South Carolina Governor Calls for Reducing Individual and Corporate Taxes

In her State of the State speech, South Carolina Gov. Nikki Haley (R) discussed the importance of broad-based tax 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 tax from six brackets to three, reduce taxes for the citizens of our state by almost 80 million dollars, and phase out the corporate 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 brackets into three, while cutting rates;

3. Amend the Constitution to establish Property Tax 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 credit, 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 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 inflation 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 base, driving up rates for those who are unable to obtain special status for themselves. Regular reporting on the number of beneficiaries for each tax expenditure, 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:

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.