North Carolina Senate Passes Nation’s Lowest Flat Tax, Blocks Cap-And-Trade

Lawmakers in North Carolina, the state that has been an inspiration and model for tax reform efforts in so many other states, are once again taking action to make their tax code even less burdensome and more conducive to job creation. On May 18, the North Carolina Senate passed a new budget that speeds up already-codified income tax relief and schedules further rate reduction, bringing the state income tax rate down to 2.49% by the end of the decade.

As the latest example of significant tax relief receiving bipartisan support, more than a third of Democratic caucus in the North Carolina Senate voted for this new budget, which would give North Carolina the lowest flat income tax rate in the nation, a title currently held by Arizona’s 2.5% flat tax. North Carolina already has the lowest corporate income tax in the nation and that tax will be phased out entirely by 2030.

Governor Roy Cooper (D) released an executive budget earlier this year that would halt the phaseout of the North Carolina’s corporate tax. As expected, that proposal was rejected by the General Assembly, where Republicans now hold supermajorities in both the Senate and House thanks to the party switch announced by Representative Trisha Cotham (R) last month.

The North Carolina House passed their version of the budget in April, which speeds up already scheduled income tax rate reduction that was approved as part of the budget signed into law in November 2021. Aside from the income tax relief, there are other parts of the House and Senate-passed versions of the budget that conservatives will like. Both the House and Senate budgets, for example, would protect North Carolinians against efforts to impose a cap-and-trade program for carbon emissions with a provision stipulating that “No state agency, governor, or the Department of Environmental Quality, may require certain public utilities to engage in carbon offset programs.”

Critics of cap-and-trade point out that it has the same effect as a carbon tax, resulting in higher gas prices and utility bills. Cap-and-trade is part of the reason why the price of gasoline in California is typically much higher than the national average. The inflationary effect cap-and-trade has on the price of gas is also a key reason why the Transportation and Climate Initiative (TCI), a proposed regional cap-and-trade program focused on transportation emissions, folded after receiving a cold reception from lawmakers in every blue state where it was pitched save for Massachusetts. That did not deter Governor Cooper’s administration from voicing support for TCI.

The move to block imposition of cap-and-trade without legislative approval in North Carolina follows a series of cap-and-trade-related developments in other parts of the country. Governor Glenn Youngkin (R) is now working to remove Virginia from the Regional Greenhouse Gas Initiative (RGGI), another regional cap-and-trade program, because of the inflationary effect it has on utility bills. Meanwhile in New York, Governor Kathy Hochul (D) recently authorized a new cap-and-trade program as part of the $229 billion budget signed into law in early May.

Governor Hochul tasked the state Department of Environmental Conservation and the New York State Energy Research and Development Authority with studying the potential effects that cap-and-trade would have on energy prices in New York. They found that cap-and-trade could inflate the price of a gas by 62-cents per gallon and raise the cost of natural gas by 80%, which would adversely affect the 60% of New Yorkers who heat their homes with gas.

“We began running the numbers on that, based on some of the metrics being used by Washington state and some of our own, and revealed some…potentially extraordinary costs affiliated with the program,” New York Department of Environmental Conservation Commissioner Basil Seggos said about the potential effect of cap-and-trade back in April.

“New York’s budget outlined broad details about how the revenues would be spent, creating a ‘climate action fund’ that would direct two-thirds of revenues toward ‘transitioning to a less carbon-intensive economy,’ while channeling other money to ‘industry small businesses’ and consumers,” Energy & Environmental News reported about the Empire State’s cap-and-trade program. “But the state still has to hash out which polluters will be able to buy allowances and contribute revenues to the program — a question that promises to be highly contentious.”

Though TCI has ceased to exist and details for the implementation of New York’s cap-and-trade program are not expected to be released until later this summer, RGGI is still alive and Governor Cooper has signaled his interest in the possibility of having North Carolina be a part of that cap-and-trade pact. In 2021, a spokesman for Governor Cooper confirmed that joining RGGI “is a policy option under consideration.” Under the cap-and-trade-blocking provision in the state House and Senate-passed budgets, however, Governor Cooper can consider joining a regional cap-and-trade program as much as he wants, but he and any future governor must get approval from the General Assembly in order to impose such a policy in North Carolina.

A conference committee will soon convene to hash out the differences between the House and Senate budgets over the next few weeks. The following chart from the John Locke Foundation, a Raleigh-based think tank, illustrates some of the key differences between the North Carolina House and Senate budgets.

The details of the final North Carolina budget deal won’t be public until the conference committee releases them, which will likely occur in June. Yet Governor Cooper already knows he’s likely to receive a new budget that includes additional income tax relief he does not want, proceeds with the corporate tax phaseout that he has asked to halt, and prevents him from implementing cap-and-trade in North Carolina.

Despite all that, there are two key reasons why Governor Cooper may still end up signing the budget that the GOP-run General Assembly sends to him. The first is that he knows his veto will be overridden. The second is that Medicaid expansion, which has long been a top priority for Cooper, is contingent upon enactment of this new budget. As such, by July 4, North Carolina could be on track to have a 2.49% flat personal income tax and no corporate tax by the end of this decade.