New SC tax reform plan could lower rates, but 24% of filers would pay more money
A new plan of how to reform the state’s income tax system is now on the table.
And proponents say it gives the state a pathway to having zero income tax, which some lawmakers have called for.
The gradual reduction of the state income tax, however, will be based on enough revenue coming into state coffers, and shifts where the state starts tax calculations to adjusted gross income instead of the lower federal taxable income.
Tax rate cuts would be triggered if income tax revenue to the state grows by at least 5%. The plan would keep an additional $200 million out of state coffers each year.
Under the new plan approved by the House Ways and Means Committee on Wednesday, the state would have a two-tiered system with the first $30,000 of a person’s taxable income taxed at 1.99%. The remaining income would be taxed at 5.39%.
The move would bring the state’s effective tax rate to 2.6% down from 2.7%.
In the first year of the plan, more than three quarters of income tax filers would see a tax cut or no change in how much they pay to the state in income taxes. State Rep. Brandon Newton, R-Lancaster, said 24% of the filers would see an increase.
Also, the state would create its own deduction of $15,000 for individual filers with incomes up to $40,000. That exemption would gradually decrease for filers up to $95,000. Those with incomes higher than $95,000 would not be eligible.
The exemption would be $22,500 for filers who are head of household and $30,000 if married filing jointly.
The goal of going to a flat tax is meant to ensure more people pay income taxes to the state as 44% of filers don’t pay state income tax under the current system. The proposed new structure would decrease that share to 34.5% of filers, according to Ways and Means Committee documents.
“The original idea was to get the lowest possible rate with a flat tax so everybody was treated the same,” Ways and Means Chairman Bruce Bannister, R-Greenville, told reporters.
When the Republican leadership trotted out their initial tax reform plan, which went to a flat tax of 3.99%, with a plan of lowering the rate to 2.49%, it led to an initial tax increase to 60% of income tax filers. After the plan was fully phased in, most people would have seen a cut.
Bannister said he didn’t anticipate how many people would complain about the initial proposal.
“They were a lot louder than I expected, so when you have resistance like that, you can back up and find a different path,” Bannister said.
Bannister expects the tax reform plan to be debated on the House floor Tuesday, leaving it for the Senate to pick up next year.
The tax reform would go into effect for next year’s income taxes, which people file in 2027.
The phased-in approach is meant to protect state services in case the economy experiences a drastic downturn.
“I think this is a responsible way of guaranteeing, when we have growth, that we’re using growth dollars to flatten the tax out, whereas some states, I would say like Kansas for example, who just sliced their tax rate with no plan, they saw massive, draconian cuts they had to make year over year,” said state Rep. Brandon Newton, R-Lancaster.
Bannister said calls to completely eliminate the income tax from members of the hard-line conservative Freedom caucus, some Democrats and even potential Republican candidate for governor Nancy Mace played no role in the trot of this new plan.
“We’ve been trying to figure out for the last six or seven years how we get out of that sticker price shock income rate,” Bannister said. “The fact that we’re doing it now is just something that Speaker (Murrell) Smith has been wanting to do for a long time.”
With the plan to tie the reduction to growth in income taxes allows revenue from other sources such as the sales tax and corporate taxes to grow.
“So instead of tying it just to all revenues, which I think could be a little more dangerous, because you can have random spikes in weird sources, this would allow you to tie it to the actual source that we’re trying to eliminate,” Newton said.
“This is, in my mind, a responsible way to get rid of the income tax, and in reality, the only rational way to get rid of the income tax,” Newton added.
Every tenth of a percentage point equates to about $100 million kept out of state coffers. When the state reaches the 1.99% rate, each tenth of a percentage point will represent even larger amounts.
Also, proponents say they believe the state’s earned income tax credit, in place to help lower income people, would be used by more filers. The state’s credit would be capped at $200.
Still, six Ways and Means Committee members voted against the new plan, which was formally rolled out Wednesday morning.
“I appreciate all of the work that has gone in, especially on (the) earned income tax credit, but I have not had a chance to review the document and did not feel comfortable voting for something, that I had not yet reviewed, this significant,” said state Rep. Gilda Cobb-Hunter, R-Orangeburg.
House Minority Leader Todd Rutherford, D-Richland, also was against the tax reform package, because it would raise taxes on 24% of filers.
“We saw the presentation, and you couldn’t identify who exactly those people were, and that was the most concerning part,” Rutherford said. “I have been here for 27 years, nobody has complained to me yet about how much they pay in state taxes. They complain about property taxes all the time, but they don’t complain about state income taxes, not that anybody wants to pay them.”
This story was originally published April 30, 2025 at 2:24 PM with the headline "New SC tax reform plan could lower rates, but 24% of filers would pay more money."
