Discover how North Carolina’s strategic tax cuts, prudent financial planning, and conservative fiscal policies have led to national recognition, more money in taxpayers’ pockets, and the highest possible bond ratings, signaling a new era of economic stability and growth.
North Carolina has achieved a remarkable fiscal turnaround, distinguishing itself as a national leader in responsible governance and economic growth. Just over a decade ago, the Tar Heel State grappled with a poorly constructed tax code that burdened households and discouraged investment, facing significant budget shortfalls. Today, through strategic tax reforms and stringent fiscal management, North Carolina is celebrated for its financial health, securing top national rankings and the coveted AAA bond rating from all three major agencies: S&P, Fitch, and Moody’s.
A Decade of Transformative Tax Reform
Prior to 2010, North Carolina’s tax landscape was significantly different. The top marginal personal income tax rate stood at 7.75%, making it the highest in the Southeast. The state also imposed one of the highest corporate tax rates in the region. This environment, coupled with other factors, led to a substantial $3.5 billion budget shortfall by 2009, resulting in temporary teacher pay cuts, state employee furloughs, and heavy reliance on state reserves.
The turning point arrived in 2010 when Republicans secured legislative majorities for the first time in 140 years. This shift initiated a decade-long commitment to comprehensive tax reform. Legislators systematically reduced income and sales taxes, transforming the state’s economic outlook.
Putting More Money in Your Pocket: Personal and Corporate Tax Reductions
North Carolinians have a significant reason to celebrate, as a new round of income tax reductions took effect on January 1, 2023. The state’s 4.99% personal income tax rate has fallen to 4.75%, a stark contrast to the 7.75% rate from a decade ago. This rate is scheduled to continue its descent, reaching 3.99% by 2027.
The impact of these changes hasn’t gone unnoticed nationally. Forbes recognized North Carolina among the top five states for income tax reductions for 2023, highlighting the state’s commitment to making its tax code less burdensome and more competitive. Arizona, Iowa, Idaho, and Mississippi also made the list, but North Carolina stands out as a leader in pro-growth tax reform, serving as a model for other states.
On the business front, the corporate tax rate of 2.50% is set to be lowered further to 2.25% in 2025 and will be entirely phased out by 2030. This makes North Carolina’s corporate tax rate the lowest of any state that levies one, significantly enhancing its attractiveness for job-creating investment. Additionally, the budget exempted military pensions from the state income tax, a crucial benefit for North Carolina’s fifth-largest military population.
The state also broadened the scope of its sales tax to include more services but simultaneously dropped the state rate to 4.75%, down from the 5.75% rate enacted by the previous legislature. These calculated adjustments demonstrate a holistic approach to tax reform aimed at fostering a more dynamic economic environment.
Beyond Tax Cuts: A Commitment to Fiscal Prudence
North Carolina’s fiscal success isn’t solely due to tax cuts; it’s also a product of responsible financial management. The state has garnered national attention for its conservative and responsible handling of taxpayers’ money, particularly through the implementation of a “budget stress test.”
As profiled by Pew Trusts, North Carolina is one of five states that utilize this critical tool to determine how much money should be allocated to its rainy-day fund. These stress tests help lawmakers anticipate how the state budget would perform under various economic scenarios, such as recessions or natural disasters like hurricanes, effectively averting future crises. With the passage of the fiscal year 2022 budget, North Carolina met the recommended target for its rainy-day fund, significantly increasing its savings reserve.
Senate leader Phil Berger (R-Rockingham) announced a substantial $6 billion surplus for the fiscal year 2022-23 budget, with the rainy-day fund balance projected to reach $4.75 billion by the end of the biennium. An additional $1 billion state inflationary reserve was also created in anticipation of a recession, underscoring the state’s proactive approach to financial stability. House Speaker Tim Moore emphasized the importance of preparing for economic downturns, contrasting it with past failures.
National Recognition and Elite Bond Ratings
The concerted efforts in tax reform and fiscal management have elevated North Carolina’s national standing. The Tax Foundation, a nonpartisan tax policy research organization, recently ranked North Carolina 10th in the nation for its business tax climate. This marks a significant improvement from its 2014 ranking of 44th, positioning it among the ten most competitive states for business investment.
Further solidifying its reputation, North Carolina has recently achieved AAA bond ratings from all three major agencies: S&P, Fitch, and Moody’s. As reported by The Center Square, this makes North Carolina one of only 14 states in the nation to hold this elite status, surpassing the U.S. government’s own credit ratings. State Treasurer Brad Briner highlighted that these top ratings are “not by accident” and are a direct result of legislative foresight and effective management by state government.
These AAA ratings provide tangible benefits to taxpayers, as they allow the state to finance debt for crucial services like education and infrastructure at the lowest possible interest rates. S&P cited North Carolina’s “strong economic growth, ability to manage revenue to support expenditure mandates, well-defined financial management policies, and commitment to maintaining balanced biennial budgets and very strong reserves” as key factors. Fitch echoed this, praising the “rainy day fund and other reserves provide a robust source of financial flexibility.”
Future Priorities and Continuous Improvement
While North Carolina has achieved remarkable success, legislative leaders and advocacy groups like the NC Chamber remain committed to continuous improvement. Current discussions involve accelerating personal income tax reductions versus expanding the standard deduction and further cutting or eliminating the franchise and privilege license taxes.
The Tax Foundation’s Katherine Loughead advises policymakers to continue enhancing the state’s income tax competitiveness while also prioritizing the reform of outlier taxes like the franchise and privilege license taxes. The NC Chamber also advocates for capping, reducing, and ultimately eliminating the regressive state franchise tax, alongside protecting existing pro-growth reforms.
North Carolina’s journey from a fiscally challenged state to a national model for responsible tax policy and financial management is a testament to sustained legislative commitment and prudent oversight. As the nation faces economic uncertainties, the Tar Heel State’s proactive approach ensures a strong foundation for future prosperity and continued taxpayer savings.
