South Carolina lawmakers reach deal to cut income tax
Governors and lawmakers in 14 states enacted income tax relief last year and eight states have already approved income tax cuts so far this year. South Carolina is now set to be the next state whose residents will receive income tax relief. The income tax cut expected to hit Gov. Henry McMaster’s (RS.C.) office this month, in addition to allowing people to keep more of their paychecks, will help Carolina South to avoid falling even further behind neighboring states where numerous income tax cuts have been approved over the past decade and as recently as last month.
Next to South Carolina, thanks to a bill recently signed by Governor Brian Kemp (R-Ga.), Georgia residents will soon see their income tax rate drop from 5.75% to 4 .99%. Meanwhile, across the border from South Carolina, North Carolina’s flat rate income tax has dropped from 5.25% to 4.99% on the first day of 2022. The rate Tar Heel state income tax is expected to drop further to 3.99% in 2026.
Although North Carolina residents recently received another tax cut, Raleigh lawmakers recognize there is still demand from voters for additional income tax relief. A poll released by the Center for American Ideas and the GOPAC Education Fund on June 8 found widespread support for a proposal to further reduce North Carolina’s income tax rate to 2.5% by 2030. The new poll shows support for moving to a 2.5% income tax rate. ranging from 74% to 77% in the four competitive state legislative districts that were surveyed. By passing legislation to move to a 2.5% flat tax, North Carolina lawmakers would match the new income tax rate that Arizona is headed toward thanks to tax reform enacted by Governor Doug. Ducey (R), which was led by a legislature with slim majorities by Senator JD Mesnard (R) and House Majority Leader Ben Toma (R).
Many members of the South Carolina legislature recognize that if they don’t get income tax relief enacted this year and improve it in later sessions, they’ll likely see the tax disadvantage of the Palmetto State relative to neighboring states continue to grow. As in North Carolina, a recent poll indicates there is strong support for state income tax relief in South Carolina. A poll released by the South Carolina Policy Council on June 4 found that 77% of respondents think reducing state income tax is important, with 54% saying reducing the tax rate on state income is very important.
The good news for South Carolinians who want to see the state income tax rate reduced, thanks to the efforts of Colombian lawmakers, is that South Carolina is now poised to be the next place where income tax relief will be enacted in 2022. After years of being surrounded by states cutting income taxes while rates in South Carolina remained unchanged, South Carolinians are poised to receive the income tax relief they need.
“We are calling for the reduction of the highest marginal personal income tax rate in the South since our inception,” said Dr. Oran Smith of the Palmetto Promise Institute. “We took a leap forward this year by releasing a video during the Governor’s State of the State as he called for reduction. We hope that before the end of the month, that ugly ‘7’ on the Tax Foundation card will be gone for good!”
With a top rate of 7%, South Carolina currently has the highest income tax rate in the entire Southeastern United States. For those striving to attract more jobs, investment, and people to South Carolina, this is a distinction that must end. In an effort to change that, the South Carolina House and Senate both passed income tax relief bills by unanimous majority this spring. Members of the conference committee have since worked out the differences between the two proposals.
There are significant differences between the House and Senate income tax bills in South Carolina that need to be resolved. Many believe that each chamber’s proposals have unique aspects that, if combined, would lead to the most positive outcome for taxpayers.
The income tax relief bill passed by the House, which lowers South Carolina’s top tax rate from 7% to 6% over five years, does not reduce as much the higher rate than the bill passed by the Senate, which reduces this rate to 5.7% immediately. While the Senate passed a larger reduction in the top rate, the House simplified the income tax code in a way that the Senate bill does not. The income tax cut passed by the House cuts the state from four income tax brackets to two, consolidating the bottom three brackets into a single bracket taxed at 3%.
Many hoped that the larger cut in the top rate approved by the Senate would be combined with the consolidation of the lower brackets in the tax plan passed by the House to produce an end product that adopts the optimal parts of both plans. Instead it was reported on Friday, June 10 that the conference committee is going with the rate cut passed by the House and tying that to a $1 billion refund to taxpayers. Under the compromise, which is expected to be voted on by South Carolina lawmakers in the coming week, the top tax rate will drop immediately to 6.5%, then be gradually reduced to 6% over the next few weeks. next five years. The two lower tranches will be consolidated into a 3% tranche.
“We have made substantial investments in South Carolina,” House Speaker Murrell Smith (R) said. “A billion in reserves, $1 billion in roads and $2 billion in tax relief.”
The enactment of an income tax cut this year will bring much-needed relief to South Carolina families, many of whom are grappling with the highest inflation in four decades. In addition to allowing households to keep more of their hard-earned income, personal income tax relief bills also generally benefit small businesses, as most fall under the tax system. on personal income. Yet South Carolina is already assessing a preferential 3% flat tax on business income imposed under the personal income tax system, making the pending tax relief package of no benefit to individuals. small business owners.
According to IRS data, more than 514,000 small business owners file through the South Carolina personal income tax system. Reducing the top personal income tax rate, which is being attacked by opponents as a gift to the wealthy, in practice expands the ability of small businesses in most states to hire new workers and grant grants. raises to existing employees. Because South Carolina already taxes small business income at a preferential rate, lawmakers should lower the personal income tax rate below 3% to provide relief to business owners. small enterprises.
The upcoming tax cut from Governor McMaster’s office will drop South Carolina’s highest tax rate below 7% for the first time since the rate was passed in 1959. That said, the South Carolina will still have the highest tax rate in the region even after Governor McMaster signs the income tax cut that is expected to pass on June 15. Even if the Senate’s larger top rate cut had been included in the final package, South Carolina would still have had the highest income tax rate in the Southeast. That’s why top lawmakers have already made it clear that this is just a first step and that tax reform must be on the agenda for future sessions if the South Carolina tax code must be made more competitive.
The income tax relief agreement reached between the South Carolina House and the Senate caps a remarkable legislative session in the state of Palmetto. Between approving long-sought income tax relief and passing landmark legislation to create scholarship accounts that will give thousands of children access to more of schools, South Carolina lawmakers are about to wrap up work on what is set to be a substantial legislative session that will provide plenty of material for discussion on the 2022 election campaign and beyond. .
Update: This article has been updated to reflect that small business income in South Carolina is taxed at a preferential rate of 3.0%.