State economists expect North Carolina to collect $71.2 billion in revenue across the 2025 and 2026 fiscal years, according to an updated revenue forecast released Friday.
That's an increase of about $1.3 billion since a March projection and about $2.7 billion from the state's certified budget. The projections come from the Office of State Budget and Management and the legislature's nonpartisan Fiscal Research Division.
Economists wrote that stronger-than-expected income tax collection drove much of that increase, with capital gains realizations boosted by a third consecutive year of strong stock market performance and "substantial corporate bonuses" driven by significant 2025 profits.
Senate Leader Phil Berger and Speaker of the House Destin Hall pointed to the upcoming revenue forecast revision this week when they rolled out a framework for the state budget, explaining that they planned to be able to both slash the personal income tax rate and boost state employee pay.
"We fully anticipate and expect that we're covering those pay raises without any real difficulty," Berger told reporters Wednesday, a day after he and Hall announced the agreement that will now lead to more granular budget talks.
Berger and Hall agree to continue the phase-out of corporate income taxes and slash the personal income tax rate from 3.99% this year to 3.49% for 2027 to 2029 before dropping it further. The plan does away with most upcoming revenue triggers to income tax rates, instead codifying planned cuts that take the personal income tax rate as low as 2.99% in 2033 and 2034 before reinstating triggers that could slash it another half-percentage point.
Without the updated budget agreement, forecasters said, revenue would have hit triggers in two consecutive years dropping the income tax rate to 2.99% by 2028.
Republican lawmakers are planning to give average 3% raises across state government, with teachers receiving average 8% raises and state law enforcement poised to receive raises between about 10% and 20% depending on the agency.
Berger and other Senate Republicans have long been wary of the revenue forecasts, believing they are overly cautious.
In response to Friday's release, Berger, R-Rockingham, said in a statement, "For years, we’ve seen these revenue forecasts significantly underestimate our state’s economic outlook. North Carolina’s economy is strong, and we continue to bring in substantial revenue surpluses thanks to Republican-led tax and budget policies."
Sales taxes were higher than expected in April due to "a substantial increase" in federal income tax refunds, the forecast said, and corporate income tax collections remained high because of corporate success. And rising property and casualty insurance rates helped boost taxes collected from insurance premiums.
Governor Josh Stein, a Democrat, has called for the state to stop reducing the income tax rate, leaving it at 3.99% while North Carolina grapples with expected changes to state spending foisted upon it by last year's H.R. 1.
In response to Friday's release, Stein wrote, "With the strong stock market, revenues have exceeded our forecast. That is good news, but we can’t stake our future on stock market volatility. We need to make fiscally responsible decisions and continue to invest in what makes our state so strong: our people.”
The forecast warns that spiking fuel costs related to the United States' war with Iran could slow spending for consumers and investment for businesses, particularly because they've been the key driver behind inflation reaching its highest level since 2023. That's led to higher long-term interest rates, making it harder for businesses to borrow money and potential homeowners to find a mortgage.
Forecasters also warn that while "optimism in AI-driven earnings growth" is pushing up the stock market and, in turn, resulting in the state beating revenue expectations, that trend could turn quickly if the stock market were to plummet.
" As in the late 1990s and mid-2000s, however, a rising dependence on stock market gains raises the risk of a more significant drop in individual and corporate income tax revenues if stock prices were to fall persistently below recent highs," forecasters wrote.
