What changes can North Carolina taxpayers expect in 2023?

The 2021 long session brought North Carolina a “First in Freedom” budget, with pro-growth tax cuts which will continue to reward taxpayers in 2023 and beyond. The 2022 short-session budget, signed into law in July, brought additional changes for North Carolina families.

See below for personal, business, and sales tax changes to expect in 2023. 

Personal: 

• Your personal income tax rate will fall from 4.99% of your income above the standard deduction to 4.75%. In future years, savings will grow as the personal income tax decreases to 3.99% after 2026.

• The standard deduction and child tax credit changes from the 2021 session will continue to benefit taxpayers this year and perpetually unless another legislative session changes them. 

Business: 

• Though the corporate income tax rate is still 2.5% this year, the rate is scheduled to phase out to 0% by 2030, beginning with the decrease scheduled for 2025.
• Beginning with taxes filed in 2023, North Carolina’s franchise tax base will be simplified for taxes reported in 2022. The new law will reduce business liability by requiring businesses to calculate their tax liability under one base instead of three. In prior years, North Carolina’s franchise tax was levied on the largest of these three options: the company’s net worth, 55% of the real property in the state, and the business’s total tangible property investment in the state. With the new law, businesses will only calculate their franchise tax on their net worth. Although the franchise tax is still harmful and redundant, this action reduces the burden on businesses.  

Sales:

• The state sales tax rate will not change from 4.75%. Five North Carolina counties put local tax increases on the ballot during the recent elections. Notably, none succeeded.  

• Sales to interstate air and ground couriers are exempt from the state sales tax effective July 1, 2022, according to the latest budget. 
• Beginning this fiscal year that began July 1, lawmakers will divert 2% of the state’s sales tax revenue to the Highway Fund. This action muddles the user-pays principle historically used for transportation funding via the gas tax. The dollar amount of the sales tax revenue transfer is, however, calculated based on estimated vehicle-related purchases. Though this change does not directly affect your sales tax rates, it could have future implications for sales tax revenue and rates. 

• The motor fuels tax (the gas tax) is calculated each year based on a formula tied to the state’s population change and energy inflation. In 2023, the gas tax will be 40.5 cents per gallon, an upward change from 2022’s 38.5 cents per gallon.