‘Just freeze it.’ Why NC Gov. Josh Stein wants to pause tax cuts, and Republicans don’t
North Carolina’s Democratic Gov. Josh Stein wants to freeze the state’s tax cuts, but he’ll face strong headwinds from the Republican-controlled General Assembly, who see the state’s continued growth as a reason to keep them in place.
Tax cuts have long been a Republican priority, and part of recent state budgets that became law. For the 2024 tax year, the individual income tax rate is 4.5%, with the 2025 rate dropping to 4.25%. The rate will drop to 3.99% in 2026. The corporate income tax rate is 2.5%, and Republican lawmakers would like to reduce it until it is eliminated.
“Just freeze it,” Stein said Tuesday about the tax cuts.
When the state’s consensus revenue forecast, written by the Legislative Fiscal Research Division and Office of State Budget and Management, which is part of Stein’s Cabinet, was released on Friday, Stein warned of a looming “fiscal cliff.”
For 2025-2026, the forecast shows a year-over-year growth rate of just 0.5%, followed by a 2.4% drop in 2026-2027.
Stein said the projected budget shortfall of $800 million in 2026-2027 is “entirely self-inflicted.”
“It just doesn’t make sense, and so we have to come up with strategies to address that deficiency,” Stein told reporters on Tuesday at the governor’s mansion after an unrelated event.
Senate leader Phil Berger was dismissive of Stein’s “fiscal cliff” comment, telling reporters after a Senate session on Tuesday that Stein’s warning was reminiscent of statements from past Democratic governors, including Gov. Roy Cooper and Gov. Bev Perdue.
Berger sees ‘good news’ of growth
“I saw it as good news, notwithstanding the fact that that we had the hurricane, and pretty much the economy in Western North Carolina almost shut down for the last part of the year. Yet we get a consensus forecast that says that our revenues actually are still growing. Our economy continues to grow,” Berger said.
“I think that’s a testament to to the policies that have been adopted over the past decade and a half, that have lowered taxes, addressed the regulatory climate, given the private sector really the the oxygen it needed in order to grow. We are one of the fastest growing states,” he said.
Berger thinks the state “is in good shape,” while acknowledging some challenges ahead like Western North Carolina recovery.
Berger wants to continue to phase out the corporate income tax. Individual income tax collections, more people moving here and the “expanding economy” will meet future funding needs, he argued.
Stein, on the other hand, told reporters at the mansion Tuesday that because the state has such a low corporate income tax already, “getting to zero really does nothing for us from a corporate competitiveness perspective.”
“We’re the third-fastest growing state in the country. We have a growing economy. We have more demands than ever before, and we’re facing a shortfall that’s entirely self-inflicted,” he said.
The forecast anticipates an extra $544 million in revenue before the new fiscal year begins July 1, which is 1.6% more than anticipated. That’s because of “more robust economic growth and financial conditions” than foreseen in the last forecast in May 2024, along with investment income, the corporate income tax and continued growth in wages and consumer spending.
But after that, the joint forecast predicts that “economic factors exerting upward pressure on the forecast are outweighed by downward pressure from reductions in the individual and corporate income tax rates, resulting in negligible growth in FY 2025-26 and a decline in FY 2026-27.”
State, and federal, taxes are due by April 15.
What’s next
The state budget process, which is the primary work of the General Assembly this year, was set to begin this week, but the impending snow led to cancellations of several committee meetings.
Helene relief could be a big part of the state budget, as well as other bills already in the works. The House is expected to vote on its latest Helene recovery bill next week. Stein proposed $1 billion in immediate relief. He said Tuesday that he will also ask Congress for another $13 billion to $14 billion in federal funds for Helene recovery.
Stein’s State of the State address will be held on March 12 at 7 p.m. in the House chamber. The legislature will formally invite Stein through a resolution filed Tuesday. Held every two years, the speech is an opportunity for the governor to make her or his pitch for the coming legislative long session. The event is a joint session of the House and Senate, and the Council of State and N.C. Supreme Court also attend.
If lawmakers can come to a deal on the budget, Stein would decide whether to let it become law. Republicans have a veto-proof supermajority in the Senate but are one vote short of a supermajority in the House, so may need some Democratic support to override a Stein veto of the budget.
This story was originally published February 18, 2025 at 6:23 PM.
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