In the final weeks of 2024, the North Carolina General Assembly unveiled a last-minute proposal to cap the state income tax at 5% through a constitutional amendment. Republicans argued the cap would permanently protect taxpayers from future tax hikes, while Democrats expressed concerns over the state’s future financial stability.
On Monday, senators introduced a constitutional amendment that would reduce the current income tax cap from 7% to 5%. The proposal passed the Senate in a 30-19 party-line vote and now awaits consideration in the House.
The move follows North Carolina’s recent tax reductions, which lowered the flat individual income tax rate from 4.75% to 4.5% for 2024. Further reductions are planned to bring the rate to 3.99% by 2026. While the rates remain below the constitutional cap, proponents of the amendment aim to safeguard against future tax increases if control of the General Assembly were to one day return to those in favor of higher tax rates.
“A constitutional amendment preventing the income tax rate from exceeding 5 percent provides a strong protection to the paychecks of hard-working North Carolinians,” said Brian Balfour, Senior VP of Research at the John Locke Foundation.
Balfour explained that the corporate income tax is scheduled to phase out by 2030, and the individual income tax rate is slated to decrease to 3.99 percent by 2026. The proposed amendment would have no impact on the current tax rates.
“The value of such an amendment, however, would be to provide strong protection against future legislatures who seek to soak taxpayers in order to further enlarge an already bloated state government,” he added.
Democrats opposed to the move warned of potential budgeting issues and financial pressure the state may face. Sen Graig Meyer, D-Orange, expressed concerns that continued tax cuts could exacerbate the state’s financial challenges, particularly as Hurricane Helene relief demands significant funding. However, Sen. Paul Newton, R-Cabarrus, disputed the fears relayed by his Democrat colleagues.
“Every time we reduce the income tax rate, we hear a human cry of, ‘you’re taking availability away from the state that could be money used for other things,'” said Newton. “The reality is, as we’ve reduced taxes, we have increased the revenues of this state.”
He explained that in 2010, the budget was about $20 billion, and now it’s about $30 billion, while the tax rate has gone from 8% to 4.5%.
Balfour echoed the sentiment, explaining that Democrats have been warning of budget shortfalls due to tax cuts since before the Republican tax reforms of 2013.
“The warning of budget shortfalls due to tax cuts is the same song they’ve been singing for a dozen years,” Balfour said. “Leading up to the historic tax cuts of 2013, they warned the state budget would be starved and see massive shortfalls. With every subsequent tax cut they’ve warned the same thing. But the reality is we’ve experienced massive annual budget surpluses the last decade (aside from the Covid year).”
The state controller’s cash watch from Nov. 29 shows $3.8 billion still in the savings reserve fund. Even if those funds are almost all committed to relief, the state still has $1 billion in a “stabilization and inflation” reserve, and $721 million in emergency/disaster reserve. There’s an additional $223 million in a “carryforward” reserve and $703 million in an “economic development project reserve.”
As of the end of October, North Carolina had more than $12 billion in “non-reverting departmental funds” — unused money that carries over for specific purposes but could be redirected by legislative action. Additionally, the state had $1.78 billion in surplus revenue for the current fiscal year.
SEE ALSO: Senate takes up 3 bills to address term limits, voter ID and tax cap
The Senate passed a second constitutional amendment on Monday that would require photo identification for all voters in North Carolina. Legislators explained that while state law already requires photo ID for absentee voting, the amendment would just conform the state constitution to current state law.