New North Carolina Budget Features Income Tax Relief, Universal School Choice, More Taxpayer Safeguards

Official text of the new two-year state budget agreement reached between North Carolina House and Senate leaders was officially released Wednesday, September 20. The budget deal includes tax relief that will, if enacted, allow households and small businesses to keep more of their income, along with provisions aimed at safeguarding North Carolinians against new taxes and regulations proposed at the local level. A floor vote on the deal will occur later in the week.

The North Carolina budget agreement would speed up the already codified drawdown of North Carolina’s personal income tax, which fell from 4.99% to 4.75% at the start of 2023, bringing the rate down to 3.99% at the end of 2025, one year ahead of schedule. The budget would also implement annual revenue triggers over the next decade that, if met, could bring North Carolina’s income tax as low as 2.49%.

Getting the rate down to 2.49%, were that to occur, would give North Carolina the nation’s lowest flat income tax, a distinction now held by Arizona, where legislators have their eyes on further cuts to their 2.5% rate that took effect the same day North Carolina’s 4.75% rate kicked in. North Carolina’s corporate income tax, now the lowest in the nation at 2.25%, is already scheduled for full phaseout by the end of this decade as part of the last budget signed into law by Governor Roy Cooper (D) in November 2021.

The new budget agreement also extends the sales tax exemption for jet fuel. In doing so, North Carolina legislators are demonstrating a continued commitment to avoiding taxation of business inputs. Jet fuel is exempt from sales tax in North Carolina, Georgia, and other states for the same reasons that business software purchases and other inputs are not included in the sales tax base. Taxation of business inputs leads to a phenomenon referred to as “tax pyramiding,” resulting in higher and more opaque tax burdens on the end consumer.

Aside from tax rate changes, the budget agreement would also protect North Carolinians from the threat of locally-imposed taxes and prohibitions on plastic bags, cups, containers, and other materials. Democrats are criticizing that reform, with Representative Lindsey Prather (D) describing it to the Asheville Citizen-Times as “overreaching and micromanaging our local governments from Raleigh.” Proponents of that provision, however, contend it stops overreaching and micromanaging on the part of local politicians and that it would protect all North Carolinians from locally-imposed taxes, prohibitions, and other costly regulations.

In addition to tax reform that could give North Carolina the lowest flat income tax in the U.S., the budget agreement would also make North Carolina the ninth state to offer families a universal school choice program, joining Arizona, Arkansas, Florida, Indiana, Iowa, Ohio, Utah, and West Virginia. The budget agreement accomplishes this by lifting the income cap for the state’s Opportunity Scholarship Program, making all North Carolina families eligible for education vouchers that allow parents to choose the school best suited to their child’s needs. More than 19,000 children across North Carolina now utilize the program. The value of the education voucher will decline as household income rises, bottoming out at 40% of the full $6,492 voucher.

Leadership in the North Carolina House and Senate decided to remove additional casino authorization from the budget. Doing so addresses concerns held by some legislators. “I appreciate leadership placing these two issues into a separate bill, allowing our members the freedom to vote according to their conscience without having to vote against the budget,” Representative Neal Jackson (R) told the Carolina Journal’s Donna King.

North Carolina’s Automatic Continuing Resolution Seen As Model That Should Be Applied At Federal Level

The fiscal year in North Carolina ended June 30. Thanks to a state law enacted in 2016, if a new budget is not in place by the end of the fiscal year then the state continues operating at the previous year’s spending levels. Some believe North Carolina’s automatic continuing resolution, which has put an end to shutdown politics in North Carolina and increases leverage for the side favoring less spending, is a reform that members of Congress should consider for the federal budget process. Bipartisan legislation to implement a federal automatic continuing resolution has been introduced by Senators James Lankford (R-Okla.) and Maggie Hassan (D-N.H.).

A decade ago North Carolina had a progressive income tax with a top rate of 7.75%, which had been as high as 8.75%, while the corporate rate was 6.9%. Now, after a decade featuring multiple rounds of tax reform, the state has a flat income tax scheduled to go below 4% and a corporate tax on track to be eliminated entirely. North Carolina has been one of the fastest growing states for more than a decade, which is why the state gained a congressional seat following the last reapportionment. Proponents of this budget agreement believe it will make North Carolina an even more attractive destination than it already is to live, work, raise a family, do business, and invest.

“A decade after North Carolina kicked off the flat tax revolution that has since swept the country, North Carolina lawmakers continue to lead by example, demonstrating for all what pro-growth tax reform looks like,” said Grover Norquist, president of Americans for Tax Reform. “10 years ago North Carolina was home to the least competitive personal and corporate income tax rates in its region. Now the state has one of the lowest flat income taxes and is on track to be the third state with no corporate income tax. It’s amazing how much has changed since Bev Perdue was raising income taxes, sales taxes, excise taxes, and other taxes only 14 years ago.”

The North Carolina House and Senate are expected to vote on this budget agreement before the end of the week. Were Governor Cooper to veto this budget, Republicans in both chambers of the General Assembly have the supermajorities needed to override his veto without any help from Democrats.