Readers,

Is North Carolina truly on the edge of a fiscal cliff? In this newsletter, we will walk through three reasons why North Carolina is not on the verge of a fiscal cliff. We will walk through each reason one at a time.

Last month, the state’s budget forecasters estimated a $544 million revenue surplus for FY 2024–25, followed by modest revenue growth in FY 2025–26, and then a projected $800 million shortfall in FY 2026–27.

In response, some elected officials have seized on the forecast to argue against North Carolina’s scheduled corporate and personal income tax cuts, claiming the state is headed for a “fiscal cliff.”

The term “fiscal cliff” in this context refers to “a precarious financial situation where current policies are unsustainable, and without timely intervention, the state faces severe economic and political consequences,” as defined by ChatGPT.

That may describe the federal government — but not North Carolina.

North Carolina is not, by any reasonable definition, on the verge of a fiscal cliff. Here’s why:

1. Reserve Funds: North Carolina holds nearly $8 Billion in various reserve accounts.
2. Economic Growth: The North Carolina economy is expanding.
3. Tax Cut Safeguards: Personal Income Tax cuts are tied to revenue triggers. If those triggers aren’t hit, the cuts won’t occur.

1. Reserve Funds:

North Carolina has nearly $8 billion in various reserve accounts.

• Savings Reserve (Rainy Day Fund): $3.73 billion
• Stabilization and Inflation: $1 billion
• Economic Development Project: $677 million
• Information Technology: $344 million
• Medicaid Contingency: $727 million
• Opioid Abatement: $41 million
• State Emergency Response/Disaster: $709 million
• Wilmington Harbor Enhancements: $284 million
• Hurricane Florence Disaster Recovery: $26 million
• American Recovery Plan Act: $15 million
• Federal Infrastructure Act: $96 million
• Carry Forward: $188 million
• Other reserves: $33 million

Grand Total: $7.87 billion

Additionally, the state currently has a cash balance of $2.62 billion between the Highway Fund and the Highway Trust Fund.

And moreover, the latest budget projection estimates North Carolina will have a $544 million surplus this year. These funds could be allocated out, moved to a reserve fund, or a combination of both.

Holding $8 billion in reserves is not a bad position to be in, even when staring down a possible $800 million revenue shortfall in two years.

To put that in perspective: it’s like the federal government holding $2 trillion in reserves — with $0 in national debt. By contrast, the federal government spent $6.75 Trillion in FY 2024, currently holds more than $36 trillion in debt, and has less than $1 trillion in total reserves.

2. Economic Growth:

As tax rates have decreased, economic growth in North Carolina has continued — and in recent years, accelerated:

State revenue as a portion of GDP has consistently been between 4 and 5 percent, and was as high as 5 percent as recently as 2021-2022. If state revenue drops to 4 percent of GDP, but GDP rises to $887 billion as UNC Charlotte’s Belk College of Business projects for FY 2025-26, state revenue would be roughly $35.5 billion.

That would be $600 million more than the state budget forecasters are projecting. Of course, this is napkin math, while the forecasters’ formulas are much more sophisticated. But the point is, if we continue on a trajectory of economic growth, our state revenue picture will be in excellent shape.

Here are some key facts and context for North Carolina’s current financial situation:

• From 2011 to 2024, state revenue grew by 78%, from $19.5B to $34.7B.
• Revenue growth has averaged 4.72% annually, while GDP growth averaged 5.11%.
• In the past 3 years, GDP growth jumped to 6.8%, while revenue still grew at 1.49%.
• Forecasting errors have underestimated revenue by an average of 4.83% per year since 2011 — amounting to a cumulative $18 billion underestimation.
• North Carolina is one of 14 U.S. states with a AAA credit rating from all three major credit ratings agencies.

3. Tax Cut Safeguards:

The legislature put into law two major tax cuts: the corporate income tax and the personal income tax (PIT).

The PIT comprises about 43% of state revenue, but future reductions are dependent on past revenue growth.

For example, here’s how the PIT would look by 2029 if all the triggers are hit, which may be unlikely:

Personal Income Tax Cut Schedule:

2026: 3.99% (automatic)

2027: 3.49% (if FY 2025–26 revenue ≥ $33.042B)

2028: 2.99% (if FY 2026–27 revenue ≥ $34.1B)

2029: 2.49% (if FY 2027–28 revenue ≥ $34.76B)

Forecasters are already expecting PIT to drop to 3.49% for 2027. Afterwards, it is unclear whether the state will reach the subsequent revenue targets each time.

By law, PIT cannot fall below 2.49%. And based on projections, it will be difficult — though not impossible — to reach that level.

Meanwhile, the corporate income tax, which comprised just 4.2% of total state revenue in 2022, is scheduled to phase out by 2030.

Full List of Personal Income Tax Cut Triggers:

In Summary:

While some are sounding the alarm over a so-called fiscal cliff, the facts tell a different story:

• North Carolina has nearly $8 billion in reserves.
• The economy is strong and growing.
• State revenue remains healthy and consistently underestimated.
• Major tax cuts are triggered only by realized revenue growth.

In short, North Carolina is not on the verge of a fiscal cliff — and any conversation about reversing tax cuts should be grounded in facts, not fear. And, if we continue down a trajectory prioritizing economic growth and pro-business policies, the Tar Heel state will likely top $1 Trillion in GDP by 2030.

On March 18th, NCFREE partnered with the Greensboro Business League for its Policy & Prosperity Breakfast at the Proximity Hotel in Greensboro. The event brought together nearly 100 business leaders and local elected officials, including members of the County Board of Commissioners, City Council, and Mayor Nancy Vaughan.

NCFREE Executive Director Alex Baltzegar moderated an insightful panel featuring Minority Leader Representative Robert Reives and Senators Paul Lowe and Dave Craven, Chair of the Finance Committee. Additionally, Lloyd Whittington, Editor-in-Chief of the Triad Business Journal, led an engaging fireside chat with Senator Gladys Robinson, who represents Guilford County.

Discussions centered on fostering smart, controlled regional growth and embracing innovative solutions for workforce housing and quality of life improvements. Senator Lowe highlighted the transformative impact of targeted tax incentives in revitalizing the Triad, shifting its economic base from tobacco to an innovation-driven job hub.

Senator Robinson underscored the region’s appeal to major employers like Toyota and Boom Supersonic and hinted at a potential new investor poised to further strengthen the Triad’s economy in the coming months. Sen. Craven and Leader Reives highlighted the growth in workforce readiness seen in the region’s HBCUs and the need for private company engagement in continuing to build and support that pipeline.

Panelists emphasized the importance of providing opportunities rather than handouts, and reinforced their optimism about bipartisan collaboration on critical issues such as economic investment and community development.

NCFREE remains committed to facilitating these essential discussions statewide and is planning future events in Charlotte, Greenville, and Wilmington.