With Governor’s Recommended Budget, NC Could Choose Tax Cuts for Working Families Over Enriching Corporations and the Wealthy Few

Note: We updated this blog on March 31, 2025 after receiving updated estimates for the average tax change by income group from scheduled cuts to the personal and corporate income taxes from the Institute on Taxation and Economic Policy.

On Wednesday, Governor Stein released his recommended budget for the next two fiscal years, FY 2025-2026 and FY 2026-2027. After more than a decade of tax cuts that have enriched the wealthy few at the expense of public services that support well-being for all, this budget proposal would pause future tax rate reductions in favor of targeted cuts for working families and key investments in communities’ well-being. Pausing cuts for the wealthy few is a common-sense approach to state tax policy: it would put North Carolina on a more sustainable financial path and start resuming the generational public investments that drive economic success. But with state spending still falling far short of historic averages, much more will be needed to fully fund public education, stabilize the child care industry, address the housing shortage, and increase state employee pay.

Proposal would freeze personal and corporate income tax cuts, putting state revenue on a more stable trajectory 

If cuts to the personal income tax (PIT) and corporate income tax (CIT) go ahead as scheduled, the state’s Consensus Revenue Forecast anticipates revenues will increase a mere 0.5% in FY 2026 before declining 2.4% in FY 2027, an alarming projection in the context of a growing state economy and population. The governor’s proposed budget wisely responds to this forecast by freezing the PIT and CIT at their current rates, raising more than $2.4 billion over the next two years and transforming the estimate of FY 2027’s year-over-year revenue change from a 2.4 percent decrease to a 1.9 percent increase. 

Compared with the governor’s plan to hit pause, proceeding with scheduled PIT and CIT cuts would cause North Carolina to lose $8.5 billion annually when cuts are fully implemented in 2030, compared to today’s tax rates. Those public dollars are sorely needed to raise teacher and state employee pay, fund a full recovery from climate disasters in Western and Eastern North Carolina, and bring down the cost of child care, housing, and higher education. 

The Governor’s plan to pause cuts doesn’t just preserve public dollars that are urgently needed across the state. It also acknowledges that 80 percent of North Carolinians report having experienced no personal benefit from past tax cuts. That perception is backed up by the data: if PIT and CIT cuts go ahead as planned next year, most North Carolinians will get $85 or less back, on average. Meanwhile the richest 1 percent will get over $3,500, a cut that’s more than 700 times larger than what the lowest-income North Carolinians would receive.

Allowing the CIT rate to decline next year would be particularly egregious. At a time when so many in our state are struggling to make ends meet, 94 percent of the revenue lost from reducing the CIT would flow out of North Carolina. The governor’s budget recognizes that stopping unpopular cuts and avoiding a structural budget deficit is a win-win for North Carolina. 

Targeted tax cuts for working families would help cost of living, make state tax code more equitable 

By freezing current tax rates, the governor’s budget proposal is able to establish three new tax credits to let working families keep more of what they earn: 

1. Working Families Tax Credit: This refundable credit would be equal to 20% of the federal Earned Income Tax Credit and provide an average credit of $419 to nearly 700,000 households.
2. Child Tax Credit: By converting the existing child tax deduction to a refundable Child Tax Credit worth up to $150 per child, the governor’s proposal would reach about 200,000 more families and increase the child benefit for nearly 700,000 families.
3. Child and Dependent Care Tax Credit: This refundable credit would be equal to 50% of the federal credit, raising after-tax incomes of about 214,000 families by $303 per year on average. 

Unlike scheduled cuts to the PIT and CIT, these three credits (combined with freezing the PIT at its current rate) would target benefits to North Carolinians who are struggling to make ends meet: 97 percent of the total cut would go to households with annual incomes below $90,000, and the average income of residents receiving a cut would be $38,000.  

A tremendous body of research has demonstrated the effectiveness of tax credits in alleviating hardship and improving health, education, and employment outcomes for low- and moderate-income families. The three credits in the governor’s proposal would help North Carolinians catch up to working families in other states and start reaping the benefits of boosted incomes. We also know that a larger investment in a Child Tax Credit could lift more than 100,000 children out of poverty in our state, and that funding the child care system directly does far more to help working families with low incomes afford child care and to support early childhood educators who keep the system running.  

Key investments would halt yearslong decline in state support, but spending plan falls far short of needs and historic average 

North Carolinians are experiencing the everyday dysfunction that occurs when tax cuts for the rich come at the expense of funding public services: long wait times at the DMV, teacher shortages, child care centers closing their doors due to lack of funding, and local budgets that feel the squeeze when state support doesn’t keep up.  

The governor’s budget proposal includes many investments that would begin to address the chaotic impacts of chronic underfunding: higher teacher pay to recruit excellent educators, more DMV workers to reduce wait times, and increased child care subsidy rates to help centers remain open. As shown below, investments like these add up to spending equal to 4.52 percent of our state’s economy in FY 2026. Compared to the 50-year average of 5.75 percent, the governor’s spending proposal would halt the chronic decline in state spending, but still leaves North Carolinians far short of historically typical levels of public investment. The difference between 4.52 percent and 5.75 percent may not sound like much, but it amounts to more than $9 billion in public dollars that North Carolinians are missing out on in their communities each year. 

If proposed spending matched the 50-year average, our state budget could fund billions of dollars in urgent needs in FY 2026 that are left out of the governor’s proposal: full funding for the Leandro Plan to provide every child with a sound, basic public education, a statewide floor for childcare subsidy rates that addresses huge inequities between counties, a more meaningful cost of living increase for state employees, and enough funding for the Housing Finance Agency to address North Carolina’s housing inventory gap. The returns on these investments far exceed their cost: research commissioned by the NC Chamber Foundation estimates that insufficient child care availability costs the state $5.65 billion in lost economic activity each year, and that closing the housing gap would generate $489 billion in economic activity and nearly 2.2 million jobs. 

Because leaders in the state legislature have stowed away billions of taxpayer dollars in shady reserve funds in recent years, next year’s budget could utilize reserves to make a downpayment on some of these missing investments. For example: 

• The balance in the Economic Development Project Reserve sits at almost $700 million and could be used to support the child care industry as core economic infrastructure. 

• The Stabilization and Inflation Reserve sits at $1 billion and could be used to further increase state employees’ and teachers’ pay. 

To sustain the public services that North Carolinians want, however, will require corporations and the super-rich to resume paying what they owe in state taxes. Restoring a higher tax rate on the very highest incomes and bringing the corporate income tax rate into closer alignment with neighboring states is the surest path to secure some of the investments missing from the governor’s budget.  

With odds increasing for a recession in 2025 due to federal policies and proposed federal cuts to the Supplemental Nutrition Assistance Program shifting as much as $730 million in additional costs onto state government, charging full steam ahead with scheduled tax cuts for the richest North Carolinians is untenable. The governor’s budget would provide some stability for working families in uncertain times by hitting pause on further cuts, with much more still needed to bolster long-neglected services and secure well-being in every community. 

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