North Carolina revenue predictions fall with recession risk

RALEIGH, N.C. (AP) — North Carolina officials on Wednesday downgraded anticipated state revenue collections compared to their recent forecast, largely over rising economic uncertainty and the risks of a U.S. recession.

The adjustments agreed upon by economists working in Democratic Gov. Josh Stein’s budget office and at the General Assembly keep front and center competing tax-cutting plans passed by the Republican-controlled House and Senate. The plans are contained in rival budget bills that will soon be subject to negotiations.

A small revenue surplus predicted for the year ending June 30 in February’s consensus revenue forecast is now more modest thanks to lower-than-expected corporate income tax collections in April. General Fund collections now are expected to outpace revenue levels agreed on last year by $364 million — a $180 million decline compared to February predictions — to a total of over $34.5 billion.

The Office of State Budget and Management said that expectations of lower profits and higher input costs from President Donald Trump’s trade tariffs likely led businesses to make reduced estimated tax payments this spring.

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The downgrade drifts into the upcoming two-year forecast, which reduces anticipated revenue collections by another $218 million during the fiscal year starting July 1 and by $222 million for the year starting July 1, 2026. That’s because the overall economic outlook has declined and “the probability of a recession has increased,” Nick Clerkin, an economist with the General Assembly’s Fiscal Research Division, wrote to legislators and staff.

Lower estimated wage and employment growth will place pressure on corporate and individual income tax collections and slow growth in sales taxes as consumers shift away from goods affected by tariffs, state economists warned.

These downgrades still follow a February forecast that estimated planned and potential tax cuts would lead to only slight year-over-year revenue growth for the 2025-26 fiscal year and an actual year-over-year reduction for the 2026-27 fiscal year. Wednesday’s consensus now calculates that reduction for the 2026-27 fiscal year at $827 million.

The predicted revenues reflect a 2023 law that will reduce the state individual income tax rate of 4.25% this year to 3.99% in 2026 and also likely decrease it to 3.49% in 2027 if a revenue threshold is met. Both Stein’s administration and legislative staff agree that anticipated collections will exceed the fiscal “trigger” for the 3.49% rate to be enacted.

Stein has criticized the triggers as needlessly creating a “fiscal cliff” of large gaps between revenues and spending needs in the coming years. Stein’s budget proposa l asked that the individual income tax rate be frozen at 4.25%

Both the Senate budget plan approved by the chamber in April and the House plan approved in May allow the rate to fall to 3.99% next year as scheduled. While the House proposal would raise the revenue thresholds contained in current law before rates could fall even lower, the Senate plan creates a more aggressive series of triggers that could reduce the rate one day to 1.99%.

Senate leader Phil Berger said last week the House plan appears to renegotiate the 2023 tax law and argues it would result in an income tax increase. But House Speaker Destin Hall disagreed, saying the chamber’s proposal adjusts the revenue thresholds for inflation and is more fiscally conservative.

House and Senate differences within their competing budgets on taxes, teacher pay raises and the elimination of vacant state government positions would have to be worked out before they could present a final plan to Stein, who could use the threat of his veto stamp to wield influence. Republicans are one seat short of a veto-proof majority.

Although the House budget plan contained many provisions opposed by Democrats, over half of their members in the chamber voted last week for the proposal, in part because of how it slowed down the income tax cuts.

After a speech on energy in Raleigh, Stein told reporters Wednesday that while he “wasn’t thrilled” with the House position on taxes, “it is much more fiscally prudent than the Senate position, which is to just further erode our revenue sources.”