State economists forecast higher-than-expected revenue, but a drop could be coming

Stronger-than-expected economic growth is padding North Carolina’s piggy bank as state lawmakers remain at odds over a new state budget. But revenues are expected to drop next year, which could force state spending cuts. 

A new state forecast, released Tuesday by state economists, anticipates $35.08 billion in general fund revenues in the current fiscal year, which ends June 30. That’s about $370 million more than projected in May 2025. The total represents a 1.5% increase in total general fund revenues compared to the previous fiscal year. 

The forecast was compiled by the Consensus Forecasting Group, a group of economists at the Office of State Budget and Management and the General Assembly’s Fiscal Research Division. 

The state collected almost $300 million more than expected in individual income taxes, the group reported, citing robust business profits, stable wage growth and growth in equity values as major reasons. Insurance premium taxes and investment income also contributed to the  overcollections. 

Insurance premium tax collections are higher due to recent increases in property insurance premiums and rising Medicaid expenditures on enrollees in managed care health plans, according to the state. Investment income is elevated from persistently high short-term interest rates, economists said.  

The forecast also includes lower growth in sales tax collections — expected to be $156 million less — driven by higher-than-expected refunds to nonprofits and local governments, along with lower-than-expected  inflation on taxable goods.

Outlook for 2026-27 

The economists are forecasting about $34.7 billion in general fund revenue collections in the next fiscal year, up 2.8%, or about $951 million relative to certified revenues. Year-over-year, the forecast represents a 1%, or $360 million, decrease in revenues compared to the consensus forecast for the current fiscal year. 

“The economic outlook underlying the May 2025 consensus forecast anticipated a modest deceleration in economic growth starting in late 2025,” the group said in a forecast report. “Although job growth has slowed, business investment and profits have proven resilient.”

The economists predict that lower interest rates and new tax cuts will boost consumer spending and business investment through late 2026, despite sluggish job growth. They expect slower growth in consumer spending and wages in 2027.

The forecast said the strong stock market performance in the past fiscal year and rising corporate profits could lead to even higher-than-expected income tax collections. “Further increases in equity values could push incomes and consumer spending higher, boosting personal income and sales tax revenues,” the forecast said. 

The economists predicted that the conflict in the Middle East will stabilize and “move toward resolution” by the middle of next month. But they warned that a prolonged conflict could lead to persistently high prices and potential shortages of energy commodities. 

“This would raise prices for businesses and consumers across the globe, reducing business investment and consumer spending on other goods and services and raising the risk of global recession,” the economists said. They also listed changes in federal policy as a possible risk that could change the timing of state income tax payments.