By Holley Ulbrich
South Carolina’s new proposal for a flat income tax, H. 4216, seems to be on the fast track for what is billed as a tax cut. Maybe. But not for most of us.
The federal standard deduction, expanded in the first Trump administration, would be cut for state tax purposes from $15,000 ($30,000 for a married couple) to a miserly $6,000 and $12,000, respectively. Then it is phased out until it disappears at an adjusted gross income of $40,000.
But wait, there’s good news. The tax rates would be changed from a two-step schedule of 3% and 6.3% to a single flat rate of 3.99% (just so we can claim to be lower than our neighbors). That’s a tax cut, isn’t it?
Yes and no. The General Assembly giveth and the General Assembly taketh away. The federal standard deduction, which was also followed in South Carolina’s state income tax, gives people at the bottom a little relief and makes the income tax just a little bit progressive.
That’s “economist-ese” for taking a smaller percentage of income in taxes for poor people than rich people. Our other state and local taxes on sales and property, and our fees and charges for government services, are regressive. They take a larger share of income from the poor than from the rich. So, the income tax has provided a partial equalization of the total tax liability across households at different income levels.
According to estimates by the S.C. Department of Revenue and Fiscal Affairs, if your family is in the median income range of $50,000 to $75,000, more than 80% of you will discover that your income taxes will go up, not down. Less than 10% of households in the income range of $300,000 to $500,000 will have that same sticker shock, but rather will see a steep reduction.
Revenue from the individual income tax is expected to decline by about $216 million in the first full year.
Bottom line: This is a tax cut for the wealthy, plain and simple. And unlike the usual justification – attracting business – the personal tax rate will now be lower than the business tax rate.
That’s not the only problem with this bill. With no chance to itemize, citizens with heavy medical expenses and/or generous charitable contributions or lots of interest on their home mortgage and/or student loans will have to rethink their priorities. Medical expense deductions are important for many disabled or elderly citizens, especially if there is a family member in a nursing home. Medicare is not much help there — and the future of Medicare is uncertain.
South Carolina is riding a wave of revenue growth that is overdue for correction. The stock market is flailing, consumer confidence has dropped, tourism prospects (important to our state) are dismal as people from other nations are reluctant to come here, and tariffs are likely to revive inflation that has just returned to more normal levels (not counting eggs).
The state’s definition of income for tax purposes will still be tied to the federal definition of adjusted gross income but that may change if Congress, worried about ballooning deficits, fails to extend the tax cuts from the first Trump administration. The legislature has made a number of commitments, such as higher teacher pay and a larger state contribution each year to protect the soundness of the retirement fund. Legislators may not be able to fund these priorities if revenue from the income tax falters, as it does with either tax cuts or recessions.
This bill needs to go in the circular file and start again.
Holley Ulbrich is retired professor emerita of economics from Clemson University.
