A GREAT IDEA…BUT A LITTLE LATE
This week, it came as a surprise to many when Governor Haley called for abolishing South Carolina’s income tax. This new proposal is significantly more ambitious than anything Haley has proposed on taxes before. The governor’s previous income tax proposal consisted of deleting the state’s 6 percent bracket in South Carolina’s income tax; a policy which if enacted would save the average South Carolinian roughly $28. In contrast, eliminating the state’s income tax would save taxpayers thousands.
The governor’s sudden shift on tax policy, while laudable if genuine, comes at a rather inconvenient time for South Carolina taxpayers. The legislative session’s official end is on June 5th, and with no major tax reform bill having passed either chamber this session so far, the chance for significant tax reform at this point in the session is effectively zero.
There was in fact a bill (S.901) introduced in January by Senator Katrina Shealy (R – Lexington) that would have done just what Haley has proposed by eliminating South Carolina’s income tax. But Governor Haley has not seen fit to comment on the bill, and the legislation has languished and will die this session in the Senate Finance Committee. S.901 should have been easily noticed as it was one of only 5 general tax cut bills proposed this session compared to a plethora of bills that aim to increase taxes or fees or provide special tax incentives for favored groups. Haley has signed 8 bills that fit into the latter two categories over the course of this session.
We can only hope that the governor in next year’s legislative session has this apparent new desire for significant tax reform and will ignore the specious arguments presented against it. While many are quick to tout South Carolina as a low tax state, some basic elements of the tax code would help argue otherwise. South Carolina’s top income tax bracket of 7 percent is the 13th highest in the nation. Further, the fact the 7 percent bracket kicks in at roughly $14,000 means South Carolina has “the highest marginal tax rate on the lowest level of taxable income in the Southeast (and third in the nation)” according to the State Department of Commerce. This high tax burden on low earners is a direct result of a lack of reform in the past. South Carolina’s tax brackets have not been properly indexed to inflation over the last half century; if they had been, the 7 percent top bracket wouldn’t kick in until an individual made $73,600. In other words, by failing to index the income tax to inflation, South Carolina has effectively been raising taxes on all its citizens.
Some opponents of tax reform also like to bring up how much eliminating or lowering taxes would “cost” the state, and follow up by asking how these tax cuts will be paid for. Presumably those asking these questions believe the state would be unable to provide the necessary services in absence of income tax revenue. The first thing to note here is that to speak of the cost of a tax cut or paying for a tax cut is a logical fallacy. South Carolina would not be purchasing a tax cut. The state doesn’t pay for revenue it never collects. The concept of paying for a tax cut implies that all the money currently in private hands is merely a gift from the government which truly owns those funds. Second, seven states currently have no income tax and still manage to provide services. Finally, even if new revenue is needed as a compromise to achieve tax reform, there are more than enough special tax exemptions that can be eliminated. It is not unusual in any given year for South Carolina to exempts more in sales taxes than it collects in income tax revenue.
Reforming the South Carolina tax code is long overdue and would prove an economic benefit to all South Carolinians. The Tax Foundation, the National Center for Policy Analysis, and the Cato Institute have all found links between higher tax rates and lower economic growth, and the Mercatus Center at George Mason University has found that states with lower tax rates tend to experience higher rates of in-migration while high tax states experience the opposite. In short, South Carolina has everything to gain from reducing the tax burden on its citizens. Citizens can only hope that come next session South Carolina’s governor will walk the walk on tax reform.