NC’s revenue is declining, even with a growing population and economy

Now is the time to pause tax cuts for corporations and the wealthy few

On Valentine’s Day, the Office of State Budget & Management (OSBM) and the legislature’s Fiscal Research Division (FRD) released a projection of state revenues that should make lawmakers want to break up — at long last — with endless tax cuts for corporations and the wealthy few.

Ahead of the budget process every year, OSBM and FRD release the Consensus Revenue Forecast. This year’s forecast gives NC policymakers an idea of the amount of money they have available to plan for a two-year state budget covering Fiscal Years 2025-26 (FY 2026) and 2026-27 (FY 2027). This forecast shows revenues growing just 0.5 percent in FY 2026 before declining 2.4 percent in FY 2027. The state’s economists say that scheduled reductions in the personal and corporate income tax rates (which we know overwhelmingly benefit the richest 20 percent of North Carolinians) are to blame for the decline.

Forecasting state revenues for the next couple of years is helpful for lawmakers trying to build a budget, but taking a longer look over the past few decades can help us see just how unusual and troubling it is for the state to experience revenue declines during a time of economic growth.

Before FY 2014, going back to the 1970s, NC’s General Fund tax revenue never declined during a non-recession year. Since FY 2014, revenue has declined three times in non-recession years, and the forecast predicts the biggest non-recession decline we’ve ever seen (2.4 percent) in FY 2027.

In other words, annual revenue growth data going back decades indicates that state revenue is simply not growing at the rate that it used to, despite lofty promises that tax cuts for the rich would trickle down to all North Carolinians. In the approximately 35 years leading up to the Great Recession, average annual revenue growth was over 8 percent. In the years since tax cuts for corporations and the rich were implemented starting in 2014, average annual growth has been half that. If FY 2021 is excluded — 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.

It matters to us that revenue growth is so low because of what this means for well-being and quality of life for North Carolinians. When revenue growth is expected to be negative in the coming years, how can lawmakers provide the pay raises that state agencies need to fill vacancies? How can they make the long-term commitment needed to rebuild Western and Eastern NC after climate disasters? How can they ensure dignified and competitive pay for North Carolina’s teachers and child-care workers? How can they keep up with the needs of a growing state? The answer, of course, is that they can’t.

While the revenue forecast is sometimes discussed as if it’s a weather report, it’s important for North Carolinians to know that the approaching fiscal cliff wasn’t inevitable. It didn’t have to be this way, and the benefit of a forecast is that lawmakers can still change course.

North Carolina’s tax code used to raise revenue more equitably, and at levels more adequate to meet the needs of our communities. If policymakers were still collecting revenue at our all-time peak (FY 1995), we would have billions more in public money available to address long-neglected needs and help North Carolina’s families thrive.

Finally, the revenue forecast is further evidence that the legislature’s “tax trigger” scheme is not providing the safeguard that legislative leaders promised it would. The forecasted revenue for FY 2026 — although less than 1 percent higher than the year before — is still high enough to trigger a 0.5 percent reduction in the personal income tax rate to 3.49 percent in 2027. Allowing this trigger to go into effect would be deeply irresponsible in the context of continued inflation and a likely shift of federal costs onto state government. When seen alongside the cost of current state services and the cost of a sound, basic education for every child, it’s clear that the revenue thresholds that trigger further income tax cuts are disconnected from the reality of what North Carolinians need.