2 weeks Ago
COLUMBIA — Statehouse Republicans are defending a contentious income tax proposal that would raise taxes on low- and middle-income earners to cut wealthy earners' taxes, arguing the program will eventually result in lower taxes for the vast majority of South Carolina residents. But to work, the plan — which seeks to convert the state to a flat 2.49 percent income tax rate for all earners once fully realized — will require the state to experience significant economic growth at a time uncertainty at the federal level has caused some businesses to reconsider their investments.
Currently in South Carolina, approximately 44 percent of residents pay no income tax, while middle-income earners pay 3 percent. The state's highest earners pay 6.2 percent income tax, leaving South Carolina with the highest top income tax rate in the region.
The latest tax plan, which House Majority Whip Brandon Newton, R-Lancaster, characterized as a "conservative revolution" of the state's taxes, would immediately convert that three-tiered system to a flat 3.99 percent for all income levels. It would also end the state's nearly 40-year-old practice of assessing income taxes based on a progressive federal system, which substantially increases the percentage of taxes residents pay after surpassing roughly $100,000 in income.
Doing so will result in higher tax bills for 60 percent of South Carolina residents. According to estimates by the S.C.
Revenue and Fiscal Affairs Office released this week, the typical median income earner — who earns about $57,000 per year — could immediately expect to see their taxes increase by $521 per year under the GOP plan, while only those earning $150,000 per year or more can expect to see their taxes decrease. Some critics bashed the plan as a giveaway to the wealthy. House Ways and Means Chairman Bruce Bannister characterized critiques of the bill as "inaccurate," noting that tax rates in the bill will eventually decrease to a flat 2.
49 percent for everyone, resulting in approximately 77 percent of residents paying less tax than they do today. To get there, the state will need to hit certain revenue "triggers," an assumption which is based on the state experiencing substantial economic growth. After years trending upward, RFA data show employment growth in South Carolina has actually begun leveling off, while personal income growth is expected to slow.
Even with the uncertainty at the federal level, Newton said he believes it is a safe bet taxes for lower-income earners — while set to grow initially — will eventually come back down. North Carolina, which state lawmakers have been using as a benchmark for tax relief, has seen significant issues covering the cost of government as a result of its income tax reforms. In a media interview last week, North Carolina's budget director said at current rates, the state was expected to experience a $3.
5 billion budget shortfall in just three years, with no guarantees they will be able to make that up. "You’d have to have a tremendous amount of growth in your economy, and you would have to also not have high inflation, and that's just not something any of the economists are thinking is likely at all,” Kristin Walker told North Carolina Public Radio last week. South Carolina could experience similar problems, particularly given the size of the state budget has actually been growing in recent years.
According to RFA estimates, South Carolina government coffers would experience a $216.6 million decrease in revenue from an immediate shift to a 3.99 percent flat income tax rate.
A planned further drop to 2.49 percent — which would occur every year there is 50 percent income tax growth — would slash state revenues by $2.7 billion, or approximately 22 percent of the state's general fund budget last fiscal year.
But that's if the triggers are actually reached. With so much uncertainty tied to the tax proposal, Orangeburg Democratic Rep. Gilda Cobb-Hunter told reporters it's not a question of when the working class sees tax relief from the proposals, but if.
"I'm not convinced that it is in the best interest of working people in this state," she said. "Given the chaos at the federal level, given the uncertainty about our incomes, about our economic future, I just think we might need to tread lightly." In lawmakers' initial conversations about tax reform, it centered around the need to make the state more competitive.
South Carolina's top income tax rate was the highest in the Southeast, they said, and a deterrent to the state's success against Georgia and North Carolina. States like Tennessee don't tax income at all, while both Georgia and North Carolina have top income tax rates several points behind South Carolina's. Overall, the Tax Foundation ranks South Carolina's tax system the 33rd most-competitive in the United States, well-behind neighboring peers.
Ultimately, House Speaker Murrell Smith told WACH-FOX's "Connect to the Capitol" program over the weekend, the goal is to bring the state's effective tax rate to the "same low rate" for all South Carolinians, which he argued would help everyone. "There are winners and losers in any tax system," he said during the March 28 interview . "What the beauty of this is, is that everyone is treated the same.
Rather than the federal government telling us who we can and who we can't tax." But the explicit goal, he also said during that same interview, would specifically be to attract high-wage earners to the state, the cost of which would be partially offset out by increases in income taxes on the lowest wage earners. "The one area we have not had as much success as we would like would be in recruiting corporate headquarters to South Carolina; bringing those individuals here, the high-wage earners and the ones who really run the corporations, to South Carolina," said Smith.
"And that is because, in my opinion, we have the highest income tax rate." What is equitable is a matter of perspective. While state data show the top 10 percent of wage earners constitute the lion's share of South Carolina's income tax revenues each year, lower-income people pay a greater share of their incomes on taxes than the state's wealthiest residents despite the benefit of lower rates.
Analyses by the left-leaning Institute on Taxation and Economic Policy show that the highest proportional tax burdens are felt by those earning less than $21,200 and on the middle class, who pay about 10 percent of their income in taxes. Because sales taxes are disproportionately borne by the lower classes, South Carolina's graduated income tax rates — where the poor pay less and the rich pay more — are what keeps tax burdens relatively even across all income levels. And with a bevy of sales tax exemptions on items like groceries, sweetgrass baskets and even lottery tickets, lower-income earners can expect to pay anywhere between a four and five percent share of their annual incomes in sales taxes, while the wealthiest 10 percent of earners pay substantially less.
While other states like North Carolina and Louisiana implemented so-called "tax swaps" to pay for their tax cuts, South Carolina won't. "They were raising taxes in other areas to pay for the significant amount of the cuts they're making," said Newton. "This plan is not.
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