North Carolina’s budget analysts have scaled back the state’s General Fund revenue projections for the next three years, citing signs of economic slowdown and increasing pressure on the economy from tariffs in federal trade policy.
“The downward revision is due primarily to lower-than-expected corporate income tax
collections in April, particularly related to reduced estimated tax payments from businesses, likely due to anticipating higher input costs and lower profits from recently implemented tariffs,” state economists wrote.
The revision comes as legislative leaders in the General Assembly begin work to reconcile competing budget proposals from the House and Senate.
Forecast Revised Downward from February
The May 2025 Revised Consensus Revenue Forecast, released by the Office of State Budget and Management and the General Assembly’s Fiscal Research Division, projects that state revenues for the current fiscal year will total $34.71 billion — still above initial expectations, but $180 million below February’s forecast.
Economists cite weaker-than-expected corporate tax collections, slower personal income growth, and persistent inflation as contributing factors. Forecasts for fiscal years 2025–26 and 2026–27 have also been adjusted downward by $218 million and $222 million, respectively.
The report notes that recession risks are rising, with anticipated slowdowns in employment and wages likely to affect revenue growth through 2027. Notably, economists point out a downward trend specifically in transportation revenue for the state due to emerging trade policy at the federal level.
“Highway Trust Fund revenues are revised modestly downward due to anticipated reductions in vehicle sales resulting from federal trade policy impacts on automotive pricing,” they wrote. “All other Highway Fund and Highway Trust Fund revenue sources
have remained unchanged from February projections.”
Budget Proposals Reflect Tax Philosophies
As lawmakers absorb the implications of the revenue downgrade, negotiations between the House and Senate are intensifying at the state legislature in Raleigh.
“Slower-than-expected revenue growth in the second half of the fiscal year signals a more cautious outlook for future budgeting decisions,” the OSBM stated.
The House budget proposal, unveiled earlier this month, recommends maintaining the state’s flat personal income tax rate at 3.99% through 2027, and adjusting the triggers for future cuts. The plan includes raises for state employees, expanded school choice programs, and increased infrastructure investment.
Meanwhile, the Senate’s budget, which passed the chamber floor in April, keeps the tax cutting plan that has been in place for more than a decade under the Republican-led legislature. It outlines a path to continue lowering the income tax rate to 2.49% by 2027, contingent on revenue targets. The Senate’s plan allocates funds for savings reserves and continues expanding access to health care by reducing regulations.
Budget writers from both chambers are in a conference committee that will try to iron out the differences before the new fiscal year begins July 1. Under state law, if no new budget is agreed upon by the end of the fiscal year, the previous state budget remains in effect.
Accuracy shows questionable track record
While state officials continue to rely on consensus forecasts to guide spending decisions, some policy experts warn against putting too much trust in long-term revenue predictions.
Analysts from the John Locke Foundation argue that the forecasting model used since 2011 has consistently underestimated state revenues, often by hundreds of millions of dollars. The organization says this trend can lead to unnecessary caution in spending or misplaced justification for tax policy shifts.
“Legislators should regard the consensus revenue forecast estimates released more than two years in advance with a healthy dose of skepticism,” wrote Joseph Harris, fiscal policy analyst for the John Locke Foundation, in a February analysis. “These long-term estimates tend to have more political utility than economic predictive power and should not be used for the justification of policymaking. Nevertheless, budget writers must remain vigilant and limit spending growth, as the possibility of an upcoming recession could strain the state budget.”
From 2015 to 2022, the state’s consensus forecasts were off by an average of nearly $1.4 billion per year. In several cases, the revenue surplus far exceeded projections — particularly in 2021 and 2022, when pandemic recovery effects and federal stimulus funds created unexpected boosts. The consensus revenue forecasts underestimated actual revenues by an average of nearly $1.7 billion per year, equating to an average error of 6.2%. These large gaps raise concerns about using such forecasts as a basis for multi-year budgeting decisions.
Still, the numbers indicate that any effort to increase state spending should be viewed with caution.
“North Carolina has not yet reached the Goldilocks size of government—not too big, not too small, but just right,” said Donald Bryson, CEO of the John Locke Foundation. “With revenue expectations softening and tax rate triggers on the line, budget conferees should resist the urge to expand government through recurring spending or pork-style earmarks. The responsible path forward is to restrain spending and protect taxpayers, not to chase more money to justify more government through new taxes or slower income tax cuts.”
With just over a month before the fiscal year ends, legislative leaders must weigh a more cautious revenue outlook against calls for tax relief, education reform, and public sector investment, Bryson said. The direction they choose will shape North Carolina’s financial foundation heading into what could be a turbulent economic period.
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