NORTH CAROLINA — For the fifth time in five years, the state’s tax rate is set to drop again on the first day of 2026. Critics say the cuts disproportionately benefit the wealthy and reduce needed state revenue to keep up with growth, while proponents believe the reduction attracts businesses and keeps the state competitive.
The reduction is part of a multi-year plan, approved by state legislators in 2021, with the tax rate gradually lowering each year through 2027. The rate was at 5.25% in 2021 before falling to 4.99% in 2022. It has continued on a steady decline to reach the new floor of 3.99% by Jan. 1, 2026, with the goal to eventually reach 2.49%.
READ MORE: With Medicaid pilot funding stalled, local organization gets $1.5M to build a new program
ALSO: Legal Aid Wilmington to relocate as funding cuts, $1M grant reshape services
For a single filer in Wilmington earning $50,000 annually, the new rate results in a savings of approximately $97 per year, or about $2 more per weekly paycheck. For higher-income earners who bring in about $200,000 per year, the rate change translates to about $487 saved annually.
Senate leader Phil Berger (R-Rockingham) and other Republican legislators backed the plan to reduce tax rates in order to make North Carolina more competitive for businesses and workers, with residents keeping more of their income.
However, the timing of the latest cut has become a point of contention as the state continues to operate on a budget frozen at 2023 spending levels. The Office of State Budget and Management projects slower revenue growth tied in part to the rate cut, with overall collections reduced by roughly $823 million.
In their forecast, state economists cautioned, while revenue collection remains strong in the short term, “growth is expected to slow significantly,” noting the scheduled tax reductions put pressure on the state’s general fund. Although the state maintains healthy reserves, OSBM projects declining growth will limit the legislature’s ability to fund future state employee pay increases or expand services.
Still, the income tax rate has become a stumbling block in the latest budget negotiations, as House and Senate leaders remain divided on whether to pause future cuts.
As reported by WUNC, House Speaker Destin Hall (R-Caldwell) has led a push to redirect a portion of the revenue intended for future tax cuts toward compensation, including a proposed 5% raise for state employees and teachers to address staffing shortages. By contrast, Sen. Berger maintained throughout the 2025 legislative session that honoring the scheduled tax reductions is a non-negotiable commitment to North Carolina’s business community.
Brian Balfour, vice president of research at the John Locke Foundation — a Raleigh-based think tank advocating for free markets and limited government — is in support of maintaining the tax rate cuts. He contends it will help maintain North Carolina’s stable tax environment, a factor cited by CNBC when ranking the state #1 for business for two consecutive years.
More so, Balfour said the state cannot afford to “stand still” while some regional neighbors move to eliminate taxes entirely.
“We have a somewhat unique situation regionally, with Florida and Tennessee having no state personal income tax,” Balfour told Port City Daily. “Georgia legislators this year began discussing a pathway to eliminating their personal income tax.”
By reaching the 3.99% threshold, Balfour believes North Carolina gains a competitive edge over South Carolina, which utilizes progressive tax brackets. Simply put, progressive systems tax higher levels of income at higher rates. In contrast, North Carolina’s flat tax treats every dollar the same, regardless of total income.
For example, a South Carolina resident earning $200,000 annually would pay a rate of 6.5% on a portion of their income, resulting in a tax bill of about $11,000. In North Carolina, the same earner would pay the flat rate on all of their income, resulting in about $8,000.
Essentially, with a 3.99% rate applying equally to all earners, a high-earning professional moving from South to North Carolina could see thousands of dollars in immediate annual savings in their income taxes.
To Balfour’s point, North Carolina may beat out South Carolina for a skilled worker, but for a professional weighing a job offer in Wilmington against one in Nashville, the lack of an income tax acts as a built-in signing bonus.
“If we don’t continue to push forward, we may end up getting passed by other states,” Balfour said, referring to corporations and businesses going elsewhere.
He also pointed to the long-term human impact of the tax reduction, noting in the decade following the 2013 tax cuts — which lowered income tax rates and shifted the state to a flat tax system — North Carolina reduced its poverty rate from 17.9% in 2013 to 12.8% in 2023; it was the fifth fastest rate drop in the nation behind Arizona, who uses progressive income taxes like South Carolina. From Balfour’s perspective, tax relief ultimately provides fuel for job creation and leads to increased consumer spending.
Alexandra Sirota, executive director of the North Carolina Budget & Tax Center, argues the flat rate disproportionately benefits the state’s highest earners while reducing North Carolina’s capacity to fund essential services.
Her analysis highlights the tax cuts enacted since 2018 have been enormous for the state’s highest earners, with the top 1% of North Carolinians — those with average annual incomes approaching $2 million — paying $4.9 billion less in combined state and federal taxes in 2026 than they would have under previous policies. Roughly $2 billion of projected tax savings for the top 1% comes from state tax cuts alone.
To visualize the scale, Sirota points out $4.9 billion is enough to fund the state’s entire annual contribution to the UNC System — which increased in-state tuition this fall — and is nearly enough to fund the state’s share of the Medicaid program, which costs about $5.5 billion annually. While the state expanded Medicaid in 2023 to cover hundreds of thousands of additional residents, Sirota explained the ongoing tax cuts reduce the state’s capacity to sustain its required share of the program as federal support scales back.
“The federal government is stepping away from their historic commitments to programs that help people get the care they need, leaving states scrambling to fill the gaps,” she noted. “For North Carolina, this means rising costs at the same time that state tax cuts slash our public revenue.”
A central argument against the timing of the cuts focuses on the “revenue triggers” — revenue benchmarks that activate the tax cuts. Under state law, tax rates only drop if the state hits specific targets. For the 2026 cut to take effect, annual revenue had to exceed $31.3 billion; it did and is projected to hit $34 billion.
In 2027, it has to reach $32.35 billion for the next cut to go into effect.
Sirota suggests the targets are flawed because they do not account for inflation. As the price of goods and services rose over the last few years due to inflation, the state’s sales tax collections increased accordingly and thus tax rate reductions were activated. The state is collecting well over its tax targets, bringing in roughly $33.5 billion in 2024 and projected to hit $34 billion in 2025.
The National Consumer Price Index — which measures costs of goods and services — has decreased from a peak of 9.2% in 2022 to 2.7% today. Inflation for the southern region of the country, including North Carolina, remains about 2.2%.
According to Sirota, the actual purchasing power of those dollars declined, meaning the revenue collected buys less than it would have in previous years and does less to support state funded services.
“Instead of funding child care, public education, and support for working families that will set future generations up for success, policymakers are focused on giving tax breaks to the wealthy and profitable corporations,” Sirota noted in her analysis.
As the new year begins, state legislators will look to have a completed budget by the June 30, 2026 deadline, with tax policy likely at the center of the debate.
Have tips or suggestions for Charlie Fossen? Email charlie@localdailymedia.com
At Port City Daily, we aim to keep locals informed on top-of-mind news facing the tri-county region. To support our work and help us reach more people in 2026, please, consider helping one of two ways: Subscribe here or make a one-time contribution here.
We appreciate your ongoing support.
