Revenue forecast rises as lawmakers warn of Medicaid costs, tax cuts

State budget analysts have released an updated revenue forecast showing stronger-than-expected collections, but lawmakers caution that rising costs and future tax cuts could strain North Carolina’s finances.

The Fiscal Research Division and Office of State Budget and Management project $35.079 billion in General Fund revenue for fiscal year 2025-26 and $34.72 billion for 2026-27, both increases over prior estimates. 

The revised forecast reflects an improving economic outlook and stronger tax collections. Economists at the state legislature’s Fiscal Research Division now expect 6.7% growth in personal income in 2025-26, up from 5.2% in May 2025. 

Through February, personal income taxes, business taxes, and nontax revenue were running ahead of projections, despite sales tax collections lagging slightly behind projections. As a result, the updated forecast increases expected revenue by $370 million for FY 2025–26 and $951 million for FY 2026–27. 

House Speaker Destin Hall, R-Caldwell, pointed to the surplus as evidence of long-term fiscal policy success.

“Today’s announcement of a surplus demonstrates the success of the fiscally responsible policies enacted by our Republican majority over the last fifteen years,” Hall said.

Brian Balfour, vice president of research at the John Locke Foundation, said the continued pattern of higher-than-expected collections reflects a longer-term trend.

“This new revenue forecast represents a $370 million increase above the certified projection made last year,” Balfour said. “Once again, actual revenue appears to be coming in hundreds of millions of dollars ahead of the projections used to formulate the state budget.”

Balfour added that recurring surpluses challenge earlier concerns about the fiscal impact of tax cuts.

“Significant surpluses have become the norm over the past dozen years, as government forecasters have consistently underestimated the positive impacts of tax cuts, and defied the predictions of revenue shortfalls made by opponents of those tax cuts,” he said.

However, Hall cautioned that while the state expects additional revenue, rising spending pressures, particularly a projected Medicaid shortfall, could offset these gains.

“Unfortunately, this surplus revenue will be entirely consumed by a projected billion-dollar Medicaid rebase,” Hall said. “This program must be reformed in order to preserve our ability to fund public safety, education, and other priorities. We must protect North Carolina’s hard-earned reputation for fiscal strength by passing a responsible budget sooner rather than later.”

In addition to immediate budgetary impacts, the updated forecast also influences the state’s ongoing tax reduction plan. Under current law, North Carolina uses revenue triggers to automatically lower personal income tax rates when collections exceed certain thresholds.

Based on the new projections, the state is expected to hit a second trigger in 2028, reducing the income tax rate to 2.99%.

While Republican leaders have championed the tax cuts as a driver of economic growth, they also note that the triggers could increase the risk of future budget gaps if revenue growth slows.

“Under the updated revenue forecast, the state is projected to hit a second revenue trigger in 2028, increasing the chances of a significant recurring deficit and underscoring the need for a responsible budget,” the statement from Hall’s office read.

House Republicans say they intend to continue the state’s tax reform strategy.

“House Republicans support continuing North Carolina’s successful tax reform model of gradual, thoughtful tax cuts, which has taken us from a 7.75% top marginal tax rate to 3.99% over the last 15 years and created the best business climate in the country,” the statement said.

Despite the generally positive outlook, Fiscal Research flagged several risks that could affect the forecast. Geopolitical tensions, including the ongoing US–Iran conflict, could impact energy prices and economic growth. Additionally, uncertainty surrounding April income tax collections could still shift current-year revenue totals. 

The forecast sets the stage for budget negotiations in Raleigh, where lawmakers must balance continued tax reductions with rising spending obligations while maintaining the state’s fiscal stability.

“Revenue forecast rises as lawmakers warn of Medicaid costs, tax cuts” was originally published on www.carolinajournal.com.