2 days Ago
On March 25 the state's Republican leadership rolled out a flat-rate income tax plan , pitching it as a way to make South Carolina more competitive with the lowest top tax rate in the Southeast. Instead of taxing different levels of income at the current rates of zero, 3 percent, and 6.2 percent there would be just one rate: 3.
99 percent. And a larger portion of people's incomes would be taxable. The thing is, switching to a flat income tax wouldn't be a tax cut so much as a rearrangement of who pays what.
This may come as no surprise to most, but those who would pay less under a flat tax plan are generally the highest income earners, while those who would pay more are in the middle to low income brackets. Don't take my word for it. The S.
C. Revenue and Fiscal Affairs Office laid that out in a study two years ago . The 2023 analysis wasn't looking at the current legislation , calling for a 3.
99 percent flat tax, but it was close, looking at how a 3.71 percent flat tax would work out. Here's the takeaway: "the change would cause a shift of $1.
06 billion in tax liability between taxpayers based on their filing situations; over 66% would pay more while 19% would pay less." The rest would be essentially unchanged. The study found that in every income group up to $100,000, the large majority of people would pay a higher tax bill, while in every income group above $100,000 most people would pay less.
For those with taxable incomes between $20,000 and $50,000, at least 93 percent would see their bills increase. Again, that wasn't a study of the current legislation, but a very similar plan. A chart from a 2023 S.
C. Revenue and Fiscal Affairs Office report estimates the impact of a 3.71 percent flat income tax across different income brackets.
State lawmakers last week proposed a similar idea calling for a 3.99 percent rate. Now you may have heard, correctly, that 44 percent of South Carolina income tax return s filed in 2023 showed zero tax liability.
That figure is also from the Revenue and Fiscal Affairs Office study. Gov. Henry McMaster said during the March 25 rollout of the flat tax plan that it would mean "everybody has to pay something — a little something, at least — to be a part of this state of South Carolina.
" But it's not true that everybody would have to pay something, because some important types of income would remain exempt from state income tax. So who are all these people, the 44 percent of tax filers who paid nothing in 2023? Well, lots of them had no income to tax after claiming the federal standard deduction, and many had income that South Carolina has chosen to not tax. That includes Social Security, military retirement income and railroad retirement benefits — exemptions that would remain in place under the flat tax plan.
And that means plenty of people, including some of the retirees relocating to the Palmetto State , would continue to owe zero income tax to the state. For lots of people, once you subtract the standard deduction from taxable income, and don't count the kinds of income South Carolina exempts, there's nothing left to tax. And that's why the flat tax plan would eliminate the federal standard deduction when calculating state-taxable income, replacing it with a smaller state deduction.
Right now the income that South Carolina taxes is based on federally taxable income, after deductions. By changing that rule, the state would tax a larger part of people's gross incomes. For example, for 2024 returns a married couple filing jointly would reduce their taxable income by $29,200, and a single person by $14,600.
Those federal deductions would no longer count, replaced by a state deduction of $12,000 for a couple or $6,000 for an individual. By increasing the taxable income of most people by $8,600 ($17,200 for a couple), the state would have more income to tax. There are, of course, more details in the new flat-tax proposal, but that's the big picture.
South Carolina's income tax would become regressive, and most negative impacts would be felt by middle- to lower-income earners ..
