Your North Carolina Income Tax Cut Is Coming — But There’s a Catch

North Carolina paychecks might get a boost as personal income tax rates drop toward 2.99%. But a growing debate has lawmakers at a crossroads. When you purchase through links on our site, we may earn an affiliate commission. Here’s how it works. Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.You are now subscribedYour newsletter sign-up was successfulWant to add more newsletters?Delivered dailyKiplinger TodayProfit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. 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Thanks to a landmark law passed just a few years ago, Tarheel State taxpayers are slated to see personal income tax rates trigger annually downward until 2028. But a new legislative push seeks to hit the brakes.Gov. Josh Stein (D) and some Republican state House leaders are warning of a $2.8 billion to $3.5 billion budget shortfall over the next two years. That could potentially threaten funding for critical services unless the income tax cuts are paused."We are not a poor state," Gov. Stein remarked to reporters, while proposing a $1.4 billion plan to shore up immediate services — particularly the state's Medicaid program. "But we are making ourselves a poor state by reckless, pre-programmed tax cuts."Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special IssuesProfit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.Profit and prosper with the best of expert advice - straight to your e-mail.However, the GOP-led state Senate remains committed to the rate reductions, meaning the upcoming spring legislative session is shaping up to be a tumultuous battle over the state's long-term fiscal path. Here is what is at stake for your 2026 North Carolina paycheck and beyond.North Carolina's flat income tax rate is 3.99% for 2026, lower than last year's 4.25%. Under the current legislative roadmap, additional cuts are scheduled through 2028, provided the state hits specific revenue benchmarks.Note: Additionally, the corporate income tax rate is scheduled to hit 0% by 2030. The NC Office of State and Budget Management (OSBM) recently projected that the General Fund revenue is on track to exceed the $33.042 billion trigger required to authorize the next round of cuts.Yet, the benefits are not expected to be distributed equally. According to an analysis conducted by the OSBM, higher-income households stand to see the most significant dollar-amount relief in 2027:Annual Household IncomeEstimated 2027 Tax SavingsOver $764,000$8,095$764,000 – $314,000$1,826$314,000 – $144,000 $769 $144,000 – $78,000$352$78,000 – $45,000 $173$45,000 – $21,000$65Under $21,000$1Although the North Carolina income tax cuts are codified in law and set to trigger automatically upon meeting revenue targets, the state's fiscal leadership remains sharply divided.Notably, North Carolina entered 2026 as the only U.S. state without a new budget, due to a stalemate in the General Assembly over income tax cuts and their impact on public service funding. This means the Tarheel State is currently operating on recurring base funds.And this legislative session, the debate continues, as Gov. Stein is spearheading calls to freeze further future rate reductions, citing a projected revenue gap of to $3.5 billion by the 2027-2028 fiscal year."[This gap would cause] the state to have to make painful cuts to critical services like public safety, education, and health care," Stein stated in a March press release. "As our population rapidly grows and the federal government becomes a less reliable partner, I urge this General Assembly to…hit pause on outdated, irresponsible tax triggers."But legislative leaders argue that the governor's own spending plan — including the $319 million boost to the Medicaid budget — poses fiscal risks as well."Senate Republicans remain committed to addressing the state’s most pressing needs in a responsible, fiscally sound manner," Lauren Horsch, spokesperson for state Senate Leader Phil Berger (R-District 26), issued a statement in response to the plan. "Gov. Stein’s proposal…would create a recurring budget deficit and force the state to increase taxes on working families.”Meanwhile, the OSBM projected a $370 million revenue surplus for the current fiscal year of 2025-2026. While a surplus is usually good news, State House Speaker Destin Hall (R-District 87) noted that the funds are expected to be "entirely consumed" by rising Medicaid costs.Because certain economic triggers are projected to be met this year, North Carolina lawmakers might cut the income tax rate to 3.49% in 2027. However, the viability of the 2.99% target in 2028 remains in intense debate, particularly with a potential budget deficit on the horizon."We are bearing the fruit of an orchard that was planted a long time ago," Gov. Stein noted during a recent education conference. "But today, we risk hollowing out the institutions that have helped to create our success."The fiscal cliff Stein warns about dominated last February's budget talks, ultimately resulting in a $600 million stopgap for Medicaid and other essentials but leaving broader funding for public education and infrastructure in limbo.So for North Carolina taxpayers, the road to a 2.99% income tax rate cut might be blocked by a looming $2.8 billion to $3.5 billion deficit reality — or no budget at all. Stay tuned for more updates.Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.Kate is a CPA with experience in audit and technology. As a Tax Writer at Kiplinger, Kate believes that tax and finance news should meet people where they are today, across cultural, educational, and disciplinary backgrounds.