The South Carolina Statehouse in Columbia, SC
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Former Congressman Trey Gowdy (RS.C.) said in a preface to his top three reasons to live in South Carolina in a recent episode of his podcast that he could “give the Chamber of Commerce speech on low taxes.” Actually, he couldn’t. Even a skilled speaker like Mr. Gowdy would have a hard time advancing the case for low taxes on living in South Carolina, which he wisely did not try (instead of the physical beauty and friendliness of the state to its residents). .
By simply standing still and not making improvements to state taxation laws while the surrounding states were busy cutting taxes for the past decade, South Carolina has achieved the highest income tax rate in the entire southeastern United States. South Carolina’s highest income tax rate of 7% starts at $ 15,400, meaning the vast majority of South Carolina taxpayers, both individuals and runaway businesses, pay the highest rate.
North Carolina used to have the dodgy award now held by South Carolina, but Republican lawmakers there have reformed their personal income tax over the past decade, moving it from a progressive structure with a top rate of 7.75% to a flat income tax a 5.25%. In western South Carolina, Georgia lawmakers have also lowered their personal income tax rate in recent years, lowering the top rate to 5.75% in 2019, and adding more income tax breaks by increasing the standard withholding in 2021. Even state legislators in the nearby income tax-free states of Florida and Tennessee have found ways in recent years to improve their tax laws and provide additional relief.
In fact, South Carolina could fall further behind its neighbors before lawmakers even return to the state capital, Columbia. That’s because the new budgets recently approved by both houses of the North Carolina General Assembly would further increase North Carolina’s tax advantage over South Carolina. The North Carolina House budget lowers the state income tax rate to 4.99%, while the Senate budget lowers the rate to 3.99%. The House of Representatives and the Senate are now working on the final budget in the conference committee. However, both budgets were approved with enough Democratic votes to overcome a veto by Governor Roy Cooper (D).
Trey Gowdy stated on his podcast that he “would be more likely to pay more to be in a beautiful place, surrounded by really nice people,” and that’s exactly what he does. There is good news for Gowdy and others who want to enjoy all that South Carolina has to offer – be it the fine people or beautiful scenery from coast to mountains – without paying the area’s highest income tax rate. There are members of the South Carolina state legislature now motivated to pass tax reform that will lower South Carolina’s top uncompetitive tax rate. Additionally, Palmetto state lawmakers have a governor in Henry McMaster (R) who has made it clear that if lawmakers sent one to his desk, he would sign an income tax cut.
In late July, Senator Josh Kimbrell (R-Spartanburg) announced the introduction of a law to revise the state tax code. Senator Kimbrell’s plan would remove all credits and deductions in state income tax law to significantly lower the income tax rate and replace the 7% staggered income tax with a flat 3.5% income tax.
“It is no longer time for South Carolina to rethink our antiquated tax code to give us an edge in economic competition between states,” said Senator Kimbrell when he presented his proposal in late July. “I want to position South Carolina as a leader in the Southeast for economic development and opportunity. It is for this reason that I have drafted this draft law, which is to be introduced to the legislative body at the next session. “
Should Senator Kimbrell’s proposal go into law, South Carolina would move from the highest income tax rate in the area to a lower rate than North Carolina and Georgia. Halving the state’s highest income tax rate would certainly make South Carolina a more attractive option for workers who discovered in the last year that they can work remotely rather than be in New York, Chicago, or other major cities. Having no state income tax has helped attract many people and employers to Florida and Texas, but many teleworkers may prefer to pay a 3.5% state income tax rather than zero if that means they are in one State like South Carolina can live that has four seasons.
Senator Kimbrell’s plan also eliminates state corporation tax and aims to zero state income tax for small businesses filed as transit companies under the individual income tax system. According to the IRS, more than 380,000 sole proprietorships in South Carolina report the individual income tax system, as do more than 121,000 partnerships and S-corp owners.
“Under that law, South Carolina no longer has corporation tax,” said Kimbrell of his proposal, which will also be facilitated by expanding the sales tax base. “This is being expanded to include an exemption from income tax for run-through companies – an exemption from taxation at the company level.”
The guiding principles of Senator Kimbrell’s plan were early lauded by a highly respected South Carolina economist. Rebecca Gunnlaugsson of Acuitas Economics, who previously served as chief economist for SC’s Department of Commerce, said the following about Senator Kimbrell’s proposal:
“(The proposal) addresses perhaps the biggest problem in South Carolina tax law – the myriad of ad hoc deductions and exemptions that pile up each year that make it complex, unfair, unsustainable, and unsupportive to economic growth “Gunnlaugsson told FITS News. “This plan aims to create a simple, inexpensive, broad system, which is fantastic.”
“The abolition of corporation tax makes sense,” added Gunnlaugsson. “Apart from the fact that it is a question of double taxation of income, it has so many peculiarities and loopholes that it is generally ineffective and unpredictable and increases little in relation to the national budget.”
The passage of Senator Kimbrell’s South Carolina bill and tax rate changes to the North Carolina Senate budget would make the Carolinas a corporate tax-free zone. This would give South Carolina and North Carolina a significant national and global advantage, especially if President Joe Biden’s proposed increase in the state corporate tax rate were to become law. While North Carolina lawmakers could increase their tax advantage over South Carolina with the new budget negotiated in the conference committee this week, it won’t be long if Senator Kimbrell’s bill passes in the next session.