RALEIGH, N.C. (AP) — North Carolina officials on Friday projected a modest revenue surplus this fiscal year, the result of stronger than anticipated economic conditions, but warned soon-implemented tax cuts should mean lower collections ahead, which could require tougher spending choices.
Economists working in new Democratic Gov. Josh Stein's administration and at the Republican-controlled General Assembly predict that state government collections will outpace revenue levels agreed upon last spring for the year ending June 30 by $544 million. That's a 1.6% increase above the $34.2 billion figure, according to Stein's Office of State Budget and Management.
The general fund overcollections are attributed largely to higher than expected income tax revenue based on growth in wages, profits and consumer spending, according to memos from the legislature’s Fiscal Research Division and the state budget office.
But the memos said additional income tax rate cuts enacted largely by GOP legislators and taking effect soon will curb revenue collections. Economists estimate it will result in only slight year-over-year revenue growth for the next fiscal year with a 2.4% — or $823 million — reduction for the year starting July 1, 2026.
The consensus forecast, which will be reviewed in the spring to account for April 15 collections, serves as the initial baseline that Stein and GOP lawmakers will use in respective spending proposals in the months ahead.
Combined with the major needs associated with Hurricane Helene, the forecast is likely to validate for Democrats arguments that the future tax reductions should be repealed for corporations and high wage earners and a new law greatly expanding taxpayer-funded grants for children to attend private school should be pulled back.
State law has dropped the corporate income tax rate from 2.5% in 2024 to 2.25% this year, and it’s poised to fall to 2% in 2026. And laws reducing the individual income tax rate from 4.5% in 2024 to 4.25% this year will decrease it to 3.99% in 2026 and potentially 3.49% in 2027.
The General Assembly already has spent close to an additional $1 billion on Helene recovery in western counties since October. While lawmakers are considering a bill to spend $500 million more on such aid, Stein sought more than twice that amount.
While the “forecast for this year is positive, North Carolina is approaching a fiscal cliff that threatens our ability to invest in rebuilding western North Carolina, strong public schools, people’s health, infrastructure, and other services we need to make North Carolina safer and stronger,” Stein said in a news release while committing to work with legislators to "develop solutions.”
After three consecutive years in which the state budget office said revenue exceeded budgeted amounts by at least 10%, revenue collections during the fiscal year that ended June 30 fell slightly short of budgeted levels.
GOP budget writers may have to locate spending reductions in the next two-year budget to make up for anticipated lower revenue. State coffers still contain billions of dollars in reserves, however.
Republicans have said that previous Democratic admonitions that lowered tax rates would result in budget crises haven't come to pass.
The “forecast confirms that North Carolina’s economy continues to grow and that the General Assembly’s fiscal policies and tax cuts are a success. The anticipated surplus reflects that,” Lauren Horsch, a spokesperson for Senate leader Phil Berger, wrote in an email. "Gov. Stein’s fearmongering is nothing more than an attempt to pull our state back to an era of reckless tax-and-spend policies.”
North Carolina legislators are starting budget committee work next week. With Republicans no longer having a veto-proof majority, Stein’s veto could hold more sway in negotiating a spending plan more to his liking as long as all Democrats stay united behind him.