New tax law will cost South Carolinians millions in higher state taxes

South Carolinians will pay $1.6 billion less in federal income taxes under the tax reform law that Congress passed last year. But they could pay almost $200 million more in state income taxes, according to a state agency.

“If South Carolina does nothing (on tax reform this year), it’s almost certain there would be a (state) tax hike because there will no longer be personal exemptions,” said Richard Auxier of the Tax Policy Center, a nonpartisan Washington, D.C., think tank.

Before Christmas, President Donald Trump signed into law changes to the federal tax code, including repealing the personal exemption. Those changes impact many states including South Carolina, which tie their state taxes to federal tax law.

As a result, if the S.C. Legislature doesn’t conform the state’s tax to reflect the changes in the federal tax code, South Carolinians could pay more state income taxes in 2019.

Without changes, South Carolinians could pay $180 million more in state taxes next year – about $75 per person, according to new analysis done by the S.C. Revenue and Fiscal Affairs Office.

Some businesses would get a break on their state taxes – paying $67 million less – but individuals would pay $246 million more, according to that analysis.

The Revenue and Fiscal Affairs Office said:

▪  31 percent of S.C. taxpayers would have a lower state income tax bill

▪  27 percent of S.C. taxpayers would have a higher state income tax bill

▪  42 percent of S.C. taxpayers would not see their state income tax bills change

Who would be the hardest hit?

The S.C. taxpayers who report adjusted income of between $50,000 and $75,000 a year – the largest group of taxpayers.

For example, without changes to the S.C. tax code, some of those middle-income taxpayers – 129,136 filers – could see their state tax bill cut by an average of $119. However, more middle-income South Carolinians –143,721 filers – could see their state tax bill climb by an average of $433.

On the other end of the income scale, almost 7,000 S.C. taxpayers who report more than $1 million in income could see their tax bill cut an average of $3,355. But 3,217 millionaire taxpayers would see their taxes increase by an average of $1,679.

South Carolinians who own limited liability corporations would see their tax bill cut, too. Those S.C. taxpayers would save $67 million thanks to a 20 percent deduction in the federal code for qualified business income.

Total corporate income taxes paid to the state would increase by $25 million, the Revenue and Fiscal Affairs analysis said.

Tax law’s ‘collateral effect’ on SC

Overall, states, including South Carolina, will see an increase in their tax revenue because of the changes to the federal tax code.

However, South Carolina’s Republican-controlled Legislature and GOP governor see the new tax law as motivation to revamp South Carolina’s tax code.

“The recent tax reform bill signed by President Trump was a great victory for American taxpayers and our economy,” Gov. Henry McMaster said in his State of the State address last week. “But with the federal government cutting taxes, it is now more important than ever for us to do our part.”

This month, the Richland Republican announced his executive budget proposal, including income tax cuts for all South Carolinians.

McMaster’s proposed cuts would be phased-in over five years, resulting in about $2.2 billion in savings over five years.

The cuts would save the average S.C. taxpayer between $55 and about $54,000 over the full five years, depending on their income. The cuts also would reduce the state’s revenue by more than $782 million, said the state Revenue and Fiscal Affairs.

“There’s no time like the present,” said McMaster’s spokesman Brian Symmes. “The federal tax reform has given low-tax states an opportunity for a competitive advantage, and South Carolina can’t afford to be left behind.”

A S.C. House committee has been reviewing tax reform since last year, tasked by House Speaker Jay Lucas, R-Darlington, with making S.C. taxes broader, fairer and flatter.

House President Pro Tempore Tommy Pope, the York Republican that chairs that committee, is hopeful the federal tax changes will give S.C. lawmakers motivation to move forward on tax reform.

“It might be that further adjustments are in order,” Pope said after reviewing the Revenue and Fiscal Affairs analysis. “I don’t know if anyone necessarily anticipated this collateral effect.”

This story was originally published January 30, 2018 at 6:22 PM with the headline "New tax law will cost South Carolinians millions in higher state taxes."