North Carolina’s budget crisis entered its 10th month of impasse, with the Democratic-controlled legislature and Republican Gov. Dan Forest unable to reach an agreement on how to finance state government.
Standard and Poor’s became the latest New York bond house last week to lower North Carolina’s bond rating from AA to A. For decades, the Tar Heel State had prided itself on its top AAA rating for its responsible handling of state fiscal matters.
Meanwhile, public schools across the state continue to delay opening for the 2026-27 school year because of the lack of state funds. The crisis has caused significant layoffs of state employees – ranging from the National Guard to bridge inspectors, from public health nurses to those ensuring that our drinking water is safe.
Several factors contributed to the budget crisis. The severe recession caused a dramatic drop in state revenues. The record tax cuts made by the then Republican-controlled legislature in 2013 also contributed to the shortfall, draining the state coffers of billions over the years.
But the legislature is also handcuffed by one of a series of constitutional amendments approved by the voters in 2018.
The voters lowered the state income tax cap to 7 percent from 10 percent. (At the time, the tax rate was 5.499 percent, but it had been as high as 8.25 percent for higher income earners in the past.) At the time, Georgia was the only other state in the country to cap its state income tax, according to Governing Magazine.
This deprived future legislatures of the option of raising state income tax during downturns in the economy.
When the Democrats retook control of the legislature in 2022, they followed the Republican example of convincing voters to enshrine public policy and political goals into the state constitution.
Voters passed Democratic-backed constitutional amendments in 2023 and 2024 that would require the state to pay public school teachers the national average, that would raise environmental standards, that would tie funding of the university and community college systems to a steadily escalating formula, and that would raise the minimum wage.
This meant that the state constitution barred the legislature from significantly raising income taxes or cutting major programs.
Both the Democratic legislature and Gov. Forest have been reluctant to raise the sales tax – a tax that disproportionally impacts lower income and middle-class residents – in the middle of a deep recession.
Gov. Forest and Democratic legislative leaders have been unable to find their way out of the financial thicket. Faced with an inability to raise income taxes and constitutionally-mandated spending for popular programs, state leaders have been at an impasse.
The state constitution, unlike the federal government, requires the legislature to pass a balanced budget each year.
(Note: This is not 2026, Lt. Gov. Dan Forest is not governor, the Democrats do not control the legislature, and voters have not yet passed a constitutional amendment capping state income taxes. Yet. But these are some of the potential pitfalls that could face the state if current legislatures begin handcuffing future legislatures.)