By Dawn Baumgartner Vaughan
The News & Observer (Raleigh)
(TNS)
Jobs, schools, culture, the mountains, the sea: All may be factors in people deciding what state they’d like to live in. Another factor is how much they pay in taxes.
North Carolina voters will get to decide in November whether to cap their personal income tax rate at 3.5%.
It will be on ballots as a constitutional amendment, which means if it passes, the General Assembly cannot increase individual income taxes beyond that rate.
Constitutional amendments go to the ballot once they pass the legislature with a three-fifths supermajority; they do not go to the governor. The bill was part of a deal reached between top Republican House and Senate budget writers, who disagreed on how fast to cut taxes.
Regardless of whether the amendment passes, you’ll soon pay less than that 3.5% rate.
So how does North Carolina’s personal income tax rate compare to its neighboring states?
Here’s the breakdown:
North Carolina personal income tax rate
- North Carolina’s personal income tax rate for 2026 is 3.99%, and under the new state budget that became law in July, the tax rate for 2027 will be 3.49%.
- The rate is capped under the state constitution at 7%, which would be lowered to 3.5% if voters pass the constitutional amendment, meaning the legislature would not be able to increase the tax rate beyond 3.5% in future years without another ballot measure.
South Carolina income tax rate
- South Carolina’s personal income tax rate is 1.99% for incomes less than $30,000 a year. For higher incomes, the tax rate is 5.21%, minus $966, according to a bill signed into law this year.
Virginia income tax rate
- Virginia does not have a flat tax rate; it has a graduated rate depending on income, ranging from 2% to 5.75%.
Georgia income tax rate
- Georgia has a flat income tax rate for 2026 of 4.99%.
Tennessee income tax rate
- Tennessee has no personal income tax.
Income tax policy and political calculations
State government doesn’t just function on the amount of income tax you pay—revenue also comes from a statewide sales tax. Some states that have higher income tax rates have lower sales tax rates. In the case of Tennessee, which has no income tax, it has a higher sales tax than some other states at 7%, not including local sales tax.
North Carolina’s sales tax rate is 4.75%, and higher depending on local sales taxes. Most local sales and transit taxes in the state, combined with the statewide sales tax, total either 6.75% or 7%, according to the Department of Revenue. The highest local rate is 8.5% for Mecklenburg County, which added 1% this year.
“It depends on what your pay-fors are with regards to cutting income taxes,” said Abir Mandal, a senior policy analyst for the Tax Foundation, a Washington-based nonpartisan tax policy nonprofit.
“There are two possible scenarios: you could cut income taxes, and you could also cut spending. But if you don’t cut spending, that extra revenue has to come from somewhere, and the sales tax is an obvious target for that,” he said.
More than a decade ago, North Carolina Republicans opted to expand the sales tax to more services while reducing income tax rates. They created a flat income tax rate to replace one that had been tiered based on income, with a top rate of 7.75%.
While capping income taxes, lawmakers have made no move toward capping sales taxes. Republican Senate leader Phil Berger opposes capping sales tax, saying he thinks an income tax cap has “more of a direct impact on overall economic activity.”
During floor debate over the constitutional amendment, Democrats questioned what an income tax cap of 3.5% could mean for future government needs.
Democratic Gov. Josh Stein called it “a financial straightjacket that could wreak havoc on our public schools and public safety.”
Republican House Speaker Destin Hall, meanwhile, said Republicans’ policy has involved “a general principle of trying to keep taxes low as much as we possibly can, while still paying the state’s bills and investing in the things we do invest in.”
Where the Tax Foundation ranks NC
Mandal, of the Tax Foundation, told The N&O in an interview that North Carolina ranks 22nd of the 50 states on individual income tax rate. That’s based on the 2025 tax rate, which was 4.25%.
Tennessee isn’t the only nearby state with no income tax—Florida doesn’t have it, either. Across the country, the highest income tax rate is in California, with 13.3% for the highest earners.
“I think at this moment, (North Carolina) tax rates are moderate … close to the average with regards to the income tax rates. But I think the point is that they’re on their way to reducing it further … so I would say that North Carolina falls in the category of states that are trying to be more competitive,” Mandal said.
The state budget further reduces income tax rate from 3.49% in 2027 to 3.24% in 2030, and then to 2.99% in 2033, with two more reductions by 2040 if certain revenue benchmarks are met, according to budget documents.
Photo credit: Wikimedia Commons
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