North Carolina’s revenue forecast is a wake-up call

Last week, the Office of State Budget and Management (OSBM) and the General Assembly’s Fiscal Research Division released their revised Consensus Revenue Forecast for the 2025-2027 biennium in North Carolina.

The forecast is important because it tells lawmakers and the public how much revenue (or public dollars) is available to fund priorities in the current fiscal year and next fiscal year.

Here’s what this year’s forecast told us:

• Revenue will decline next year, when our state needs it to be growing to meet higher costs and long-neglected needs.
• The state is on autopilot toward income tax cuts that we can’t afford.
• If lawmakers stay on this path, it will mean cuts to health care, child care, public education, and state workers — leading to higher costs and fewer opportunities for families.

For those unhappy with current state funding levels, the forecast anticipates even fewer public dollars next year

The forecast estimates that, unless lawmakers change course, the state’s General Fund revenue will decline to $34.7 billion in the next fiscal year, which begins in just a few months on July 1, 2026. That’s $360 million less than the forecast anticipates for the current fiscal year, a gap equal to about 6,200 teacher salaries.

North Carolina communities are already feeling the consequences of years of inadequate funding and the lack of a comprehensive state budget, and can’t afford to make do with even less:

• Teachers are leaving to work in states that pay a professional salary,
• Child-care centers are closing,
• Successful health care pilots have been canceled, and
• The state’s Medicaid program will run out of funding in April without further action by lawmakers.

The forecasted decrease in revenue is especially concerning as our growing population and higher costs require more state funding to maintain the same (already low) level of services. The state also faces new costs next year, as the so-called One Big Beautiful Bill Act shifts large funding needs onto state and local governments for Medicaid and SNAP (also known as food stamps). Those new costs will require the state to have more resources at its disposal, not less.

The anticipated decline in funding is not a new trend: If General Fund tax revenue decreases in FY 2027, it will mark the third year-over-year decrease in the past five years — all in the context of a growing population and growing economy, factors that usually support tax revenue growth. Over a longer time horizon, General Fund tax revenue growth in North Carolina has been much lower since tax cuts began in 2014, as the chart below shows.

NC is on autopilot toward costly income tax cuts for the rich

Current state law triggers automatic income tax cuts if the state raises a certain amount of revenue, and the new forecast shows those revenue thresholds will be hit. This means that unless lawmakers change course, the personal income tax rate will automatically drop to 3.49 percent in 2027 and 2.99 percent in 2028.

Because the revenue thresholds are very low and unrelated to the state’s ability to sustain current services — let alone the increased investments that North Carolinians support in poll after poll — these automatic rate cuts will lead to large revenue losses that the state cannot afford. As the chart below shows, OSBM estimates that the automatic tax cuts will create a $2.8 billion structural budget imbalance by Fiscal Year 2028 (which begins in a little over one year). In other words, the state’s tax policy 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.

If lawmakers fail to address the role of automatic tax cuts in creating the imbalance, they will be left with spending cuts to balance the budget: $2.8 billion in spending cuts is equivalent to eliminating state funding for community colleges ($1.7 billion annually) and then some.

OSBM analysis also shows the average tax cut that North Carolinians of different income levels can expect from automatic rate cuts to personal income taxes: The majority of NC households will receive a tax cut of less than $170 next year, while the richest 1 percent will receive over $8,000 on average.[1]

This analysis underscores the backwardness of automatic tax cuts in a state where the cost of living is a top concern for residents of all political stripes. Rather than funding higher pay for teachers and state employees, more affordable child care and housing, and other cost of living priorities, automatic tax cuts will give $170 or less to the majority of households. Meanwhile, underfunded state institutions are shifting higher costs onto families: A $170 tax cut, for example, is mostly wiped out by a $125 average tuition increase at the state’s public universities, which hiked prices for the first time since 2017 due to a lack of state funding.

To avoid steep cuts and fund affordability priorities, different tax choices are needed this year

North Carolina does not need to hurl itself toward additional tax cuts for the rich, a structural budget imbalance, and a less prosperous future. But if lawmakers continue to do nothing, rising college tuition will be the first of many costs shifted onto working families. Without adequate state revenue, North Carolina families face the threat of higher costs and lower incomes when lawmakers must balance the state budget. Possible outcomes include:

• Deeper cuts to Medicaid and SNAP (food stamps) that cause more people to lose health care and food assistance
• Continued closures of child-care centers
• Pay cuts for teachers and state employees, or cuts to the educator and state employee workforce
• Higher fees for state services and amenities, such as state parks and museums
• Higher local property taxes when local leaders are forced to adjust to even less state funding

These outcomes would be devastating for the well-being of North Carolina communities, and they don’t need to happen. By stopping automatic tax cuts and keeping the personal income tax rate at 3.99 percent, lawmakers can preserve about $2.2 billion in annual revenue — not enough to cope with all of the damage inflicted by the One Big Beautiful Bill and years of state underfunding, but enough to at least save SNAP and rural food retailers, raise teacher and state employee pay, and stabilize the child-care industry. With a further willingness to make profitable corporations and the wealthy few pay their fair share following years of state and federal handouts in the form of tax cuts, full funding of North Carolina’s well-being priorities is possible.

The choice should be an easy one.

 

[1] The NC Budget & Tax Center regularly publishes average tax changes by income level as modeled by the Institute on Taxation and Economic Policy (ITEP). ITEP’s analysis closely matches that of OSBM, estimating average tax cuts of $9 for the lowest-income 20%, $66 for the second 20%, $168 for the third 20%, $327 for the fourth 20%, $689 for the next 15%, $1,776 for the next 4%, and $7,313 for the richest 1%.