North Carolina still does not have an enacted budget for the 2025-2027 biennium. The state has been running on continuation funding since July 2025, meaning agencies, schools, and programs operate at prior-year levels while the House and Senate negotiate the details. In May 2026, legislative leaders announced a framework deal covering teacher pay, state employee raises, and tax policy, but no final appropriations act has been signed. This NC budget update walks through what the framework contains, what continuation funding means for you in the meantime, and which tax and program changes are moving forward regardless of when lawmakers finish the bill.
Where the 2025-2027 Budget Stands
North Carolina operates on a two-year budget cycle. The General Assembly is supposed to adopt a comprehensive plan in odd-numbered years and adjust it in even-numbered years.1North Carolina Office of State Budget and Management. Budget 101 The 2025 long session was meant to produce the full 2025-2027 budget, but the House and Senate could not agree. The House favored larger investments in teacher pay. The Senate pushed more conservative across-the-board raises. That disagreement carried into 2026.
In May 2026, House Speaker Destin Hall and Senate leader Phil Berger announced a framework agreement. It includes average teacher raises of 8 percent and average state employee raises of 3 percent. Governor Josh Stein has separately proposed average teacher raises of 11 percent and a starting salary jump from $41,000 to $53,120. Whether the framework survives the full legislative process and earns the Governor’s signature is still an open question.
How the State Keeps Running Without an Enacted Budget
North Carolina does not shut down when a budget misses its deadline. Under the State Budget Act, if no new appropriations act is in effect by the start of a fiscal year, the Director of the Budget can continue allocating funds at a level that does not exceed the prior year’s recurring spending.2North Carolina General Assembly. North Carolina Code 143C-5-4 – Enactment Deadline Agencies, schools, and programs keep operating, but at flat funding. No new initiatives. No raises. No nonrecurring projects until lawmakers finalize the budget.
If the Director determines that projected revenue cannot support even the prior year’s recurring level, spending must be set lower. Bond payments and debt service get priority. Once a new appropriations act finally becomes law, allotments are adjusted retroactively to July 1 of that fiscal year.2North Carolina General Assembly. North Carolina Code 143C-5-4 – Enactment Deadline In the meantime, the legislature has passed several targeted bills for disaster recovery, county waste management, and other narrow needs.
Teacher and State Employee Pay
Pay is the most visible fight in this cycle, and the gap between proposals has been wide. During the 2025 long session, the Senate proposed an average 2.3 percent teacher raise for 2025-26. The House proposed an average 8.7 percent raise weighted heavily toward beginning teachers. Those positions were too far apart to reconcile before session ended.
The May 2026 framework narrows that gap. Under the announced agreement, teachers would receive average raises of 8 percent, with the salary structure designed to make North Carolina’s starting teacher pay the highest in the South when local supplements are included. Most other state employees would receive an average 3 percent raise, with targeted higher increases for correctional officers and state law enforcement. Governor Stein’s competing proposal calls for an average 11 percent teacher raise and would push starting base pay from $41,000 to $53,120 by the 2026-27 school year.
Retiree Cost-of-Living Adjustments
Retired state workers and teachers have seen limited cost-of-living increases in recent years. House Bill 90 in the current session proposes a 3 percent increase in retirement allowances for beneficiaries who retired on or before July 1, 2024, with a prorated amount for those who retired between July 2024 and June 2025. That bill carries a price tag of $250 million from the General Fund. Whether the final budget includes this COLA or a smaller alternative depends on how lawmakers balance the overall package against reserve targets.
Tax Changes Already in Effect
Several tax changes scheduled by earlier budget bills are now taking effect automatically, regardless of what happens with the current budget.
Individual Income Tax Rate
North Carolina’s flat individual income tax rate dropped to 3.99 percent for tax years beginning after 2025, completing a multi-year reduction that started at 4.99 percent in 2022. The 3.99 percent rate applies to the 2026 tax year. The law also includes trigger provisions: if General Fund revenue for fiscal year 2025-2026 exceeds $33.042 billion, the rate automatically drops another half percentage point to 3.49 percent beginning in tax year 2027.3North Carolina General Assembly. North Carolina Code 105-153.7 – Individual Income Tax Imposed Further triggers are set through 2033, with a floor of 2.49 percent.
