More than a decade after North Carolina replaced a tiered income tax system with a “flat tax,” some people still don’t grasp the significance.
A recent social media post highlighted a popular misconception about the state’s income tax structure.
John Locke Foundation CEO Donald Bryson responded on May 18 to a video from left-of-center activist group Carolina Forward.
Carolina Forward deserves credit for including the words “same rate.” But the commentary still suggests that taxpayers with $40,000 incomes and those with $4 million incomes pay the same tax.
Not so.
North Carolina assessed a 4.25% income tax rate in 2025. Let’s consider what happens without any deductions or credits.
The taxpayer with $40,000 owed $1,700 in income tax. The taxpayer with $4 million in income owed $170,000 in income tax. With 100 times as much income, the higher-earning taxpayer owed 100 times as much tax.
Remember that both taxpayers are funding the same state government. Lump the two tax bills together, and the $4 million income earner picks up 99% of the tab.
The tax rate drops this year to 3.99%. Now the $40,000 earner would owe $1,596. The $4 million earner would owe $159,600. The higher earner still owes 100 times as much tax and still pays 99% of the two taxpayers’ combined bill.
Lawmakers plan to drop the rate to 3.49% for 2027. The $40,000 earner would owe $1,396, the $4 million earner would owe $139,600, and the relative burdens remain the same.
Yes, the $4 million income earner would see a $30,400 tax cut from 2025 to 2027, while the $40,000 taxpayer would save $304. But the higher earner still pays proportionally more tax.
That’s the basic math of a flat-rate income tax with no deductions and credits.
But as Bryson noted on X, the news is even better for the lower-income earner.
Thanks to the standard deduction, “which has quadrupled since 2013,” the higher earner covers even more of the state’s income tax burden.
The standard deduction shields $12,750 from the state Revenue Department. Married couples filing jointly can deduct $25,500.
In 2025, that meant the single $40,000 income earner actually owed $1,158 and a married couple at that income level owed $616. This year, the bill drops to $1,087 for the single taxpayer and $578 for the couple. The anticipated 2027 rate cut would lower the bill to $951 for the single taxpayer and $506 for the married couple.
Looking at the $4 million income earner: In 2025, a single taxpayer owed $169,458 and a married couple owed $168,916. In 2026, those numbers drop to $159,091 and $158,582. Next year, the bill would decrease to $139,155 and $138,710.
With a stated “flat” tax rate of 4.25% in 2025, the effective tax rates were actually 2.9% for the individual $40,000 earner, 1.5% for the $40,000 couple, and 4.2% for both the single earner and married couple with $4 million.
In 2026, with a “flat” rate of 3.99%, the effective rates drop to 2.7% for the single $40,000 earner, 1.4% for the $40,000 couple, 3.98% for the single $4 million earner, and 3.96% for the $4 million couple.
Next year, with a rate set at 3.49%, the effective rates drop to 2.4% for the single $40,000 earner, 1.3% for the $40,000 couple, 3.48% for the single $4 million earner, and 3.47% for the $4 million couple.
It’s also worth noting the change in relative income tax burdens. With no deductions, the $4 million taxpayer earns 100 times as much income as the $40,000 earner and pays 100 times as much tax.
Because of the standard deduction alone, a single $4 million income earner is likely to pay 146 times as much income tax in 2027 as a single taxpayer earning $40,000. A couple with $4 million of income will pay 274 times as much as a couple with $40,000.
Space does not permit discussion of the child tax deduction. It’s available on a sliding scale only to single taxpayers making up to $70,000 and married couples with incomes up to $140,000. It also skews the overall income tax burden toward those with more income.
Yes, North Carolina has a “flat tax.” Higher earners clearly pay more. Suggesting otherwise skews debate about the best way for government to pay its bills now and in the future.
Mitch Kokai is senior political analyst for the John Locke Foundation.
