Income Tax Debate – Ways and Means Committee (April 22, 2025)

From the Post and Courier

COLUMBIA — Statehouse Republicans are reviving a contentious proposal to advance some form of income tax reform by the end of the 2025 legislative session that state fiscal analysts say would slash taxes for the wealthy while low- and middle-class earners would see increases.

But as members of the House Ways and Means Committee convened April 22 to discuss the proposal, some members — including one Republican — questioned whether a shift to a single flat income tax rate is necessary, particularly given a lack of evidence the status quo is actually hurting the state’s prosperity.

Billed by Gov. Henry McMaster and House and Senate leadership as a “historic” tax cut in a March Statehouse press conference, the original proposal would have consolidated the state’s progressive, three-tiered income tax structure to a flat 3.99 percent rate for all taxpayers, which they argued would increase the state’s economic competitiveness and create a “fairer” tax system that would put more money in peoples’ pockets.

But it wouldn’t. According to a fiscal note on the bill filed earlier this month, Republicans’ tax plan would actually increase taxes by hundreds of dollars for approximately 60 percent of earners, estimates by the Revenue and Fiscal Affairs Office noted, while all of the benefits of the tax cuts would be felt by the very rich.

Within days of the release of that fiscal note, House Republicans announced they would be delaying a vote on the bill, saying they needed more time to reassess their approach.

They returned to a packed hearing room April 22 in what Ways and Means Chairman Bruce Bannister, R-Greenville, described as an opportunity for members to “listen and learn” about possible alternatives to their original proposal after constituents expressed concerns about the original bill.

What quickly became clear was that moving to a flat tax would be very difficult to accomplish with only three weeks left in the 2025 session.

While South Carolina has one of the highest top income tax rates in the Southeast, it is paid by only the state’s highest earners, who also have a greater capacity to absorb higher taxes than lower-income earners. And while South Carolina’s income tax rates are comparatively high, the state’s effective tax rate is actually quite low, underpinned by multiple tax exemptions as well as one of the friendliest property tax climates in the Southeast.

With few other avenues to fund government, South Carolina relies heavily on those income taxes to pay its bills. According to state spending data, approximately 45 percent of the state’s revenues are derived from income taxes. And most of those receipts, approximately 63 percent, are covered by the state’s top 10 percent of earners.

While South Carolina has been experiencing surpluses that have allowed budget writers room to provide $200 million in tax relief to the highest income earners in each of the past several legislative sessions, there is only so much the state can cut taxes before needing to reduce the size and scope of government — the largest functions of which are health and education.

Lawmakers could simply slash the top tax rate. But that would cost hundreds of millions, if not billions, of dollars from the state budget. To keep tax cuts affordable and mitigate the impact on the budget, lawmakers instead have proposed a “broadening” and “flattening” of the tax base, a shift to one single tax rate that would both cut taxes on the wealthy while increasing taxes on lower-income earners.

There are multiple ways to do it. One scenario offered to state lawmakers would move to a flat 3.99 percent rate with a higher taxable income threshold, which RFA analyses said would result in an annual loss of $307 million in revenues and a roughly $500 increase in taxes for 58.7 percent of the population.

Another scenario favored by the right-leaning South Carolina Policy Council would move to a higher 4.74 percent flat rate that would increase taxes by an average of $330 for 38 percent of residents, with a much smaller revenue hit that could be offset by reductions in spending.

A final scenario posed to lawmakers would shift the state’s current three-tier system to a two-tier system, where a top taxable income rate of 5.49 percent would only kick in for the highest income earners in the state while all other residents would pay a rate of 1.99 percent. While 40 percent of residents would benefit from the proposal, the state will see a $300 million loss in revenue.

Regardless of how they do it, someone will pay.

“I don’t think you can lower the rate enough on the flat tax not for someone to have an increased liability or you don’t have significant impact on the budget,” Frank Rainwater, executive director of the Revenue and Fiscal Affairs office, told lawmakers April 22.

Some, like the Tax Foundation’s Manish Bhatt, suggested that a flat tax could unleash the state’s economic competitiveness.

But the lingering question for several lawmakers was why anything needed to happen at all. South Carolina remains one of the fastest-growing states in the union, and ranks among the top 15 states in the country in GDP growth.

“If we are competing for people, we are certainly winning,” Rep. Todd Rutherford, D-Columbia, said.

Some have argued a flat tax could boost the state’s economy. But the economic impact of moving to a flat tax is also negligible, with one study by the free-market Buckeye Institute finding South Carolina’s flat tax proposal would add just 1,000 jobs to the state’s economy every year. (For reference, state data show South Carolina’s economy added more than 61,000 jobs between October 2023 and October 2024.)

Philosophically, some seemed at-odds with the idea of raising taxes on most residents in the distant hope of boosting the economy.

Rep. Nathan Ballentine, a Republican from Chapin, said during the hearing he was “struggling” with the proposal, saying that while he doesn’t like that the 44 percent of residents who currently pay zero percent in income taxes don’t pay anything for services, he struggles with the idea of raising taxes on anyone to fund them.

Instead of a tax problem, he said, South Carolina had a “marketing issue,” and that too few people knew how affordable life in the Palmetto State could be.

“I think it’s up to us to get that message out,” he said.

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Source: https://nathansnews.com/2025/04/income-tax-debate-ways-and-means-committee-april-22-2025/