COLUMBIA — An income tax plan touted by state GOP leaders Tuesday as making South Carolina more competitive will cut taxes for many while requiring some people to pay more.
The proposal released with much fanfare in the Statehouse lobby would collapse all tax brackets to a single, flat 3.99% starting Jan. 1 for tax year 2026 — meaning taxpayers may not realize it until they file their taxes in spring 2027.
That would seem to be a huge cut from this year’s top tax rate of 6.2%, and that’s the goal.
Republicans have long complained the state’s top marginal rate makes South Carolina appear as the highest-taxed state in the Southeast, even while the effective rate — what tax filers actually pay — was among the lowest.
A 2022 law that has already reduced revenue by $1 billion has so far reduced that top tax bracket — what previous GOP leaders likened to a sticker price on a car that’s negotiated down — from 7% to 6.2%. But that number is still the region’s highest.
The plan announced Tuesday appears to be a far deeper cut. Yet, it reduces revenue flowing into state coffers far less. Under the phased-in 2022 law, the biggest cut came in the first year, when it eliminated more than $700 million for a half-point reduction.
Under the new plan, the state can get to 3.99% in one fell swoop by shaving $200 million from tax collections, said House Ways and Means Chairman Bruce Bannister.
Regionally, only Florida and Tenneessee would have a lower income tax rate — and that’s because theirs is zero. Their tax structure doesn’t include a state income tax. Both neighboring Georgia and North Carolina already have a flat tax rate, at 5.39% and 4.25% respectively, according to the nonpartisan Tax Foundation.
“That makes us not only more competitive, but also more attractive to new businesses and more affordable for families to call South Carolina home,” Bannister, R-Greenville, told reporters.
The plan does that by adjusting the tax structure, which will broaden the number of filers who pay.
Currently, South Carolina is among just five states basing tax collections on “federal taxable income,” meaning the state taxes only what’s left after home mortgage interest, property taxes and various other deductions and personal exemptions are subtracted. Essentially, South Carolinians start their state tax forms with less income to tax, compared to their neighbors across the state border.
The plan untethers South Carolina from the federal tax code and switches to taxing adjusted gross income as most states do. That makes South Carolina’s taxes truly comparable.
How many taxpayers will pay more versus less is not yet known. The state’s fiscal experts are working on projections that likely won’t be ready until next week.
Republicans call it flat and fair.
“Everybody has to pay something — a little something, at least — to be a part of this great state of South Carolina,” Gov. Henry McMaster said.
As of calendar year 2023, 44% of tax filers paid zero in state income taxes, while 10% of filers accounted for 65% of the total income taxes paid, according to the last analysis by the state Revenue and Fiscal Affairs Office.
That was largely unchanged from before the 2022 law, which helps explain why it received unanimous approval in the Legislature. Rather than cutting taxes mainly for top earners, as the bill’s filers initially proposed, the compromise spread tax breaks to lower income levels — which received high praise from Democrat lawmakers as helping “the working man.”
In its first year, the law dropped South Carolinians’ average effective tax rate from 3.4% to 2.7%. With the annual income tax reductions since, the effective rate has likely further shrunk, though by how much is unknown. An updated number may be released with Fiscal Affairs’ analysis of the GOP plan.
The changes won’t simply shift to lower-income filers. The plan provides a new personal exemption meant to help them, offering a full tax break for people drawing just $6,000 and providing relief for people making up to $40,000.
The bill does not change any of the state’s existing tax benefits or deductions, including those benefiting military families, senior citizens and parents of young children, Bannister said.
It’s also designed to start putting more money in South Carolinians’ paychecks starting in 2026, by requiring the state Department of Revenue to adjust employers’ withholding tables to reflect the new tax structure.
That means employers will withhold less in taxes, resulting in higher take-home pay. But it should also result in smaller refunds at spring tax time, Bannister said.
Democrats are withholding judgment on the new plan until they see the details.
Rep. Roger Kirby, the House’s assistant minority leader, said he’s not opposed to a tax cut, but legislators need to be sure they don’t hurt low-income residents and government services in the process.
“Those were always the unanswered questions” on various study committees over the years looking at reducing taxes, said the Lake City Democrat.
Moving to a single tax rate could reduce the sticker shock for people looking to move to South Carolina and businesses wanting to start shop here, since the top tax rate made it appear so much higher than surrounding states, Kirby said.
“Hopefully, it’ll be something good everybody can support, and it’ll be good for economic development,” he said.
The state Chamber of Commerce, which has pushed for a tax overhaul for years, wasted no time in applauding the proposal.
“South Carolina’s incredible economic growth has been achieved despite a clear competitive disadvantage — an archaic and confusing individual income tax rate that discourages investment and stymies talent attraction,” said the chamber’s CEO, Mike Brenan. “This historic tax cut proposal would fix that — immediately vaulting South Carolina ahead of other states that have recently cut tax rates and creating a more competitive economy that will attract even more jobs with even higher wages.”
But wait, there’s more
The proposal would continue reducing taxes until the flat rate gets to 2.49%.
Getting there all at once would cost a whopping $2.7 billion, Bannister said.
Instead, the plan calls for reducing revenues by $200 million for every year tax revenue projections rise by 5%.
That might take half a dozen years of annual reductions, as the population and industry investments continue to grow. The proposal sets no time frame, Bannister said.
“Four years, five years, six years from now, if that’s how long it takes us to get to that 2.49 number — it will just be different, because our economy would be different and the budget would be different,” Bannister said.
McMaster called on legislators to get the bill to his desk this year.
About 50 Republicans joined GOP leaders from both chambers at Tuesday’s announcement, signaling widespread support.
The bill will mostly likely get finalized with the state budget package for the fiscal year starting July 1.
“We’ll make time,” Senate Finance Chairman Harvey Peeler, R-Gaffney, told reporters.
Skylar Laird covers the South Carolina Legislature and criminal justice issues. Originally from Missouri, she previously worked for The Post and Courier’s Columbia bureau.
SC Daily Gazette is part of States Newsroom, the nation’s largest state-focused nonprofit news organization.
Seanna Adcox is a South Carolina native with three decades of reporting experience. She joined States Newsroom in September 2023 after covering the S.C. Legislature and state politics for 18 years. Her previous employers include The Post and Courier and The Associated Press.
SC Daily Gazette is part of States Newsroom, the nation’s largest state-focused nonprofit news organization.
