• On Monday, the North Carolina Senate released its recommended budget for the 2025–27 biennium
  • For fiscal year (FY) 2026, the proposal includes $32.6 billion in net General Fund appropriations and $71.7 billion in total expenditures
  • The proposal also includes further cuts to the personal income tax rate, $700 million for the Helene Fund, more than $1 billion for the Savings Reserve, and the repeal of Certificate of Need (CON) laws

Earlier this week, the state Senate introduced its biennial budget proposal for 2025–27, recommending $32.6 billion in net General Fund appropriations for fiscal year (FY) 2026. This allotment would represent an annual increase of 3 percent — 50 percent over the previous decade. This increase would be relatively modest compared with Gov. Josh Stein’s recent budget proposal, which recommended increasing spending to $33.6 billion in FY 2026.

The Senate budget proposal’s total expenditures — including state and federal receipt-supported appropriations — would amount to $71.7 billion, an annual increase of 5.7 percent and an astounding spike of 62.1 percent since FY 2019, when spending totaled only $44.2 billion. While the exact portion of the receipts from the federal government is obscure, there is an increasing concern that the state is too reliant on the fiscally unstable federal government, which is nearly $37 trillion in debt.

The remainder of this brief will identify some pertinent recommendations from the Senate proposal and highlight some critical contrasts between it and Stein’s proposal.

Income taxes

Gov. Josh Stein’s proposal suggested halting further reductions to the personal and corporate income tax rates. The Senate’s budget proposal maintains the plan to eliminate the corporate income tax in 2030 and adds to the cuts to the personal income tax rate.

The personal income tax rate is scheduled to decrease from 4.25 percent to 3.99 percent next year, with the possibility of further reductions to 2.49 percent by 2029 if specific revenue targets are met. However, the Senate’s proposal recommends eliminating the trigger requirements to get the rate to 2.99 percent and implementing further trigger-based cuts down to 1.99 percent.

On net, Stein’s recommendation would increase taxes for North Carolinians by $1.35 billion in FY 2027 and $4.1 billion in FY 2030. The Senate’s proposal would ensure hardworking taxpayers keep these funds in their pockets.

Reserve accounts

Since Hurricane Helene, the state’s Savings Reserve balance has decreased from $4.75 billion to $3.61 billion. The Senate’s proposal would replenish the Savings Reserve to its pre-Helene level. While Stein’s proposal did not recommend topping off the Savings Reserve, it did propose a $500 million allocation to the State Emergency Response and Disaster Relief Fund, which has decreased from $732.6 million to $213.9 million since Helene.

The Senate’s proposal also includes $314.6 million for the Economic Development Project Reserve in FY 2026, which would be funded from a mixture of the General Fund plus transfers from the Information Technology Reserve and the Stabilization and Inflation Reserve.

Moreover, the Senate’s proposal recommends allotting $700 million to the Hurricane Helene Disaster Recovery Fund, which would be transferred from a combination of the State Emergency Response and Disaster Relief Fund, Federal Infrastructure Match Reserve, Medicaid Contingency Reserve, and Information Technology Reserve.

Education

The Senate’s proposal recommends that teachers receive an average pay increase of 2.3 percent in FY 2026 and 3.3 percent over the biennium, along with a $3,000 bonus. Additionally, $36.3 million would be allocated throughout the biennium to fund salary supplements (up to $10,000) for teachers in advanced roles under the Advanced Teaching Roles Program.

Stein’s proposal recommended increasing average teacher pay by 10.6 percent over the biennium; however, this substantial increase would have come at the cost of decreasing funding for the Opportunity Scholarship Program by $783.8 million in FY 2026 before gradually eliminating it by FY 2037.

Health and human services

The Senate’s proposal includes an additional $1.6 billion to cover the Medicaid rebase in FY 2026, with $1.1 billion from federal funds and $500 million from the state. The rebase accounts for changes in enrollment, services, and the enrollment mix in the program. It also calls for implementing work requirements for Medicaid recipients, pending federal approval. Hospitals would experience a $30 million annual fee increase to help fund Medicaid, with an additional $56 million increase on the hospital “assessment” levied to pay for Medicaid expansion (bringing the total for FY 2026 to $579 million).

Importantly, the proposal would also repeal Certificate of Need (CON) laws that restrict health care supply and drive up costs.

NCInnovation

NCInnovation is a controversial nonprofit that received $500 million of taxpayer money to grow the university-to-industry pipeline in North Carolina in the 2023-25 biennial budget. Currently, NCInnovation’s business model is to give the $500 million in taxpayer money to a private investment manager, which will then expose it to market risk to seek out returns that will be used to fund research projects.

The Senate’s proposal would dismantle NCInnovation’s original $500 million endowment structure and redirect the funds: $100 million to the State Treasury and $400 million to the new NC Children’s Hospital. Instead of a permanent endowment, NCInnovation would receive $25 million annually for four years.

Other pertinent recommendations

The Senate’s proposal also makes the following noteworthy recommendations:

  • Increase funding for the state retirement system and the State Health Plan (SHP). Also, reinstate coverage in the SHP for GLP-1s to provide weight loss treatment, costing $25 million in the first year.
  • Increase most state employees’ salaries by 1.25 percent in FY 2026 and provide a $3,000 bonus during the biennium.
  • Eliminate the interim 70 percent carbon dioxide reduction goal. This policy shift would help to preserve power reliability and affordability, and estimates project it would save electricity customers $13 billion.
  • Increase the annual funding for child care subsidies by $80 million. This would increase the subsidy program’s requirement to $572.3 million annually.
  • Increase the base amount to which the maximum franchise tax flat rate applies from the first $1 million in net worth to $5 million. This policy change would benefit all firms with a net worth greater than $1 million.
  • Increase the cap on the Film and Entertainment Grant Fund from $7 million to $20 million per film and $15 million to $25 million per TV series season.
  • Allocate $6 million to the Office of the State Auditor to create the Division of Accountability, Value, and Efficiency (DAVE) to evaluate spending and staffing in state agencies. DAVE will then make recommendations to the General Assembly by the end of this year.
  • Increase the tax rate charged to sports wagering operators from 18 percent to 36 percent. This policy change would increase the tax rate charged to firms that operate sports gambling companies, not people placing bets.
  • Allot $250 million to farmers with verifiable agricultural disaster crop losses in 2024.
  • Decrease the appropriation to the Job Development Investment Grant (JDIG) program by $10 million. It would still receive $61.7 million in FY 2026.

Closing thoughts

The Senate’s budget proposal wisely limits growth in net General Fund appropriations; however, policymakers should practice caution about the increase in total expenditures, which the federal government heavily funds.

Legislators in the State House should consider following the Senate’s lead regarding further reductions to the personal income tax rate, repealing CON laws, replenishing the Savings Reserve to $4.75 billion, clawing back funds from NCInnovation, eliminating the Carbon Plan’s interim goal, and setting aside funds for the Helene recovery.