Could SC residents see a tax cut in 2022? Budget writers debate over making the move
If South Carolina lowers its top income tax rate by one percentage point, the state would sacrifice about $800 million a year in revenue by the 2026-27 budget year, according to state economists.
Now it’s up to lawmakers to decide if that’s the right move. State House budget writers started debate Thursday on whether to decrease the state’s top income tax rate to 6% from 7% over the course of five years, a move being pushed by S.C. Gov. Henry McMaster.
Many factors go into how much someone pays income taxes, such as whether someone is single or married, head of a household, whether the income is from a job or investment earnings, and how many deductions a person takes, said Frank Rainwater, the executive director of the Revenue and Fiscal Affairs office.
Because of those factors, Rainwater would not give an estimate of how much an average taxpayer would be able to keep if the tax cut were approved.
“This is the one reason you need to take Algebra 2 in high school to work through these problems,” Rainwater said. “It is complicated, and it’s only complicated because of the number of factors you have to consider.”
According to the Revenue and Fiscal Affairs Office, South Carolina could be giving up nearly $800.9 million in income tax revenue a year by the 2026-27 budget year when accounting for population growth and inflation.
The tax cut, previously proposed by McMaster before the pandemic, is getting a renewed push this year, when the governor and the entire 124-member House of Representatives are up for reelection.
The tax cut is sponsored by several House members including Speaker Jay Lucas, R-Darlington, Ways and Means Chairman Murrell Smith, R-Sumter, and House Majority Leader Gary Simrill, R-York.
It also comes as the state has an additional $3 billion, including $897 million in new annual revenue, to allocate in this year’s budget. McMaster allocated $177 million for the tax cut in his executive budget this year.
The proposal includes reducing the state’s top income tax rate to 6% from 7% over the course of five years, with two-tenths of a percentage point coming off each year.
For the upcoming budget year, a tax cut would cost about $142.3 million, state economists estimate.
If revenue to the state’s general fund isn’t projected to grow by at least 5% in a year, then the year’s tax cut would not take place, under the proposal.
During the 2020-21 fiscal year, state general fund revenue grew by 10.16%. For the 2021-22 it’s projected to grow by 2.54%. For the upcoming fiscal year, which begins in July, it’s projected to grow by 10.65%, according to Revenue and Fiscal Affairs.
Rainwater told lawmakers 44% of the state 2.6 million income tax filers don’t pay any state income taxes, and tax rates are only applied to 53% of a people’s income.
South Carolina is competing with neighboring states Georgia and North Carolina, which recently reduced their income tax rates.
The Palmetto State has higher top income tax rates than the Peach State and the Tar Heel State, but its effective tax rate is lower.
“A lot of people describe it as an optics problem,” Rainwater said. “I see those reports on the websites where they say, ‘Don’t move South Carolina because it’s 7%.’ That’s not telling you the whole story. When you look at the overall burden relative to other states, our overall burden is low, but ... it depends on which type of taxpayer you are. Some are better; some aren’t as good.”
House Ways and Means Committee members debating the tax cut proposal plan to continue discussing it as early as next week.
“We know these are some complex matters. We’ve been working on this. We’re committed to it,” said state Rep. Heather Ammons Crawford, R-Horry. “We definitely want to come back and make sure we take the time that we need to get this well measured approach.”
Military pensions
The House panel moved forward with another McMaster priority of waiving all state income taxes on military pensions. It’s a move to remain a military-friendly state.
It would cost the state less than $10 million, House budget staff members said.
“We want to be one of the states that rewards our veterans,” Simrill said. “Fortunately, South Carolina’s economy is strong and is strong due to more and more people moving to the state being citizens who are giving back to South Carolina, and we have done well as a state.”
Comparing tax rates
Top income tax rates
▪ South Carolina - 7%
▪ Georgia - 5.75%
▪ North Carolina - 5.25%
Effective income tax rates
▪ South Carolina - 3.1%,
▪ Georgia - 3.7%
▪ North Carolina - 4.1%,
Source: Revenue and Fiscal Affairs Office
This story was originally published February 3, 2022 at 1:48 PM.
