CHARLESTON, SC (WCSC) – South Carolina currently has the highest income tax rate in the Southeast, but Republican leaders in the state House of Representatives and Gov. Henry McMaster are pushing to lower the top state tax rate.
H.4880 would gradually reduce South Carolina’s top tax rate from 7% to 6% over the next five years, by two-tenths of a percent each year. South Carolina taxes people at different rates across multiple tax brackets based on tax filers’ taxable income, instead of using a flat tax rate like some other states do.
The top state tax rate of 7% is higher than Georgia’s top rate of 5.75% and North Carolina’s flat rate of 5.25%.
But when comparing effective tax rates — how much people actually pay, after taking into account factors like federal and state deductions — the state’s Office of Revenue and Fiscal Affairs reports that South Carolina pays in average about 3.1%, less than Georgia and North Carolina’s 3.7%. 4.1%.
“In reality, we have more of a problem of perception than a problem of high taxation? House Majority Leader Gary Simrill, R-York and lead sponsor of the bill, said during a Thursday meeting of a House Ways and Means subcommittee. Other sponsors include House Speaker Jay Lucas, R-Darlington, and Rep. Murrell Smith, R-Sumter, who chairs the House Budget Drafting Ways and Means Committee.
“A lot of people describe it as an optical problem. I mean, I see these reports on websites where they say, ‘Don’t move to South Carolina because it’s 7%’. That doesn’t tell you not the whole story,” replied Frank Rainwater, executive director of the Office of Revenue and Fiscal Affairs.
Rainwater said one reason for South Carolina’s lower effective tax rate is that the state allows more deductions than others. On average, Palmetto State filers are taxed on 53% of their income.
Because of these and other factors, such as marital status or people’s income types, Rainwater said there is no average taxpayer in South Carolina.
“There’s really no way to tell, how would this affect the average person?” he told lawmakers.
That is, if it affected them at all. Rainwater’s office reported that 44% of people who file taxes in South Carolina don’t pay a dime in income tax.
“Big picture, that’s the algebra problem we have, and whether you affect either the definition of income or the tax rate, you affect different taxpayers differently,” he said.
But the reduction would affect the amount of money the state collects.
A tax impact report of the Office of Revenue and Fiscal Affairs estimated that when inflation and population growth are taken into account, the state would lose $800,927,000 a year in tax revenue once the full 1% cut is in effect d here tax year 2026.
The South Carolina State Economic Advisors Project will have over $3 billion to spend next year, between stimulus money from the Biden administration’s American Rescue Plan Act and last year’s budget surplus, including some of the money they think the ‘State will have recurring funds each year instead of a one-time stipend. A federal judge has also ruled that states can use American Rescue Plan Act funding for tax cuts.
All members of the South Carolina House of Representatives, as well as McMaster, who supported this tax cut in previous legislative sessions, are eligible for re-election this year.
Members of the subcommittee did not vote on moving the bill forward or propose any amendments at their Thursday meeting, saying they hoped to resume their discussion as early as next week.
During this meeting, they voted unanimously to report in favor of an amended version of H.3247, which, with the amendment, exempt all military retirement benefits state income tax, beginning with the 2022 tax year.
The previous form of the bill had capped the exemptions veterans under 65 would receive and would have staggered the exemptions over a five-year period.
These immediate tax exemptions without a ceiling are also included in H.4880, the income tax reduction bill.
“We want to be one of the states that rewards our veterans so they don’t have to pay income tax, but I know that when our veterans went to war to protect us, they didn’t. didn’t set it up. They went to protect us,” Simrill said.
In South Carolina, veterans currently receive a partial tax exemption on their military benefits, which they receive if they have served at least 20 years. But 35 other states, including North Carolina, Tennessee and Florida, have passed full exemptions, while Georgia, another partial-exempt state, is currently considering moving to a full exemption as well.
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