2025 brings another NC income tax cut. Some say it's too much.

The new year brings North Carolina's eighth state income tax cut since 2014. Republican lawmakers credit the cuts with the state's economic growth, but critics say they're putting the state in a precarious financial position.

This year’s cut is one quarter of one percent, from 4.50% to 4.25%. For the average worker in North Carolina, that works out to about $131 or about $11 a month.

That may not be a lot of money in your pocket, but it will have an impact on the state budget. Legislative budget experts estimate it will cost the state about $1.25 billion a year.

Another tax cut is scheduled for next year, dropping the rate to 3.99% for tax year 2026.

Former state Rep. Wesley Harris, D-Mecklenburg, is an economist who ran unsuccessfully for state treasurer last year. He says individual income tax has long been the state's main source of revenue, and the repeated cuts are draining the state budget.

"We are having a tough time funding the things that our government the basic things our government needs to operate. And that's in the best of times," Harris said. "If we have a legitimate recession or some legitimate tough times economically, our state is going to be in a really tough place."

Harris noted that about a quarter of state jobs are unfilled, a problem department leaders have blamed on low pay. And 92 out of 100 counties have had to raise property tax revenue to cover expenses like teacher pay, shifting the burden onto local taxes.

Meantime, the legislature's own fiscal research division projected the state budget will have a structural deficit by 2027 due to the cumulative effect of the tax cuts on revenue.

"If we continue along this track, we're going to be there's going to be some very tough decisions that are going to have to be made financially," Harris said.

But conservatives like John Locke Foundation vice-president Brooke Medina say the tax cuts have fueled the state’s economic growth.

"The legislature has done a really good job in, I would say, taking an incremental approach to this," Medina said. "I believe we're really well suited to be able to weather these new tax cuts and actually flourish as a result of them."

Medina noted that the law instituting the tax cuts includes triggers that will stop the next tax cut if revenue drops below a target amount.

However, Harris pointed out, those target amounts don't account for inflation. He says the state's spending power is dropping even as its growing population is requiring more services.

"A lot of the COVID money over the past couple years has really helped put a band aid over a couple of these cracks. But now that that's almost completely gone, we're starting to see those cracks in the system," Harris said.

Still, Medina believes continued growth and fiscal discipline will keep the state budget out of the red despite inflation.

"History is a great teacher," Medina added. "Everything we've seen so far from the General Assembly suggests that they are well aware of this, and that they are taking measures and spending accordingly to ensure that we don't end up with a deficit."

State lawmakers return to Raleigh Jan. 8 to begin the new 2025-26 session.