McMaster calls Trump’s tax reform “a great victory” for taxpayers
IF YOU support a flat income tax, the House’s tax reform committee chairman is not doing you any favors by proposing one for South Carolina.
The plan to switch from a graduated income tax system that tops out at 7 percent to a flat 4.85 percent income tax has zero chance of passing this year (if ever).
But it transforms the flat tax from a talking point to an actual proposal, which spells out both what you get (the flat, 4.85 percent tax rate) and what you give up: every exemption and credit the Legislature has written into state law. Along with every itemized deduction — including the many that survived the federal tax overhaul.
Think of it as a magnet for special-interest opposition. And even general-interest opposition.
We’ve always known, more or less, what we would give up if the Legislature wiped out all the sales tax exemptions.
But most of us haven’t thought as much about the deductions, exemptions and credits that would go away under a truly flat state income tax.
That $15,000 exemption for everyone 65 and older? Gone.
The $8,100 exemption for children younger than 6? Gone.
The Social Security income deduction (up to $54,781)? Gone.
The deduction for $15,000 worth of military retirement income? Gone.
The earned income tax credit just approved last year? Gone.
The tax credit you get in return for giving money to private-school scholarships for special needs kids? Gone.
The “check offs” that allow you to send part of your tax payment to designated causes ranging from the Children’s Trust Fund and Habitat for Humanity to the Eldercare Trust Fund and the War Between the States Heritage Trust Fund? Gone.
The conservation easement tax credit? Gone.
The deduction for 529 college savings funds? Gone.
And the list goes on. In fact, a summary spends 1 2/3 pages of single-spaced 11-point type on “a noncomprehensive listing” of the exemptions and credits in current law. Then it devotes seven lines to “a comprehensive listing” of the two credits that would be allowed under the flat tax, one of which is temporary.
It begins by changing a policy that contributes as much as anything to the illusion that South Carolinians pay high income taxes.
I’m not certain whether a flat income tax would be good or bad. I’d be happy to see a lot of the current deductions and credits eliminated, but ultimately, the answer depends on how flat or progressive or regressive it makes the overall tax system — and the details of the flat tax.
House House Speaker Pro Tem Tommy Pope’s flat-tax proposal begins by changing a policy that contributes as much as anything to the illusion that South Carolinians pay high income taxes. Most states use “federal adjusted gross income” as the starting point for calculating their own income tax liability. But South Carolina starts several lines down on the federal tax form, with federal taxable income.
That number is what’s left after you subtract out your federal itemized deductions or standard deduction, your federal personal exemption and your federal child exemption.
This bill would do more than I ever could to demonstrate that no one actually pays 7 percent of their income in taxes under current law.
For a family with two young children and an adjusted gross income of $50,000 a year, that means the starting point for S.C. tax calculations is $21,100. Under Rep. Pope’s bill, the state tax calculations would start at $50,000.
The bill creates state standard deductions ranging from $10,000 to $20,000 and personal exemptions of $4,150 per person, which offset the change to adjusted gross income for some people. That family with the $50,000 income, for instance, ends up with $13,000 in taxable income under the current law and $13,400 under the House plan.
But then there are the all the special deductions and tax credits that the bill eliminates. And the rate changes, which, if this bill were to become law, would do more than I ever could to demonstrate that no one actually pays 7 percent of their income in taxes under current law — and few people pay even 4.85 percent.
Higher-income South Carolinians who itemize also could find themselves paying substantially more under the new, low flat tax.
Under current law, no one pays any taxes on the first $2,930 of taxable income. Each incremental amount of income after that is taxed at an increasingly higher rate. So even if we assume, for the sake of simplicity, that our $50,000 family doesn’t claim the state’s current two-wage-earner credit, switching to the flat tax means their state income tax bill would increase from $431 to $650.
To be sure, there is a point — probably not a lot higher than $50,000 — at which this family would be better off under Mr. Pope’s plan than the current law. The same is true for the retired couple living on Social Security and private retirement, who with an annual gross income of $63,000 pay nothing under current law and $469 under the House plan. And also the single parent with adjusted gross income of $30,000 who would see her S.C. tax bill rise from $338 to $567.
But it’s not just about wealth: Higher-income South Carolinians who itemize also could find themselves paying substantially more under this new, low flat tax.
At this point, we don’t have the sophisticated analyses, which I don’t know how to do, showing how this bill would affect all sorts of people. Once we have those, we’ll be in a much better position to determine how the plan needs to be changed — and whether it can be changed — to transform it into smart policy.
Ms. Scoppe writes editorials and columns for The State. Reach her at firstname.lastname@example.org or (803) 771-8571 or follow her on Twitter or like her on Facebook @CindiScoppe.