Voters in November's election could decide whether to permanently cap North Carolina's income tax rate.
As part of an initial budget agreement between the House and Senate announced Tuesday, Republicans want a constitutional amendment that prevents future legislatures from increasing the tax rate above 3.5%.
That figure is lower than the current tax rate — and the rates North Carolinians have paid for decades — although the number is scheduled to drop below 3% in the coming years under both current law and the terms of a GOP budget deal.
Democrats like Sen. Jay Chaudhuri, D-Wake, worry the limitation could harm the state's ability to fund education and other essential services.
"It permanently handcuffs the General Assembly's responsibility for passing fiscally sound, responsible budgets going into the future," he said.
He says the tax cap could harm the state's bond rating, which would limit its ability to borrow money at favorable interest rates. "Because bond rating agencies tend not to want to see limited discretion by the General Assembly to be able to address issues where there may be a natural disaster, or where there may be the need to try to raise revenue," he added.
House Democratic Leader Robert Reives also voiced concerns about the proposed amendment. "What I'm trying to figure out is how we can be the third fastest-growing state in the nation, and that we're going to tell future legislatures what they can't do when it comes down to taxing," he said.
But Senate leader Phil Berger, who will leave office in December after losing his primary, says he sees no potential concerns with permanently keeping the income tax rate below 3.5%.
"I have a lot of confidence that even at the lower rates, you're going to see the growth in the economy basically account for those additional dollars that may be needed by the state," he told reporters Tuesday. "I don't think we've reached, as of yet, a point of equilibrium in terms of the reduction being such that it does not result in the generation of additional activity and the generation of additional revenues."
Berger and House Speaker Destin Hall announced their agreement on the proposed constitutional amendment Tuesday, and the bill was filed by a trio of Republican senators on Wednesday afternoon.
If approved by voters, it would be the second constitutional amendment to restrict income tax rates. In 2018, 57% of voters approved an amendment to lower the maximum income tax rate from 10% to 7%.
It could prove difficult for opponents of the tax cap to defeat the amendment, even if 2026 proves to be a winning year for Democrats at the polls (as 2018 was). "Nobody supports raising taxes and nobody opposes lowering taxes," Chaudhuri said. "I think the challenge in messaging tax cuts is that ultimately, citizens are going to have to pay for it in some other way, by raising property taxes ... if you start seeing the increase in sales taxes, that's really going to hit consumers in their pocketbooks."
North Carolina has significantly cut the personal income tax rate since Republicans took control of the legislature in 2011. In 2012, the rate was as high as 7.75% before beginning a gradual drop in 2014.
Under the budget plan outlined Tuesday, the personal income tax rate would drop from 3.99% to 3.49% from 2027 to 2029, then 3.24% from 2030 to 2032, eventually reaching 2.99% for 2033 and 2034, and 2.49% when revenue triggers are reached after that point. But without a constitutional amendment, future legislatures would have the power to change those numbers.
House and Senate Republicans have also agreed to put a constitutional amendment limiting local property tax increases on November's ballot. Details of how that limitation would work haven't been announced.
Both measures will need a majority vote from the House and Senate to get on the ballot; the governor does not have the authority to veto proposed constitutional amendments.
Another property tax bill recently passed the Senate to block new property revaluations from taking effect in several counties. Berger says he's hopeful the House will pass that bill too, but it was not included in the budget framework agreement.
