Last month the nonpartisan Tax Foundation published a recommendation that North Carolina should refine its tax reduction triggers. The Tax Foundation praised the tax reforms of the previous 12 years that North Carolina has seen through, but issued a warning that not refining the triggers associated with reduction of the personal income tax could lead to challenges down the road.
“While revenue-based triggers promote fiscal discipline by tying tax cuts to available resources, North Carolina’s current design is overly rigid. The fixed revenue targets, codified in statute, fail to account for critical economic variables such as inflation, population growth, or macroeconomic shifts. Inflation has consistently exceeded the Federal Reserve’s 2 percent target in recent years, eroding the real value of revenue thresholds. Additionally, federal policy changes—such as anticipated reductions in state transfers and the extension of Tax Cuts and Jobs Act (TCJA) provisions—introduce further uncertainty, particularly as the new federal government seeks to curb spending and reduce deficits.
“The state’s static thresholds, which lack consistent year-on-year growth or alignment with economic indicators like GDP or inflation, risk triggering tax cuts at the wrong time, potentially straining the state’s ability to fund essential services.”
House budget writers have presented a budget that is forward looking, modifying the total revenue needed to trigger the reductions in the personal income tax rate to account for the impact that years of high inflation from the Biden administration is having. The proposed House budget also includes other tax relief such as an increase in the standard deduction, no tax on tips similar to the unanimously passed initiative in the US Senate just this week, and re-instituting the back-to-school sales tax holiday.
These forward looking reforms alongside a prudent investment in replenishing the state’s Rainy Day Fund to $4.75 billion show the House’s commitment to preserving a strong North Carolina into the future.
