue thresholds are met in the prior year. If these thresholds are met, the personal income tax rate would fall to 2.49 percent starting in 2029.

Combined with the personal and corporate income tax cuts that had already been scheduled, these new cuts are estimated to lead to a loss of over $13.5 billion in revenue per year when fully implemented. (This is a low estimate; the higher estimate is $15.2 billion.)

With new cuts, policymakers keep rigging the rules so the richest North Carolinians don’t pay what they owe

Legislative leaders are prioritizing the interests of the wealthiest North Carolinians over the majority of people in our state. They are diverting the wealth our work creates to the rich instead of funding the public services that can make our lives better and more affordable.

The state personal income tax is already a flat tax with a low rate, and ongoing rate reductions give the richest households the greatest share of financial gain. If we look at the effect of going to a 2.49 percent tax rate compared to today’s rate, two-thirds of the money from the cut will flow to the richest North Carolina households — those with incomes averaging $282,000.  Meanwhile, 1 in 5 North Carolina households will receive nothing, even though they likely pay a greater portion of their income in state and local taxes then the richest people in the state. This is because North Carolinians with low incomes who will see no gain from the income tax cuts pay a bigger share of their income in sales taxes than rich households.

An example shows how cutting the income tax rate from 4.75 percent (the rate in 2023) to 2.49 percent will affect regular working people compared to millionaires. Consider two single parents with one child:

  • The first person has an annual income of $1 million. They would receive a $14,713 tax cut a year, or $283 a week.
  • The second person is a new third-grade public school teacher paid a starting salary of $37,000. They would get a tax cut of $231 a year, or $4.44 each week. This teacher is likely to spend more than twice this much — at least $500 — of their own money on classroom supplies, while state funding for supplies has plummeted.

Meanwhile, a single early childhood educator with two young children earning $25,000 — the median pay in the field —would receive no tax cut at all.

By scheduling income tax rate cuts into the future, policymakers avoid their responsibility to budget for future needs and people’s priorities.

The final budget relies on a complicated scheme of revenue thresholds that trigger deeper cuts starting in tax year 2027. Based on the new law, if these thresholds are met, the personal income tax rate will decrease by half a percent each year until it reaches 2.49 percent. For example, if total General Fund revenue in fiscal year 2025-2026 reaches $33.042 billion, the rate will drop from 3.99 percent in tax year 2026 to 3.49 percent in 2027. Using revenue triggers gives lawmakers a claim to fiscal responsibility, but the complexity of this policy hides the truth that the cuts benefit the rich at the expense of our public services. And the arbitrary thresholds that have been put into law have no connection to the projected costs of delivering current services, let alone meeting the future needs of North Carolinians.

There are a few noteworthy features of the tax triggers as designed.

First, the initial revenue threshold for fiscal year 2025-26 was already met for the fiscal year that ended in June 2023. (General Fund revenue in FY 2022-2023 was $33.535 billion.) Given this, the state’s Fiscal Research Division assumes that the revenue threshold will be met to trigger a deeper rate cut in 2027. Post-2013 revenue growth year over year averaged 5 percent, and all the year-over-year changes in the new law fall below that threshold.

Lawmakers provided no explanation of the revenue thresholds they selected, but they appear to be set purposefully low enough to trigger further cuts. As the chart below shows, the thresholds’ growth over time does not follow a clear pattern. The lawmakers who wrote the budget behind closed doors provided no information about how the revenue thresholds were chosen, and the extremely rushed voting process allowed no time for discussion and debate of this issue.

As the chart above shows, the threshold with the greatest year-over-year change is between fiscal years 2030 and 2031, which lines up with the elimination of the corporate income tax in tax year 2030. This indicates that policymakers included some consideration of the combined impact of personal and corporate income tax cuts on state revenue. The elimination of the corporate income tax will cost North Carolina over $2 billion in public funds in fiscal year 2031 compared to the current tax rate, and will primarily benefit out-of-state corporations and their shareholders.

Cuts mean tax revenue will likely fall short of funding quality public schools, accessible early childhood education, affordable health care, and more.

Ultimately, revenue triggers that will lead to tax cuts years into the future are a poor substitute for a budgeting process that fully assesses the current context and needs in our state. Projecting revenue and spending into the future is a difficult task. This is one of the reasons why policymakers are responsible for balancing the budget in two-year increments. These triggers are set to cut taxes a decade into the future without accounting for the rising costs of delivering public goods and services or assessing needs based on circumstances we can’t predict — such as a global pandemic. But as the chart below shows, the revenue thresholds fall significantly below expenditure forecasts that are available.

As noted above, official estimates from both the Office of State Budget & Management and the Fiscal Research Division show that the loss to public funds from corporate and personal income tax cuts when in full effect would be between $13.7 and $15.2 billion when compared to today’s rates. This loss is over 40 percent of the total revenue available this fiscal year. The spending levels in recent state budgets are already far below what’s needed to truly give all North Carolinians the opportunity to thrive — things like first-rate public schools, affordable and accessible childcare, and excellent health care.

By cutting available tax revenue for years to come, today’s policymakers are giving handouts to the wealthy while taking from our state’s future. They make it more likely that future lawmakers will turn to revenue sources like fines and fees that shift the load to people with the lowest incomes. They make it more likely that we’ll see further cuts to public services in order to balance the budget.

Just as we come together to pay our taxes to build our communities up, so should the wealthy and profitable corporations pay what they owe so our families and communities have what they need.  In the next budget process in 2024, any revisions to the state’s spending plan must stop future tax cuts.