South Carolina Considers Modest Income Tax Cut

January 27, 2014

Governor Nikki Haley (R) of South Carolina has proposed the elimination of South Carolina’s 6 percent income tax bracket in her FY2014-2015 budget proposal. The 6 percent bracket is on incomes between $11,520 and $14,400 for the 2014 tax year. Reducing the tax rate on that income segment from 6 percent to 5 percent is expected to give taxpayers about $29 in tax relief each, and to reduce state revenues by about $26 million.

Those are small effects by any measure, and the reason is that South Carolina has three more tax brackets lower than the 6 percent bracket, and another 7 percent bracket one above it at $14,400. It’s a narrow bracket covering very little income. Indeed, South Carolina manages to have a “progressive” income tax code with five brackets, and yet the topmost bracket kicks in below the poverty line, at just $14,400, making the top rate of 7 percent the relevant rate for most households. This cluster of needless brackets adds complexity to South Carolina’s tax code, and creates work disincentive effects for the poorest South Carolinians.

South Carolina Income Taxes, 2014

Rate

On Income Over

3%

>

$2,880

4%

>

$5,760

5%

>

$8,640

6%

>

$11,520

7%

>

$14,400

Source: South Carolina Department of Revenue

Thus, while Governor Haley’s proposed tax cut is very small in terms of the amount of tax relief it provides, it could serve a valuable purpose. North Carolina just flattened its income tax effective this year, with top rates at 5.8 percent, well below South Carolina’s top rate. South Carolina used to have lower rates than North Carolina, which had a top rate of 7.75 percent: but now the tables are turned.

Governor Haley’s bracket elimination proposal is a step in the right direction towards a flatter tax code, like what North Carolina has adopted. However, it’s just a very small step, and it won’t be enough for South Carolina to catch up with the Tarheel State; not unless South Carolina policymakers are willing to reach for a bigger reform than eliminating just one bracket. Indeed, if South Carolina were to eliminate all of their lower brackets, they could conceivably then lower the top rate and create a revenue-neutral proposal with approximately similar distributional effects as the current system.

Read more on South Carolina here.

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