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Sanford Proposes to Vastly Improve South Carolina’s Business Tax Climate

3 min readBy: Josh Barro

Today, South Carolina Governor Mark Sanford announced a sweeping taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform proposal that would vastly improve the state’s business tax climate. The proposal has several planks:

  • Beginning in 2010, personal income tax filers could choose an optional flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. rate of 3.65% with no deductions. The graduated table, which would continue to be available, has six rates, topping out at 7% on taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. over $12,850. The optional flat tax would move South Carolina from having one of the highest top income tax rates in the South to the lowest, except for Texas and Florida, which have no personal income tax at all.
  • The graduated tax brackets would be fully indexed to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . Currently, the brackets are indexed, but grow at a rate below inflation. The current system results in “bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation. ” where a taxpayer whose real income is unchanged from year to year can face higher tax rates over time.
  • Corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. would be phased out over a period of ten years. This phaseout would be offset in part by an elimination of corporate tax incentives over the same period. Because South Carolina will have a very low business tax burden, Sanford believes that corporate tax incentives should no longer be necessary.
  • The cigarette tax would rise from 7 cents (currently the lowest in the nation) to 37 cents. While cigarette taxes are a predatory (and regressive) tax on a political minority, South Carolina’s rate would still be well below the national average.
  • A new, $3 per ton “tipping fee” would be imposed on landfill dumping.
  • Sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. holidays, a pet peeve of ours here at the Tax Foundation, would be abolished. (Yay!) Sales tax holidays make the tax code more complicated, distort economic decision-making, don’t appear to foster economic activity, and are a gimmicky distraction from real tax relief.
  • A committee would examine the inequities in the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. structure that currently affect businesses. While I’m not intimately familiar with South Carolina’s system of property taxation, many states tax commercial property at a higher rate than residential property. This hides the tax burden (as residential property taxes are more visible to individuals than business property taxes) and distorts economic decisionmaking (as it makes the cost to own commercial property artificially high).

All in all, this sounds like a very effective plan for improving South Carolina’s business tax climate. It embodies the Tax Foundation’s five principles of sound tax policy: simplicity, stability, neutrality, transparency, and growth-promotion.

Indeed, I entered the proposed changes into our State Business Tax Climate Index model, and found that if South Carolina adopted the plan today as fully phased in (i.e., with no tax on corporate income) the state would move from #25 to #6 on the Index, placing just behind Florida and ahead of all other states in the South. That would be a sea change (the opposite of the kind Maryland recently had) and make the state much more attractive for business investment from a tax perspective.

We’ll keep you posted as Sanford tries to get the plan through South Carolina’s sometimes-hostile legislature.