WITH JUST three days left in this session, our legislators are racing to figure out whether you’re going to pay more money as a result of the big federal income tax cut that the Congress passed and President Donald Trump signed back in December. Or you. Or maybe … over there in that corner … you.
I’m not talking about who will pay more or less in federal income taxes; the Congress decided that. I’m talking about what happens when that federal tax law meets the S.C. income tax system, which for decades has been aligned to the federal system to make tax season easier for taxpayers and tax collectors.
Because of that alignment, somebody will pay more — either in higher state income taxes or in more headaches or higher bills from their accountants.
The Legislature routinely updates our tax laws to conform them to any changes the Congress makes to federal tax law. But because of the way last year’s federal law changed tax exemptions and deductions, conforming this time would actually raise individuals’ state income taxes by $262 million. Businesses would pay $9 million less, for a net state tax increase of $253 million.
The only thing legislators are basically agreed on at this point is that they will not allow this to happen. That means they can’t simply conform our tax code to the federal tax code and be done with it.
One way to keep S.C. taxes from going up is to simply do nothing — which, until a few days ago, it looked like the Legislature was going to do.
The problem with doing nothing is that it would turn our easy-to-prepare tax returns into a nightmare.
You know how the first line on your state tax return asks for your federal taxable income? You would no longer be able to just take that number off your federal tax return. State Revenue Department Director Hartley Powell told legislators recently that if they don’t conform our tax code, S.C. taxpayers will have to make up to 30 adjustments to get the correct number to put there.
No matter how it’s done, some people will pay more, some less. So the question becomes: Which individuals should have to pay more, and which less?
That means those of us who prepare our own taxes will spend more time on them, and those of us who have them done by accountants will spend more money. Rep. Russell Ott even raised the possibility last week that we might not be able to find tax preparers who know how to do this — let alone tax-filing software. Revenue experts say not conforming also would mean a lot more errors, which could hurt the taxpayers making the errors and cost the state more money to administer the tax code. Some people might wind up paying more state taxes because of choices they make in order to lower their federal tax liability.
But how to fix this isn’t obvious. While there are countless ways to tweak state tax laws so federal conformity would be revenue-neutral for the state, it’s virtually impossible to make the changes revenue-neutral for every individual. No matter how it’s done, some people will end up paying more, some less. So the question becomes: Which individuals should have to pay more, and which less?
House members complained last week that the Senate should have sorted this out already. But while the Senate has in fact taken the lead on this issue for the past 22 years, there was nothing to stop the House from doing that. Which it finally did, introducing its own conformity bill on Tuesday and passing it unanimously two days later, after less than 20 minutes discussion.
The criticism, and the fast passage of such complicated legislation, rankled some senators, who say, essentially: It’s not that simple. One insider told me that Senate leaders spent time earlier this year going through possible fixes, but never could agree on who should pay more and who should pay less, so they did nothing.
These projections are based on a lot of things we don’t yet know about how the federal tax changes will work out.
The House’s bill, H.5341, adds a $1,525 personal exemption for taxpayers and dependents and preserves some deductions that the Congress eliminated, so overall tax collections won’t increase. But the state Revenue and Fiscal Affairs Office projects that 17 percent of S.C. taxpayers, about 415,000 people, will pay higher state taxes with this bill than without conformity. Everyone else will either pay the same or less in state taxes.
On average, those with between $1 and $100,000 in federal adjusted gross income will pay the same to about $80 less, while those with higher incomes will pay from $17 to $618 more. But those are averages: Some people in every income group will pay higher taxes, and some will pay lower taxes.
That’s one reason some senators say the Legislature should do nothing, at least temporarily. The other is that these projections are based on a lot of things we don’t yet know about how the federal tax changes will work out. Sen. Vincent Sheheen began last week by reminding his colleagues that the Legislature conforms state taxes to federal tax changes “after careful thought” and suggested that it might be best to have a House-Senate committee study the issue and make recommendations in January.
At the moment, it looks like the Senate and House will give themselves some more time to work out a conformity package and pass it next month, when they return to tie up loose ends. But that’s no sure thing. As we’ve been reminded too many times this year, the greatest force in the Legislature is inertia.
Ms. Scoppe writes editorials and columns for The State. Reach her at email@example.com or (803) 771-8571 or follow her on Twitter or like her on Facebook @CindiScoppe.