Scheduled Income Tax Cuts to Mostly Benefit High-Income Households

Individual Income Tax Rate Set to Fall from 3.99% to 3.49% in 2027 & 2.99% in 2028

The latest Consensus Revenue Forecast, issued on March 24, 2026, projects General Fund net tax collections will exceed the $33.042 billion income tax cut trigger in the current fiscal year. This means the individual income tax rate will automatically decrease, by statute, from 3.99% to 3.49% beginning in tax year 2027. The consensus revenue forecast for the current fiscal year is more than $2 billion higher than the level necessary to trigger this automatic rate reduction. This rate cut is very likely to occur and will reduce revenues by more than $2 billion per year.  

The Consensus Revenue Forecast also anticipates that General Fund revenues will be more than $500 million higher than the $34.1 billion income tax cut trigger in FY 2026-27. Although this rate cut is less certain, the result would be an additional reduction of revenues by more than $2 billion by FY 2028-29.

The chart below illustrates the anticipated revenue reductions resulting from reducing the individual income tax rate from 3.99% to 2.99% and phasing out of the corporate income tax (CIT) over the remaining years of the decade.

Chart: Individual and Corporate Income Tax Cuts to Reduce Annual Revenues by $7 Billion in FY 2031-32

Fiscal Year Impacts of Individual and Corporate Income Tax Rate Cuts

• The individual and corporate income tax rate cuts will reduce General Fund revenues by approximately $0.9 billion in FY 2026-27. That loss grows to $7.7 billion by FY 2033-34. Due to back-to-back 0.5% reductions in the individual income tax rate in 2027 and 2028, the annual revenue loss nearly doubles between FY 2027-28 and FY 2028-29, reaching $5.3 billion.
• By FY 2029-30, the individual income tax rate reductions will lower revenues by roughly $4.9 billion annually and corporate income tax revenues would be roughly $1 billion lower. By FY 2033-34, the individual income tax rate cuts alone will cost over $6 billion, with the CIT adding roughly $1.7 billion in revenue losses.
• Cumulative General Fund losses over the next seven years (FY 2026-27 through FY 2032-33) total roughly $37 billion based on OSBM’s estimates.   

Income Tax Cuts Would Lead to Large Structural Shortfall

Although the consensus revenue forecast anticipates more revenue than previously expected in both years of this biennium, hitting two individual income tax triggers in a row—instead of only one—would result in much larger structural deficits than under the prior forecast issued in May 2025.

The chart below shows the projected structural budget balance under a current-services baseline using the enacted FY 2025-26 budget as the starting point (assuming no supplemental appropriations) and growing by projected population growth and inflation as measured by the price index for state and local government expenditures.  

The chart shows that the additional revenue from the revised consensus forecast generates a small structural surplus in FY 2026-27 that quickly turns into a $5 billion structural deficit within two fiscal years compared to less than $3 billion in the prior projection. Incorporating additional appropriations to close the Medicaid shortfall, to provide cost-of-living adjustments to educators and other state employees, or to address other agency budget shortfalls would show a smaller structural surplus in the current fiscal year, no structural surplus in FY 2026-27, and larger structural shortfalls in subsequent years. 

Chart: Second Income Tax Trigger Exacerbates Structural Budget Shortfall

High-Income Households to Benefit Most from Income Tax Cuts 

The chart below shows the estimated tax savings from the anticipated cut in the individual income tax rate from 3.99% to 3.49% in 2027, by income level, among North Carolina residents who file a state income tax return. 

Chart: Size of Tax Cut by Income Group (NC Resident TY 2027) 

Key Distributional Impacts of Tax Rate Cut

• The tax cut disproportionately benefits higher-income taxpayers. Households in the top 1% by income will see an average tax reduction of over $8,000, while the majority of NC households will receive a tax cut of less than $170.
• Approximately 38% of North Carolina households who file a state tax return will receive a tax reduction of less than $100. Roughly 1 million of these households have no taxable income after the subtracting deductions and will receive no benefit from the tax rate cut. Nearly all of these households have incomes under $40,000.  
• An estimated 1.5 million North Carolinians who live in households that have incomes too low to file a state tax return—and who are not represented in the analysis above—will not benefit from the individual income tax rate reduction.
• The top 5% of taxpayers by income will receive more than 40% of the total tax cut ($742 million) for full-year state residents, while the bottom 40% of households filing a state tax return will share just 3.3% ($60 million).1  
• Over 6% of the total tax cut (about $120 million) will benefit residents of other states who earn income in North Carolina but do not live here. Among nonresidents, those with the highest incomes benefit disproportionately: the top 1% of non-resident filers—those with incomes of more than $18 million—will receive an average tax savings of $9,500, totaling $46 million.
• This lower tax rate will reduce state revenues by approximately $2.2 billion annually. This amount is comparable to the entire budget for the Division of Adult Correction and exceeds the state budget for community colleges. The revenues not collected due to the tax cuts are funds that could otherwise support services benefiting all North Carolinians.