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Following a reduction in income tax rates last year, residents of South Carolina may soon experience another tax break. New proposed legislation aims to decrease the state’s top income tax rate by over 2%, with additional cuts planned if specified income thresholds are achieved.
South Carolina currently holds one of the highest income tax rates in the southeastern United States. In comparison, neighboring states such as Alabama, Georgia, North Carolina, and Virginia maintain lower income tax rates.
While a simplified tax structure that reduces South Carolina’s tax brackets to a single rate could make the state more competitive, it is anticipated that many residents may see an increase in their tax obligations if this legislation is enacted.
According to the latest report from the state’s Revenue and Fiscal Affairs Office (RFA), approximately 59.4% of filers may face higher taxes by the year 2027.
Key Details about the Proposed Income Tax Bill in South Carolina
At the end of last month, Republican leaders in South Carolina introduced a bill, known as HB 4216, designed to consolidate the state’s tax brackets into a uniform rate of 3.99%. Currently, South Carolinians are subject to the following state income tax rates:
- 0% on annual incomes up to $3,560
- 3% on annual incomes between $3,560 and $17,830
- 6.2% on incomes exceeding $17,830
The relatively low income thresholds for these brackets significantly limit the tax base, resulting in an uneven distribution of financial responsibility among taxpayers.
For example, a study conducted by the RFA two years ago revealed that 44% of residents pay no income taxes, while just 10% of filers account for a staggering 63% of the state’s overall tax liability.
By eliminating the current brackets and instituting a single tax rate, the tax base in South Carolina would expand, potentially increasing the number of residents who contribute financially. Nonetheless, taxpayers earning above $17,830 could see a decrease in their tax rates under this proposal.
Moreover, those in the lowest income category may still owe nothing, as the proposed bill introduces a new personal exemption of $6,000 for low-income filers (and $12,000 for couples filing jointly). The phaseout thresholds for this exemption are as follows:
- Full exemption for individuals with an adjusted gross income (AGI) of $30,000 or less (couples filing jointly would have a full exemption up to $60,000 AGI).
- Partial exemptions for those with AGI between $30,000 and $40,000 (AGI thresholds for couples filing jointly would see a phase-out between $60,000 and $80,000 AGI).
However, the impact of HB 4216 extends beyond merely broadening the tax base. The bill could also alter the method of taxation for income, which would have implications for all tax brackets within the state.
Potential Shifts to a Flat Income Tax in South Carolina
South Carolina’s tax rates are notably high in the Southern region, with states like Georgia, Alabama, and North Carolina having lower rates. However, the proposed flat income tax legislation aims to change this dynamic.
“This makes us not only more competitive but also more appealing to new businesses and more affordable for families seeking to reside in South Carolina,” remarked Representative Bruce Bannister (R-Greenville), Chair of the House Ways and Means Committee, during the announcement of the bill.
Nevertheless, this proposed bill may carry some anticipated drawbacks.
Currently, South Carolinians are taxed based on their federal taxable income, permitting them to account for deductions such as property taxes and mortgage interests before state taxes are computed.
If the flat tax proposal is implemented, taxpayers will shift to being taxed on their adjusted gross income (AGI), which typically yields a higher base amount than federal taxable income. Many states with income taxes adopt this model.
The most recent report from the RFA estimates potential tax burdens for various income groups under the proposed flat rate of 3.99%:
- Individuals earning up to $10,000 may see an increase of $98 in their tax obligations.
- Those with incomes ranging from $50,000 to $75,000 could face a tax increase of approximately $560.
- Individuals making over $1 million may incur a rise of more than $10,000 in taxes.
Overall, nearly 1.7 million taxpayers might experience heightened tax liabilities by 2027 if this legislative change is enacted, while around 550,000 could see their tax bills decrease, with the average reduction estimated at $2,110.
It’s important to recognize that each taxpayer’s situation is unique, resulting in diverse outcomes across different income levels. For instance, 23,500 individuals earning between $50,000 and $75,000 could see a reduction of $125, and those with incomes between $150,000 and $200,000 might benefit from a decrease exceeding $1,000.
Due to these complexities, the Revenue and Fiscal Affairs Office advises caution against broad generalizations.
“The effect on individual taxpayers can vary significantly within each income bracket depending on their specific financial circumstances,” remarked Frank A. Rainwater, Executive Director of the Office.
Prospective Savings for Taxpayers in South Carolina
If the income tax reduction bill progresses into law, taxpayers may encounter the following potential savings:
- Estimates from GOP legislators suggest savings of approximately $200 million in the first year post-enactment.
- Future potential income tax cuts could be activated if the state meets certain revenue benchmarks, which may lead to a rate reduction as low as 2.49%.
If all proposed tax cuts are implemented, South Carolinians could benefit from savings exceeding $2 billion in total taxes. Despite current projections indicating potential tax increases for many at the 3.99% rate, subsequent reductions could alleviate tax burdens for a vast majority, presuming specific economic conditions are met.
This bill is currently under review by the state House Ways and Means Committee, facing additional legislative processes. If passed, it could be in effect as early as 2026.
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