In her State of the State speech, South Carolina Gov. Nikki Haley (R) discussed the importance of broad-based 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:
Tax reform is critical to our state – every conversation we have with CEOs at some point drifts to our tax structure, and we have been communicating with Representative Tommy Stringer and his tax reform committee on how we move forward with real changes this year.
Our budget includes almost 140 million dollars in tax cuts for the people and businesses of South Carolina. These cuts will flatten the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. from six brackets to three, reduce taxes for the citizens of our state by almost 80 million dollars, and phase out the 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. over a four year period, injecting much needed dollars back into our businesses and giving us an unbelievable economic development tool.
The tax relief we ultimately adopt must be broad-based, offering relief to as many South Carolinians as possible. And these tax cuts should mean lower rates – not more credits, exemptions, and loopholes that only benefit a chosen few.
What we have laid out in the budget is a blueprint for how we believe the dollars available for tax reductions can best be spent. Together, I believe we can agree to a set of tax cuts that make South Carolina more competitive and send more dollars back where they belong – in the pockets of the people and businesses of our state.
Here’s more detail from her budget on those proposals:
Governor Haley’s tax reform proposal consists of four key components:
1. Phase-out the Corporate Income Tax over a four-year period;
2. Consolidate six Individual Income Tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. into three, while cutting rates;
3. Amend the Constitution to establish 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. rates by statute; and
4. Require that the Board of Economic Advisors and the Department of Revenue publish biennial reports on the number of beneficiaries of each tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , deduction, and exemption, along with the impact on the State Treasury.
Corporate Income Tax. Although South Carolina’s Corporate Income Tax generates a relatively small portion of the state’s overall receipts, eliminating this tax would send a strong signal that we want to attract jobs and businesses. Under this plan, a four-year phase-out would begin on January 1, 2013 with a reduction in the Corporate Income Tax rate from the current 5% to only 3.75%. Businesses would save $61.6 million in the first year, which they could then reinvest in jobs and infrastructure.
Individual Income Tax. Collapsing six brackets into three would leave South Carolina with a fairer and flatter tax system and would provide an estimated annual income tax cut of $84 for filers with at least $5,600 per year of 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. . Individuals currently in the 4%, 5%, or 6% bracket would all see their marginal rates reduced to 3.75% under the proposed model. In the plan’s first year, this would represent a $78.2 million tax cut.
South Carolina’s individual income tax brackets are indexed for 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. under SC Code Section 12-6-520. Under the Governor’s plan, the transition between the current 3% and 4% brackets would be frozen in place at $5,600 and filers in the existing 3% bracket (with taxable income between $2,800 and $5,600) would be protected by a “hold harmless” provision to keep them from being subjected to the new 3.75% rate. Over time, inflation will continue to raise the income level that serves as the ceiling of the 0% bracket until ultimately, it reaches $5,600, and the “hold harmless” provision is no longer required. This would leave South Carolina with three brackets, set at 0%, 3.75%, and 7%.
Property Tax. Property tax rates are established in Article X of the South Carolina Constitution, making it a difficult and timeconsuming process to reduce rates, such as for the crushing 10.5% Manufacturer’s Property Tax. This plan proposes to begin by amending the Constitution so as to allow these rates to be set in statute, making it easier to reduce them in the future.
Tax Credits, Deductions, and Exemptions. The State’s current patchwork of tax credits, deductions, and exemptions often rewards targeted individuals, businesses, or classes at the expense of all other taxpayers. Extending preferential treatment to one segment of society reduces the overall tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , driving up rates for those who are unable to obtain special status for themselves. Regular reporting on the number of beneficiaries for each tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit (EITC), child tax credit (CTC), deduction for employer health-care contributions, and tax-advantaged savings plans. , along with the impact on the State Treasury, would provide key decision-makers with the information they need to regularly reassess the merits of these incentives.
Here’s South Carolina’s current individual income tax rates and what they would be if the proposal took effect:
|
Income Brackets |
Current Rates |
Proposed Rates |
|
>$0 |
0% |
0% |
|
>$2,800 |
3% |
3.75% |
|
>$5,600 |
4% |
|
|
>$8,400 |
5% |
|
|
>$11,200 |
6% |
|
|
>$14,000 |
7% |
7% |
Note: Brackets and rates are for 2012. Filers currently in the 3% bracket would be “held harmless” from a rate increase, until inflation over time increases the income threshold for the 0% bracket to that level.
The total tax reduction on the individual side would be approximately $78 million, and on the corporate side would be $61 million in the first year. (The proposal lowers it by 1.25 percentage points in the first year, and continues lowering it by the same amount each year until the tax is eliminated.)
The individual tax is a modest tax reduction that simplifies the tax system. Coupled with a review of tax incentives, it could lead to significant improvement in South Carolina’s tax climate.
The corporate tax change is ambitious but can have a big impact. If fully eliminated, South Carolina would join just Wyoming, South Dakota, and Nevada with no corporate income tax or other broad-based business tax. With America having one of the highest corporate income tax rates, that would be noticed globally.
More on state tax policy here.
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