NC’s new constitutional amendments pose financial dilemmas for state, local lawmakers

North Carolina voters who delivered a blue wave for Democrats Tuesday also overwhelmingly approved two constitutional amendments that will impact taxes for years to come.

The first amendment, approved by 62% of voters, caps state income tax rates for individuals and corporations at 3.5%. The second amendment, which 60% of voters approved, requires the state legislature to limit increases in local property taxes, reducing the money communities can raise for schools, infrastructure and other needs.

Alexandra Sirota, director of the North Carolina Budget & Tax Center, said Wednesday that the outcome of the constitutional amendments was deeply disappointing for the future of the state.

“We know that people were voting out of concern for rising costs, and we know that one of the best ways for our state leaders to address those rising costs is to fund programs and services that make life more affordable,” said Sirota. “Unfortunately, the tax amendments that passed put in place real limits on future policymakers’ ability to adjust their revenue to the needs of the moment.”

Sirota said the amendments don’t alter the need for increased investments in childcare, housing, and transportation infrastructure. The property tax measure also doesn’t offer any specifics about how the limit should work.

“It really is going to be up to state legislators to craft the exact language and the exact limit that they want to place on local governments,” Sirota said.

Amendments could hamstring local governments

Sirota said the proposed property tax limit could affect communities’ ability to upgrade infrastructure through future bonds, fill the gap when the federal government cuts food assistance, or put more money into public education.

This week the State Board of Education released a new report that detailed $18 billion in school facility needs over the next five years for the state’s 115 school systems.

Local governments often use property taxes to fund school capital projects. The newly passed constitutional amendment could limit that.

“What’s most important in this policy development is going to be having the time to really carefully consider how this gets implemented so that local governments are able to keep up with the rising costs they’re being asked to take on,” said Sirota.

New leadership, new ideas

Rep. Deb Butler, D-New Hanover, said there’s no doubt that the amendments will present new challenges for legislators who now have to decide  how to structure limits on local property taxes without adversely affecting local government services.

“Those are going to be some constraints that we’re going to have to work within,” Butler told NC Newsline.

Butler is a senior member of the House Finance Committee who has expressed interest in taking the reins of the committee when Democrats take control of the House in January.

“That’s of course the decision of the Speaker,” said Butler. “But I’ve been working on some ideas about how we generate more revenue, how we get rid of some of these ‘favorite son’ exemptions and how we level the playing field with corporations.”

Butler said the key will be to find a way to create new revenue for North Carolina without hurting small businesses or individual taxpayers.

Limiting state revenue growth

Under the state income tax amendment voters approved, the state’s maximum income tax rate is 3.5%. North Carolina’s personal income tax rate currently stands at 3.99%. It’s slated to fall to 3.49% in January, and fall again to 3.24% in 2030 .

North Carolina’s current corporate income tax rate of 2% is scheduled to reach zero by 2030.

The Budget & Tax Center says that as soon as 2028, the state is projected to face real financial challenges if the schedule of rate cuts continues.

“I think the biggest thing that state legislators are going to need to do is stop those scheduled rate cuts to make sure we at least hold the line on funding people’s priorities,” Sirota said.

In the new school facility needs report, the most common justifications reported for future expenditures are to resolve repairs or deferred maintenance. Plumbing, HVAC, and electrical needs account for $2.8 billion or 30% of all reported renovation needs at the state’s existing schools, according to the Department of Public Instruction.

Sirota notes that the failure to keep up with maintenance needs can often result in greater expense for costly HVAC repairs or mold remediation.

“Those costs need to be met with revenue,” said Sirota.

Sirota said difficult choices lie ahead. She says millionaires are already not being asked to pay their fair share. With the new income tax cap, future lawmakers may need to turn to raising sales taxes or fees, which would be a bigger financial burden on middle- and low-income households.

Some Democrats have suggested repealing the state’s opportunity scholarship program as one source of revenue.

The Republican-controlled legislature earmarked $705 million in its most recent budget for the Opportunity Scholarship Program in 2026-27, with plans to increase that appropriation to over $800 million annually by 2030.

Butler said she’ll leave it up to others in her caucus to determine how to deal with vouchers.

“That is a big source of revenue that needs to be reevaluated,” said Butler.

Luxuries and loopholes

Butler said there should be some agreement on easy reforms like removing luxury tax caps in North Carolina.

“In North Carolina, you can buy a $100 million dollar aircraft or yacht, and you pay a tax with a cap of $1,500,” said Butler. “That’s just not right.”

Butler said the next legislature should also revisit the “Blue Ridge exemption,” a property tax loophole for affordable housing that is being used by corporate for-profit developers while costing local governments tens of millions of dollars each year.

Bill to close property tax loophole advances in NC House committee

A bill to close that loophole passed the N.C. House in May, only to languish in the Senate.

“I think there’s a better, fairer way to do that that would generate revenue,” she said.

Butler said as a minority member, she’s had plenty of time to ruminate on some ideas. With a new House Speaker and a new crop of incoming lawmakers, she’s hoping for time to discuss them.

“If I’ve learned anything watching these current leaders, it’s that you don’t do anything in a rushed fashion,” said Butler. “I think about HB2 or the classroom size bill, or any number of things that they’ve gone after at breakneck speed.”

“I’d rather get it right the first time,” Butler said. “These are big changes and you don’t want to do anything that’s going to have unintended consequences.”