May 15, 2026

More than 10 months into the state’s fiscal year, legislative leaders announced this week that they are getting close to finalizing a state budget. This week’s policy update provides information about the ways that the budget agreement and two related state constitutional amendments limiting tax growth could affect nonprofits. We also share details about the U.S. Department of Labor’s formal abandonment of the 2024 overtime rule, which would have created operational challenges for many North Carolina nonprofits.

Leaders from the NC Senate and NC House of Representatives announced on Tuesday that they had agreed to the framework of a state budget for FY2025-27, which began on July 1, 2025. North Carolina is currently the only state in the country without a state budget in place.

House and Senate leaders have agreed to compromises on three of the biggest differences between their chambers’ budget proposals – pay increases for state employees and public school teachers; future changes to state income tax rates; and funding for a new children’s hospital in the Triangle.

The potential tax rate changes in the budget could impact future state funding for grants and contracts with nonprofits and for a variety of state programs and services that are important for people served by nonprofits. This year, North Carolina’s current individual income tax rate is 3.99% (down from 4.25% in 2025). Under the budget agreement, the individual income tax rate would drop to 3.49% next year, to 3.24% in 2030, and to 2.99% in 2033. Eventually, the rate could go as low as 2.49%, depending on total state revenue. The budget agreement also would keep in place the scheduled phase-out of the corporate income tax, which is currently set at 2% and is scheduled to go down to 1% in 2028 and be eliminated in 2030. As part of the budget deal, legislators are planning to place constitutional amendments on the November 2026 ballot to prevent future increases in income tax rates or property tax assessments (see the next two items for more details about these proposed constitutional amendments). 

Lawmakers will still need to work out the details of the state budget over the coming weeks, but they hope to vote on a final budget by the middle of June. 

A bill (S.1080) filed in the NC Senate on Wednesday would place a constitutional amendment on the November 2026 ballot to lower the cap on income tax rates in North Carolina from 7% to 3.5%. The Center is concerned that this constitutional amendment would be harmful to nonprofits. 

While the 3.5% cap is higher than the current 2% corporate income tax rate (which is scheduled to phase out altogether by 2030), it is below the 2026 individual income tax rate of 3.99%. The individual income tax rate has historically been much higher than 3.5%; it was 5.25% as recently as 2021.

Because income tax rates below 3.5% would be new to North Carolina, it remains unclear how these lower rates will affect long-term revenue for the state, particularly during or after an economic recession. With a 3.5% income tax cap, future state legislators would have limited ability to raise needed revenue from income taxes (even temporary tax increases on high-income North Carolinians). This is likely to create pressure to increase revenue from sales tax and governmental fees and to cut state government spending. Ultimately, a lower income tax cap would increase the likelihood of future legislative challenges to nonprofit sales tax refunds and state income tax exemption. It also could lead to significant cuts to state grants and contracts with nonprofits that provide public services and could create the need for the state and local governments to offload certain programs and services onto the nonprofit sector without compensating nonprofits for the full cost of providing these services.

The NC Senate Finance Committee is scheduled to vote on the constitutional amendment next Tuesday, and the full Senate could vote on it next week. To become a part of the state constitution, 60% of members of both the NC Senate and NC House of Representatives would need to approve the amendment and then a majority of voters would need to vote in favor of it in this fall’s election. Because voters ultimately determine whether to make constitutional amendments, legislation proposing constitutional amendments does not require the Governor’s approval.

On Tuesday, the NC House Finance Committee approved a bill (H.B. 1089) that would place a constitutional amendment on the November 2026 ballot that would require the NC General Assembly to establish limits on how much counties and municipalities may increase property tax levies. If the constitutional amendment were to pass, legislators would then work on the details of these levy limits next year. Proposals to limit local governments’ ability to increase property tax collections could help keep lease prices down for nonprofits that rent their property but also could force many counties and municipalities to cut back on expenses, potentially meaning fewer local government grants for nonprofits and reductions to local government investment in other community priorities that are important to many nonprofits.

The full House could vote on the proposed constitutional amendment as soon as next week. Like the income tax cap constitutional amendment described in the previous item, the property tax levy limit constitutional amendment would require 60% votes in both the House and Senate to be placed on the ballot and would need the approval of a majority of voters in this fall’s election to be added to the state’s constitution.