To put this in perspective, a household earning $75,000 after deductions paid roughly $3,375 in state income tax at the 4.5 percent rate that applied in 2024. At 3.99 percent, that same household owes about $2,993, saving roughly $380 a year. If the trigger kicks in and the rate falls to 3.49 percent in 2027, the annual savings compared to the 2024 rate grow to about $758.
Standard Deduction
North Carolina’s standard deduction for married couples filing jointly is $25,500. Single filers can deduct $12,750.4North Carolina Department of Revenue. North Carolina Standard Deduction or North Carolina Itemized Deductions These amounts are codified in the tax code and do not depend on the current negotiations. The federal standard deduction for 2026 is $32,200 for married couples filing jointly and $16,100 for single filers.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Corporate Income Tax Phase-Out
North Carolina’s corporate income tax continues its scheduled elimination. The rate is 2 percent for tax years beginning in 2026, drops to 1 percent in 2028, and reaches zero after 2029.6North Carolina General Assembly. North Carolina Code 105-130.3 – Corporations Like the individual rate schedule, this phase-out was enacted in prior sessions and does not require action in the current budget.
Medicaid and Federal Funding Pressures
Medicaid is a $36 billion program in North Carolina, covering more than 3 million residents including children, pregnant women, older adults, and people with disabilities. Federal dollars generally cover 65 to 90 percent of the cost depending on the service, with the state picking up the rest.7North Carolina Department of Health and Human Services. Understanding the Impact of Cuts to the NC Medicaid Budget That makes Medicaid uniquely sensitive to federal policy changes, and several major ones are hitting at the same time the state is trying to finalize its budget.
The federal law signed in 2025 requires states to verify Medicaid eligibility for expansion adults every six months instead of annually, starting December 31, 2026. That change roughly doubles the administrative workload for eligibility processing. The same law imposes work requirements of 80 hours per month for most adults aged 19 to 65 receiving full Medicaid coverage, also effective at the end of 2026. States can apply for a waiver to delay implementation until the end of 2028 if they show good-faith compliance efforts. Retroactive coverage eligibility for adults also shrinks from three months to one month beginning January 2027.
The budget currently holds a $500 million Medicaid Contingency Reserve. Whether that cushion is adequate depends on how many enrollees lose coverage during the more frequent eligibility checks and how much the new paperwork requirements cost to implement.
Public Schools and the Opportunity Scholarship Program
Public schools received $12.75 billion in state funding for the 2025-26 school year, a slight increase from $12.6 billion the prior year. That number reflects continuation-level spending. The final budget will determine whether public school funding gets a meaningful increase or stays essentially flat, and the framework’s 8 percent average teacher raise would require a substantial bump in the education appropriation.
Meanwhile, the state’s private school voucher program has expanded dramatically. In late 2024, the General Assembly overrode a gubernatorial veto to provide approximately $463 million in additional funding, clearing a waitlist of more than 54,000 students after eligibility was opened to families at all income levels. The base budget now includes $600 million for Opportunity Scholarship awards in 2025-26 and $655 million for 2026-27.
Award amounts are tiered by family income relative to the federal poverty level. The lowest-income families receive the largest awards, pegged at 100 percent of the state’s average per-pupil allocation, which was $7,468 in the 2024-25 school year.8North Carolina Office of State Budget and Management. Opportunity Scholarship Impact Analysis Families in the highest income tier receive 45 percent of that amount. The North Carolina State Education Assistance Authority administers the disbursements. How the legislature balances public school funding against the growing voucher program is one of the central tensions in the current negotiations.
The State’s Fiscal Position
North Carolina enters this cycle with substantial reserves. The Savings Reserve, commonly called the Rainy Day Fund, holds $3.65 billion. Combined with the Medicaid Contingency Reserve, the Economic Development Project Reserve, and the Stabilization and Inflation Reserve, the state has roughly $6 billion in unappropriated reserves. That is an unusually strong position and gives lawmakers more room to absorb the teacher raises, retiree COLAs, and Medicaid cost increases under discussion.
How aggressively to spend down those reserves is a recurring debate. Larger raises and expanded programs draw from the same pool that protects the state against economic downturns and natural disasters. The income tax triggers add another layer: if revenue exceeds specific thresholds, rates drop automatically, reducing future collections.3North Carolina General Assembly. North Carolina Code 105-153.7 – Individual Income Tax Imposed Lawmakers are setting two trajectories at once, deciding both how much to spend now and how much revenue the state will have in future years to sustain that spending.