How will NC lawmakers pay for state employee raises? Here’s what to watch

North Carolina lawmakers spent months wrangling over spending priorities, ultimately arriving at a deal that puts more money in North Carolinians’ pockets. 

Now the hard math begins. Managing rising costs with tax cuts could present a challenging equation.

Lawmakers plan to give raises of at least 3% to all state employees, including an average 8% raise for teachers and as much as 20% more for some State Bureau of Investigation workers. They also managed to preserve promised cuts to income tax rates. All this comes as costs are surging: Producer prices rose 6% in April — the biggest jump in four years, the U.S. Department of Labor reported Wednesday.  

Senate leader Phil Berger says population growth should help cover costs — especially because many of the people moving to the state are helping to increase the average wage. More people with bigger paychecks means more tax revenue for the state.  

But cuts to state agencies and programs could also be part of the calculus, if recent budget proposals by the Senate and House are any indicator. 

“Anything is really possible at this point,” State Rep. Erin Paré, a co-chair of the House Appropriations Committee, said Wednesday. 

“The main contention has been up to this point, those two pieces: the salary package and taxes,” Paré said. “Now that those have been agreed on, it's almost like opening the floodgates. So now the rest of the budget can come together, and I can tell you that there is a very, very strong willingness and intention to finalize the rest of the budget.”

Here are a few areas lawmakers are examining to make the numbers work.

Tax-base expansion. Berger is bullish on the state’s population growth and its expanding tax base. State economists in March revised their prediction for how much the state would collect in revenue in the 2025-27 biennium, predicting $35.1 billion in general fund revenues — up 1.5% from the previous fiscal year and up 1.1% from their prediction last May. Those additional revenues could  help the state cover rising costs — including state-employee raises — despite lower income tax rates. 

“I have a lot of confidence that, even at the lower rates, you're going to see the growth in the economy basically account for those additional dollars,” Berger said earlier this week. Berger said Wednesday that the state is expected to release a revised revenue forecast that could contain “good news.” 

He said more plans are expected to be made public in the coming weeks, but are still too much in the rough-draft stage to be made public just yet. “We're still working through some things,” Berger said. “But we fully anticipate and expect that we are covering those pay raises without any real difficulty.”

Berger also endorsed an idea Democratic Gov. Josh Stein proposed last month to eliminate a tax break that data centers get on purchasing electricity. Stein had said that law was written years ago, before the current data-center boom, and is no longer needed to attract them to the state. Berger said lawmakers agreed and plan to write it into the budget as a way to boost future revenue.

Job cuts. Legislators last year ordered State Auditor Dave Boliek to identify state jobs that had been long dormant. His office identified more than 4,500 positions that had been vacant for at least a year. Nearly 200 of those had gone unfilled for more than five years. The House’s original budget proposal called for eliminating up to 3,000 of those vacant jobs to free up millions of dollars for raises for existing employees, while the Senate called for a smaller number.

House Speaker Destin Hall, R-Caldwell, said Tuesday that there hasn’t been an agreement on how many — if any — cuts there might be. 

“If we can take those dollars and use them, I would like to use them for salary increases for the other folks there,” Hall told reporters Tuesday. 

Eliminating those positions could pose challenges: It might be difficult to create those roles if they’re needed in the future, meaning existing state workers might have to assume extra duties to fill the gaps. 

Just because a job is vacant doesn’t mean it’s not necessary, said Ardis Watkins, executive director of the State Employees Association of North Carolina. She said if job cuts are on the table, agency leaders need to have a role in the discussions. 

“I'm extremely concerned, and I hope that there will be thorough public meetings with agency heads reporting to explain what their agency does, so that we know if these cuts hurt the public or not,” Watkins said. 

Paré said budget negotiators are expected to discuss funding needs in the weeks ahead.  

“Now that [priorities are] set, the budget process will continue with area chairs — meaning different areas of the budget will get together and look at how things should be funded — if there should be cuts, if there shouldn't be cuts, if there should be additional funding put towards certain things,” Paré told WRAL Wednesday. 

Gambling taxes. Lawmakers have also considered proposals to increase taxes paid by sports betting companies and an additional tax to lottery sales and individual sports bets, people familiar with the matter told WRAL. 

The negotiations alone have caused sports-betting advocates to launch a marketing campaign trying to stop the effort. 

North Carolina launched legal online sports betting in March 2024 and, since then, has received more than $250 million in fees and taxes. The state’s eight legal sports betting operators pay an 18% tax on gross wagering revenues. The Senate’s budget proposal, which passed the chamber last year, sought to increase the tax rate from its current 18% to 36%, putting it among the highest in the nation. 

Some of the state’s sports gambling tax revenues are required to go to specific initiatives such as youth sports, gambling addiction treatment and education, and athletic departments at 13 UNC System universities. But 50%, or $111.5 million, of the revenue has gone to the state’s general fund — the main pot of money legislators use to pay for state services like education, public safety, transportation and health care.

NCInnovation. The House last year proposed to claw back $500 million from NCInnovation, a public-private partnership aimed at identifying and fostering commercially viable work born out of research at state universities. Republican House members last year said they didn’t think the money is the best use of taxpayer dollars. The Senate was less inclined to cut the program’s funding and instead sought to spend even more on NCInnovation than what the legislature ultimately approved when it created the partnership in 2023.

Asked whether the chambers had reached an agreement over NCInnovation funding, Berger said Tuesday: “We will continue to discuss how to resolve it.”

Diversity programs. In their initial proposals last year, the House and Senate agreed on saving several million dollars a year by laying off employees and eliminating programs addressing pro-diversity or anti-discrimination efforts. Republicans said they wanted to root out diversity, equity and inclusion policies that they view as unfair. Some of the cuts they agree on include more than $800,000 a year by eliminating the “Minority Male Success Initiative” in the community college system, nearly $900,000 a year more by eliminating the state’s Office for Historically Underutilized Businesses, about $1 million annually by eliminating the state’s Employment Discrimination Division, and $700,000 more by eliminating the Human Relations Commission, a group created in 1975 with a goal of promoting racial equality, employment opportunity and an overall mission “to promote understanding, respect, and goodwill among all citizens.”

Higher education. Both the House and Senate’s original budget plans called for slashing at least $100 million from higher education, and for raising tuition at public universities. Some tuition hikes have since been approved by university officials even without being ordered by the state, however, so it’s unclear if lawmakers might still want to push for more.