On Tuesday, the NC House Finance Committee approved a bill (H.B. 1042) that would make changes to property tax exemption for affordable housing purposes. Currently, joint ventures between affordable housing nonprofits and for-profit businesses that own affordable housing units are exempt from property tax exemption, regardless of how the joint ventures are funded, how much of the property is owned by the nonprofit, and whether the joint venture intends to develop new affordable housing. The use of the affordable housing property tax exemption has increased significantly over the past three years, leading to declining property tax revenue for many counties and municipalities around the state. Under the proposed legislation, there would essentially be two types of affordable housing property that would be eligible for property tax exemption: (1) property that is 100% owned and managed by a nonprofit providing affordable housing services, regardless of how it was financed; or (2) property that is financed through federal Low-Income Housing Tax Credits (LIHTC) or other government funding like bonds, even if it is owned by a joint venture where a nonprofit only has partial ownership.  The bill also would shorten the period from 10 years to five years for nonprofits to develop property to be used for affordable housing while maintaining property tax exemption. Some nonprofits have expressed concerns that this change could make it more difficult to develop property to be used for affordable housing.

The full House could vote on the bill as soon as next week.

This morning, the U.S. Department of Labor published a notice on the Federal Register formally abandoning its 2024 overtime rule, which would have significantly increased the salary threshold for exempt employees under the Fair Labor Standards Act (FLSA).

In November 2024, a federal court in Texas issued a ruling invalidating the 2024 DOL overtime rule in its entirety. Consistent with that ruling, DOL’s announcement from yesterday means that the 2019 overtime rule, which set the salary threshold for exempt employees at $35,568 per year ($684 per week) will remain in place. Under the 2024 overtime rule, the salary threshold had (temporarily) increased to $43,888 per year ($844 per week) on July 1, 2024 and had been scheduled to increase to $56,656 per year ($1,128 per week) on January 1, 2025 and to be automatically reset every three years, starting on January 1, 2027.

As background, FLSA generally requires employees to be paid one-and-one-half times their regular hourly rate of pay for any hours they work in excess of 40 hours in a work week. Employees are exempt from the FLSA overtime pay requirement if they:

Many North Carolina nonprofits had told the Center that the Biden-era overtime rule would have created operational challenges for their organizations. Before the November 2024 court ruling, nonprofits had begun to plan for a variety of operational changes to comply with the expected increase in the salary threshold, including raising staff salaries, cutting back on working hours, and planning to reclassify some employees from exempt to non-exempt.

The formal abandonment of the 2024 overtime rule and reinstatement of the 2019 overtime rule are effective today.

On Wednesday, the NC House Alcoholic Beverage Control Committee held a hearing on a bill (H.B. 921) that would make a variety of changes to state alcohol and gaming laws. Three of these changes would make it easier for nonprofits to conduct certain types of fundraising events.

The committee could vote on the bill in the coming weeks.

On Wednesday, the NC Senate Health Committee approved a bill (S.863) that would streamline certain types of redundant inspections for adult care homes, including some nonprofits. Many nonprofits that provide a variety of services that are funded in part through government grants and contracts have told the Center that redundant inspections, audits, and reporting requirements can create operational burdens that diminish their capacity to provide programs and services to the communities they serve. Potentially, this bill could be a step in addressing this concern.

On Tuesday, the NC House Commerce Committee approved a bill (H.B. 1083) that would enable businesses and nonprofits to offer “voluntary portable benefit plans” for their independent contractors. These voluntary portable benefit plans, which would not count as taxable income for contractors, could include health insurance, retirement benefits, and unemployment insurance. Potentially, these could be helpful for nonprofits that use independent contractors to provide some of their services.

In January, the U.S. Department of Education published a proposed regulation that would make several changes to federal student loan programs. One of these changes would limit the types of educational programs that are classified as “professional degrees” that are eligible for higher amounts of federal student loans. Several degree programs that are pipelines for significant numbers of nonprofit employees, including advanced degree programs in social work, public health, and nursing, would be excluded from the types of professional degree programs eligible for higher levels of student loans. Because positions with 501(c)(3) nonprofits are eligible for student loan forgiveness under the Public Service Loan Forgiveness (PSLF) program, nonprofit careers are often a good option for many graduates of professional degree programs. The proposed rule could ultimately reduce the future pool of nonprofit employees with postgraduate degrees in fields like social work, public health, and nursing. A bipartisan bill in Congress (H.R. 6718) would fix this issue by defining “professional degree” to include a wider range of postgraduate programs than the proposed regulation, including degree programs in social work, public health, and nursing. The Education Department is expected to publish a final rule in the near future.

This spring, the Center has hosted a series of Nonprofit Policy Conversations to discuss current federal executive actions and issues from the NC General Assembly's 2026 short session that affect nonprofits, as well as invite participants to share share their insights about important state and federal policy issues this year. Register now for the final event on Monday, June 15 from 10 a.m.-12 noon at Centennial Station Arts Center in High Point. The June 15 policy conversation is being presented in collaboration with Guilford Nonprofit Consortium, HandsOn NWNC, High Point Arts Council, and One Sector, One Voice Triad.

Nonprofit Policy Update is the weekly newsletter on state and federal policy issues affecting 501(c)(3) nonprofits. Learn more about the Center's public policy agenda.
©2026 North Carolina Center for Nonprofits

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